claiming travel costs before property is built

poppy

poppy

I am in the process of building a rental property on land that I own. I will be claiming the interest etc on my tax whilst the property is being built.

If I travel interstate to visit the property before it is complete, say to meet with the builder, inspect it part way through, or to organise installation of carpets etc, would I be able to claim on my tax the full cost of the trip in that tax year? That is of course assuming I did not take a holiday whilst I was there.

What if I decided it was more convenient to send my husband to visit the property (the property is in my name only)? Would I still be able to claim the cost of the trip?

Thanks!
 
I'll leave it for the experts for a definitive answer- but I would be thinking that travel to a property being built is part of the capital costs, and so would only be deductible as part of the cost base against capital gains tax when you sell.
 
I don't know either, but I would guess the opposite.

As holding costs on land being held for future income-producing purposes are deductible (ID 2001/479), I would think visits to the property would also be deductible - at least to the extent they would also be deductible if the property was already producing income.

GP
 
redwing said:
I take it things would be different though if done via a company or trust structure ?
Click to expand...

Not really, since the expenditure is tied to the property.

The only thing that makes a difference is if you are a passive property investor (99% of the time) or if you are in the business of buying and selling properties.
 
Mry said:
Not really, since the expenditure is tied to the property.

The only thing that makes a difference is if you are a passive property investor (99% of the time) or if you are in the business of buying and selling properties.
Click to expand...

How about if the company sent you as an employee to check on the building?
 
Thanks everyone, so it seems like it is probably a capital cost, which makes sense, but I'm just not 100% sure yet as there is some difference of opinion and I haven't been able to find anything specifically documented.

I guess my situation is the equivalent of someone travelling to their property to do improvements rather than a repair, which is probably a more common scenario. I haven't found any specific info on the ATO web site yet regarding travelling to carry out improvements. I'll keep looking around.
 
Doug,

When they are part of the holding costs motor vehicle expenses can be included in the cost base.


ATO Interpretative Decision
ATO ID 2003/773
Income Tax
Capital gains tax: cost base - non income producing property - travel costs - cents per kilometre method

FOI status: may be released
Status of this decision: Decision Current

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.



Issue


If a taxpayer travels to a non income producing property in their own car to carry out maintenance on the property, can the taxpayer use the 'cents per kilometre' method in Subdivision 28-C of the Income Tax Assessment Act 1997 (ITAA 1997) as an estimate of the travel costs to be included in the third element of the property's cost base?

Decision


No. The 'cents per kilometre' method cannot be used as an estimate of the amount of the travel costs that can be included in the third element of the cost base of the property under subsection 110-25(4) of the ITAA 1997 as the amount calculated under that method includes an amount for the decline in value of the car which is a capital cost.

Facts


A taxpayer who resides in one State owned a non income producing property in another State which they acquired after 20 August 1991.

The taxpayer travelled interstate for a holiday and whilst there travelled to the property in their own car to carry out maintenance work.

The taxpayer disposed of the property and made a capital gain.

The taxpayer sought to use the cents per kilometre method for determining the amount of the travel costs to be included in the third element of the cost base of the property as a result of travelling to the property in their own car to carry out maintenance on the property.

Reasons for Decision


The third element of the cost base of an asset acquired after 20 August 1991 includes the non-capital costs of ownership of the asset which are not deductible (subsection 110-25(4) of the ITAA 1997). For non-capital costs to fall within the third element of cost base, the costs incurred must be directly related to the ownership of the asset.

In this case, as the travel to the property to carry out maintenance is directly related to the ownership of the property, the travel costs incurred in undertaking the travel will form part of the third element of the cost base of the property provided they constitute non-capital costs.

Where the taxpayer undertakes the travel to the property in their own car, the question arises whether the cents per kilometre method in Subdivision 28-C of the ITAA 1997 can be used for calculating the costs incurred in relation to the travel.

The 'cents per kilometre' method in Subdivision 28-C of the ITAA 1997, when used as a method for deducting car expenses, in effect allows a partial deduction for a variety of car expenses including fuel and oil, registration, insurance and an amount representing the decline in value of the car. An amount representing the decline in value of a car cannot be included within the third element of the cost base of an asset as it represents a capital cost as opposed to a non-capital cost.

Accordingly, the cents per kilometre method cannot be used to estimate the car expenses that can be included in the third element of the cost base of the property. Instead, the car expenses that will form part of the third element will be the non-capital expenses that relate wholly to the travel to the property and, where the car expenses relate only in part to that travel, the part of those expenses that is reasonably attributable to the travel to the property (subsection 112-30(1A) of the ITAA 1997).

