Taxation Law: Analysis of Amendment in Travel Expense Deductions

This report examines the recent amendment in Australian taxation law concerning the disallowance of travel expense deductions for rental properties. The amendment, introduced in the 2017-18 Federal Budget, restricts deductions for travel expenses related to the inspection, maintenance, and rent collection of residential rental properties. The rationale behind the amendment is to address concerns about taxpayers claiming deductions without proper cost allocation or for private purposes. The report details the amendment's impact on the housing market, including potential effects on property owners who manage their properties in remote areas. It also highlights the government's estimated revenue savings and the potential for increased scrutiny of travel expense claims. While the amendment aims to prevent tax evasion and ensure the integrity of tax measures, it may negatively affect some legitimate taxpayers. The report concludes that the amendment is a viable method to address concerns about travel expense deductions but acknowledges its potential adverse effects on some taxpayers and the housing market.

Taxation law Semester 2 2017

TABLE OF CONTENTS
Introduction................................................................................................................................3
Amendment in law.....................................................................................................................3
Rationale for this restriction.......................................................................................................3
Impact of amendment on housing market..................................................................................5
Conclusion..................................................................................................................................5
References..................................................................................................................................7

INTRODUCTION
As per recent law, travel expenses regarding inspection, maintenance and collection
of rent of rental property will not be allowed (Li & Whitworth 2016). This amendment has
been done with the objective to develop reliable method to deal with the concerns that
taxpayers claim deductions of travel expenses without correct allocation cost, or having
claims of travel costs for private purpose of travel. The present study is based on an
evaluation of recent amendment provided by budget in Australia regarding disallowance of
travel deductions. The study will include a description of the amendment and its justification.
In addition to this, the impact of this amendment will be stipulated on the housing market of
Australia.
AMENDMENT IN LAW
Previous legislation regarding travel and car expenses
If an individual travels in order to examine or property maintenance or accumulating
the rent, they might be capable of claiming the travelling considering as a deduction. They
are legally permitted to take a total deduction in which the only reason for the trip is
regarding the rental property (James, 2016). Conversely, in, certain circumstances individual
is unable to claim a deduction or may be allowed to do deduction partly because the trip was
for multiple purposes. However, if an individual gets a flight to the rental property, stays
there all night and return back home on a particular date, all the hotel and airfare expenses
will usually be accepted as a deduction for the only reason of the trip that was to examine the
rental property.
Proposed Law: prohibits the travel expense deduction for housing rental property
By considering the initiative dubbed “Reducing pressure on housing affordability”, it
has been announced by the Federal Budget 2017-18, from 1 July 2017, Government will
prohibit travel expense deduction regarding inspection, maintenance or accumulation of rent
for a housing rental property (Source: Budget Paper No 2 [p 29]). This measure is also
applicable to gather rent on a particular housing property (Bayes and et al., 2016). By
considering the concerns of Federal Government, as per this change residential investment
properties owners might claim travel expenses without the proper allocation of costs or have
claims of travel costs for a private purpose, and travel costs regarding inspection,

maintenance or accumulation of rent for a housing rental property will be prohibited from 1
July 2017 (Australian taxation office, 2017).
For the implementation of this measure, ED legislation had proposed for insertion of insert
new section 26-31 into the Income Tax Assessment Act 1997 (ITAA 1997) which will be
applicable for 1 July 2017 (Deloitte, 2017). Disallowance is associated with the travel
expense occurred to gain or produce assessable income by making use of residential premises
or accommodation and not mandatorily incurred by carrying on business with the objective to
gain or produce assessable income (Fishman, 2017).
RATIONALE FOR THIS RESTRICTION
In accordance with the view point of regulatory authorities amendment related to the
housing market is justified because it assists the government in the prevention of evasion of
the law. The measure is all about to deal with concerns that taxpayers are claiming
deductions for travel expenses without correction of allocation cost or having claims of travel
costs for the private purpose of travel, said by the budget papers (Fishman, 2016). Being a
part of the strategy of the government to improve the outcomes of residential, this method
will give self-assurance in the tax measure by making sure that the allowances are well
targeted. However, it is not applicable to business properties. Currently, expenses regarding
travel expenses claims are for inspections, although in reality, vacations and holidays are
costing $160 million in a year or more than this for the government.
This method will not avoid investors from involving third parties like agents of real
estates for management of property services. However, these all expenses will stay
deductible.this method is calculated in order to gain profit of $540.0 million on the onward
periods of estimates (Brennan & Siagian, 2016). In addition to this, the cited approach of the
federal government will prevent manipulation of accounts by restricting tax payers for adding
their personal expenses as rental charges.
According to viewpoint of treasurer, allowance of this expense is severely abused due
to which it has been allowed. However, in this aspect various relief is provided for genuine
expenses such inspection cost (Chardon, Freudenberg & Brimble, 2016). As per recent
provisions, if inspection is carried by third party then expense will be permissible but assesse
must ensure that incurred must be supported by sole purpose of inspection (IBDO Australia,
2017). With this amendment, Australian government had curtailed deductions of
discretionary expenses which can lead to losses related to negative gearing. Further, with