Note: This note has been added to explain the legislative changes made to certain capital gains provisions, as a result of Act No 32 of 2006, which received Royal Assent on 6 April 2006.
For CGT events happening on or after 1 July 2005, the third element of the cost base has been amended to include the 'cost of owning' the CGT asset and remove the requirement that the costs be 'non-capital costs of ownership'.
However, these changes do not affect the decision in this interpretative decision.

[HISTORY: This ID has been amended to explain the legislative changes made to certain elements of the CGT cost base, where the relevant CGT event happens on or after 1 July 2005.]

Date of decision: 23 July 2003

Year of income: Year ended 30 June 2003

Julia
www.bantacs.com.au
 
Poppy,

PBR 65056 is a very interesting ruling, thanks for finding it. This paragraph from it seems to support your case:
Capital Gains Tax
Although your travel expenses incurred in travelling to the construction site to visit suppliers and to work on the construction of the property are not deductible under section 8-1 of the ITAA 1997, they may be included in the cost base of your rental property for the purposes of CGT.


But take a look at the following ruling which appears to contradict it.


ATO ID 2004/732
Income tax
Capital gains tax: cost base: travel and accommodation costs relating to initial repairs

FOI status: may be released
Status of this decision: Decision Current

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.



Issue


Can a taxpayer who incurs travel and accommodation costs to carry out initial repairs on a property they use for income producing purposes include these costs as part of the cost base of the property under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision


No. Travel and accommodation costs incurred to undertake initial repairs cannot be included as part of the cost base of the property under section 110-25 of the ITAA 1997.

Facts


The taxpayer purchased an investment property in the 2002 income year. The property was located a substantial distance from the taxpayer's residence.

Shortly after its acquisition, the taxpayer undertook minor repairs and renovations to the property to make it more attractive to potential tenants.

During the course of the repairs and renovations, serious white ant damage was discovered. The taxpayer incurred substantial expenditure in rectifying the damage.

On completion of the repairs and renovations, the property was rented to tenants.

All of the repairs and renovations were initial repairs of a capital nature and the costs incurred by the taxpayer in making them were therefore not deductible.

The taxpayer also incurred substantial travel and accommodation costs in carrying out the repairs. These costs were also not deductible.

The taxpayer sold the property in the 2005 income year. In working out the amount of their capital gain the taxpayer sought to include the travel and accommodation costs in the cost base of the property.

Reasons for Decision


Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements:

1.
acquisition costs
2.
incidental costs
3.
non-capital costs of ownership which are not deductible
4.
capital expenditure to increase the value of the asset, and
5.
capital expenditure to establish, preserve or defend title to the asset or a right over the asset.
The first element of the cost base, being the acquisition costs, is the total of the money paid, or required to be paid, and the market value of the property given, or required to be given, in respect of the acquisition of the asset.

Travel and accommodation costs incurred in carrying out initial repairs on a property are not considered acquisition costs within the meaning of subsection 110-25(2) of the ITAA 1997 because they are not money paid in respect of acquiring the property.

The second element of the cost base is the incidental costs that the taxpayer incurs in acquiring the asset or which relate to a CGT event that happens in relation to the asset (subsection 110-25(3) of the ITAA 1997).

Incidental costs that can be included in the cost base of a CGT asset are set out in section 110-35 of the ITAA 1997. Travel and accommodation costs are not listed as one of the incidental costs.

The third element of the cost base of an asset acquired after 20 August 1991 is the non-capital costs of ownership. The costs include, but are not limited to, interest on money borrowed to acquire the asset or to refinance such a borrowing, interest on money borrowed to finance capital improvements to the asset, repairs and maintenance, insurance premiums, rates and land tax (subsection 110-25(4) of the ITAA 1997).

Travel and accommodation costs incurred in carrying out initial repairs to a property are capital costs and therefore do not form part of the third element of the cost base of the property.

The fourth and fifth elements of the cost base are provided under subsections 110-25(5) and (6) of the ITAA 1997 respectively. Travel and accommodation to undertake initial repairs to a property clearly do not fall within either of these elements.

Accordingly, the travel and accommodation costs the taxpayer incurred to undertake the repairs to their property cannot be included as part of the cost base of the property under section 110-25 of the ITAA 1997.

Note: The taxpayer can include the expenditure incurred in actually repairing and renovating the property in the property's cost base, provided the expenditure is reflected in the state or nature of the property when a CGT event happens to the property: subsection 110-25(5) of the ITAA 1997.

Date of decision: 19 August 2004

Year of income: Year ended 30 June 2005



Legislative References:
Income Tax Assessment Act 1997
section 110-25
subsection 110-25(2)
subsection 110-25(3)
subsection 110-25(4)
subsection 110-25(5)
subsection 110-25(6)
section 110-35

Related Public Rulings (including Determinations)
Taxation Ruling TR 97/23
Taxation Determination TD 98/19

Related ATO Interpretative Decisions
ATO ID 2003/771
ATO ID 2003/772
ATO ID 2003/773

Keywords
accommodation expenses
capital gains tax
CGT cost base
repairs & maintenance expenses
repairs in entirety
travel expenses

Date of publication: 3 September 2004

ISSN: 1445-2782


Julia
www.bantacs.com.au
 
julia said:
Doug,

When they are part of the holding costs motor vehicle expenses can be included in the cost base.


ATO Interpretative Decision
ATO ID 2003/773
Income Tax
Capital gains tax: cost base - non income producing property - travel costs - cents per kilometre method

FOI status: may be released
Status of this decision: Decision Current

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.



Issue


If a taxpayer travels to a non income producing property in their own car to carry out maintenance on the property, can the taxpayer use the 'cents per kilometre' method in Subdivision 28-C of the Income Tax Assessment Act 1997 (ITAA 1997) as an estimate of the travel costs to be included in the third element of the property's cost base?

Decision


No. The 'cents per kilometre' method cannot be used as an estimate of the amount of the travel costs that can be included in the third element of the cost base of the property under subsection 110-25(4) of the ITAA 1997 as the amount calculated under that method includes an amount for the decline in value of the car which is a capital cost.

Facts


A taxpayer who resides in one State owned a non income producing property in another State which they acquired after 20 August 1991.

The taxpayer travelled interstate for a holiday and whilst there travelled to the property in their own car to carry out maintenance work.

The taxpayer disposed of the property and made a capital gain.

The taxpayer sought to use the cents per kilometre method for determining the amount of the travel costs to be included in the third element of the cost base of the property as a result of travelling to the property in their own car to carry out maintenance on the property.

Reasons for Decision


The third element of the cost base of an asset acquired after 20 August 1991 includes the non-capital costs of ownership of the asset which are not deductible (subsection 110-25(4) of the ITAA 1997). For non-capital costs to fall within the third element of cost base, the costs incurred must be directly related to the ownership of the asset.

In this case, as the travel to the property to carry out maintenance is directly related to the ownership of the property, the travel costs incurred in undertaking the travel will form part of the third element of the cost base of the property provided they constitute non-capital costs.

Where the taxpayer undertakes the travel to the property in their own car, the question arises whether the cents per kilometre method in Subdivision 28-C of the ITAA 1997 can be used for calculating the costs incurred in relation to the travel.

The 'cents per kilometre' method in Subdivision 28-C of the ITAA 1997, when used as a method for deducting car expenses, in effect allows a partial deduction for a variety of car expenses including fuel and oil, registration, insurance and an amount representing the decline in value of the car. An amount representing the decline in value of a car cannot be included within the third element of the cost base of an asset as it represents a capital cost as opposed to a non-capital cost.

Accordingly, the cents per kilometre method cannot be used to estimate the car expenses that can be included in the third element of the cost base of the property. Instead, the car expenses that will form part of the third element will be the non-capital expenses that relate wholly to the travel to the property and, where the car expenses relate only in part to that travel, the part of those expenses that is reasonably attributable to the travel to the property (subsection 112-30(1A) of the ITAA 1997).

Note: This note has been added to explain the legislative changes made to certain capital gains provisions, as a result of Act No 32 of 2006, which received Royal Assent on 6 April 2006.
For CGT events happening on or after 1 July 2005, the third element of the cost base has been amended to include the 'cost of owning' the CGT asset and remove the requirement that the costs be 'non-capital costs of ownership'.
However, these changes do not affect the decision in this interpretative decision.

[HISTORY: This ID has been amended to explain the legislative changes made to certain elements of the CGT cost base, where the relevant CGT event happens on or after 1 July 2005.]

Date of decision: 23 July 2003

Year of income: Year ended 30 June 2003

Julia
www.bantacs.com.au
Click to expand...


Julia ,

this ruling states that travel expenses can be claimed as a deduction
which was the original question that was asked.
I have cut the relevent section from your post and writen in red.

Please correct me if I have misinterpreted

Instead, the car expenses that will form part of the third element will be the non-capital expenses that relate wholly to the travel to the property and, where the car expenses relate only in part to that travel, the part of those expenses that is reasonably attributable to the travel to the property

The cents per km is a completely different issue. The ruling talks about the
Declining car value, which is why the cents per km ruling was disallowed. It doesn’t prevent claiming travel costs.

Here is a thought experiment.
If I run from Sydney to Melbourne in my ggumboots to inspect my investment property, can I claim the cost of meals and accommodation that might be incurred on the trip or just the cost of replacing the ggumboots if they wear out? I suppose the response is that this is private expenditure
but companies claim these expenses all the time for their employees.
 
this ruling states that travel expenses can be claimed as a deduction
which was the original question that was asked.
I have cut the relevent section from your post and writen in red.

Please correct me if I have misinterpreted

Instead, the car expenses that will form part of the third element will be the non-capital expenses that relate wholly to the travel to the property and, where the car expenses relate only in part to that travel, the part of those expenses that is reasonably attributable to the travel to the property

The cents per km is a completely different issue. The ruling talks about the
Declining car value, which is why the cents per km ruling was disallowed. It doesn’t prevent claiming travel costs.

Here is a thought experiment.
If I run from Sydney to Melbourne in my ggumboots to inspect my investment property, can I claim the cost of meals and accommodation that might be incurred on the trip or just the cost of replacing the ggumboots if they wear out? I suppose the response is that this is private expenditure
but companies claim these expenses all the time for their employees.
__________________
Click to expand...


Firstly I would like to point out I posted that ruling as evidence that you could claim motor vehicle costs as part of the holding costs (third element) which is exactly what I said in my post before that but someone came along and then said you can't so I posted the ruling to prove you could. But third element costs are specifically non capital costs so if, as was said much earlier the motor vehicle expenses are capital costs (because they are part of the original building costs) they cannot be included in the third element. The sorts of costs that would be included in the third element would be trips to the hardware store to buy materials for repairs while you were living in the house (ie not deductible otherwise).

When ever motor vehicle cost are claimable and you are required to sleep away from home your meals and accommodation are also claimable

Secondly business can buy their employees protective shoes and claim a tax deduction for it, so can employees if there is a risk of injury in their occupation or abnormal wear and tear. By the same token if you bought steel caps to wear while doing repairs to your rental property you would be allowed a deduction for them too but you would have to apportion the difference between private and business use. A diary kept for one month would sufice. On the otherhand based on PBR 65056 the non private portion of the steel caps would be part of the Div 43 special building write off if they were worn while delivering materials to the site but if you were simply inspecting the original construction of the building they don't qualify under Div 43 but do qualify as capital costs but then ID 2004/732 suggest that shoes are not included in the definition of cost base so you will probably miss out there too. There is some more apportionment issues for your diary.
Luckly I'm not the bunny that is responsable for making the rules.

Julia
www.bantacs.com.au
 
Thanks Julia, the ruling you found does seem to contradict the one I found. I would have thought that travel to perform initial repairs would have been treated in the same way as travel to a rental property that is under construction. But who knows...

The interesting part of ruling 65056 is that (the way I interpret it), if I travel to the construction site to say get some carpets and blinds installed, I can add the travel cost to the cost of the carpets etc and depreciate that. That would be nice!

I guess I will probably have to apply for a ruling myself in order to be certain. Also, I have pretty much decided that my husband will need to go and attend to these things, as I do not get any paid leave, and with the properties being in my name that may complicate things further.
 
Poppu,
Great research PBR 51783 is the key! The one thing I wasn't sure of is whether the travel costs would be capital or revenue in nature. PBR 51783 says they are revenue in nature so all the arguements regarding cost base elements do not apply. The cost of inspecting the construction of the rental property is the same as inspecting the property for tenant damage etc according to PBR 51783 so it is a straight out deduction in the year it is incured.
I should point out here that this is what great pig said right at the start of this thread.

Julia
www.bantacs.com.au
 
A contradiction it seems for Ormiston's case, which held that for properties that in the construction / renovation phase -

Deductible
Interest, rates, land tax and insurance - regularly re-occuring costs

Not Deductible
Construction, repairs and depreciation.

Travel to review construction progress seems capital on the outset (3rd element), as it is a cost involved in the construction process. This ruling seems to contradict Steele's case.

This is the part that blows my mind -

the interest is not incurred ‘too soon’, is not preliminary to the income earning activities and is not a prelude to those activities
Click to expand...
How can travel to inspect the construction phase of a house not be considered a 'preliminary' expense? Its not going to happen after the house is built, which I consider a key factor.

But hey, if the ATO says you can claim it, just do it.

Remember that this is a private ruling, and although it is indicitive of how the ATO would decide something, you can't rely on it as it is only binding on the person who applies for it.

EDIT - Hey, I think I'll apply for a private ruling and see if the construction costs of my new property and not considered to be "incurred ‘too soon', is not preliminary to the income earning activities and is not a prelude to those activities".
 
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