these integrity measures, confidence of taxpayers will be boosted along with reducing cost of
negative gearing to the fiscal Budget. It is because; auditors and authorities will crucially
scrutinize overnight travel expenses and in case of any manipulation there will be tax penalty.
As per the amended law, travel expenses will be deductible only if these are ordinary
nature and compulsory to occur. This aspect clarifies the fact that the expenses associated
with travel must be supportive and suitable for the rental activity and not inevitably
indispensable from the view point of taxpayer (Fishman, 2017). In previous law there was no
such clarification due to which various landlords were taking unjust benefit of loophole in
taxation provisions and were deducting personal expenses as rental charges. Consequently,
amendment clarified to landlords that traveling to a rental property will not be considered
ordinary and necessary in all cases.
IMPACT OF AMENDMENT ON HOUSING MARKET
This can cause a considerable effect on owners of residential investment property who
manages their property by themselves which they own in countryside areas, throughway or
mining towns (Ong and et al., 2017). Taxpayers who are legally incurring travelling costs in
order to constantly examine or take on maintenance of properties in the country, distant or
throughway places (Australian taxation office, 2017). That might require searching for a
trustworthy manager of the property in order to manage the property to acquire costs
deduction related to maintaining renting the property.
In accordance with the study of Chung (2017), there are 2 million landlords in
Australia out of which, approximately 1.3 million are destructively geared by this
amendment. Further, Government of Australia is likely to carry out an added $540 million in
proceeds for the travel changes in the upcoming four years (Beale, Financial & House, 2016).
According to the recent statistics of ATO there were approximately travel expenses of
$455,861,897 regarding rental property made by individuals in 2014-15. In this amount also
all expenses were not related to residential property (Bayes, McClure & Parker, 2016). This
approach comprise lot of money but it is comparatively small in terms of big deductible
rental property outlays such as council rates, repairs and maintenance, plant depreciation,
body corporate fees, interest, capital works deductions, property agent fees, water charges,
insurance and land tax (Croker, 2017).

Apparently it shows that the ATO is worried merely about the growth in travel
deductions claimed, but also about the genuineness of concerned claims. This factor shows
that on an overall basis this change will not affect overall value and transactions of housing
market as capital aspects of property is not affected (Chardon, Freudenberg & Brimble,
2016). However, it will negatively affect some honest tax payers as they cannot deduct
justified expenses related to rental property but same will be allowed there is justified
measure for allowance such as document to proof nexus among expenses and its reliability to
rental property. It has been estimated by ATO, that this amendment will provide revenue
saving of amount $160 million and revenue of $540.0 million over the forward
following financial years:
Table 1: Estimation of revenue with amendment of disallowance of travel expenses
(Source: 2017-18 Budget Paper No. 2 - Revenue Measures (page 29))
2016-17 2017-18 2018-19 2019-20 2020-21
Australian Taxation Office - .. $160 million $180 million $200 million
CONCLUSION
The budget of 2017 seems to rule becoming more stiffen regarding the claims that can
be made by investors having a significant investment in property, especially associated with
depreciation deductions. In accordance with the present study, the conclusion can be drawn
that amendment of disallowance of travel expenses in Australian taxation provisions is
viable. It is a reliable method to deal with the concerns that taxpayers claim deductions for
travel expenses without correct allocation cost, or having claims of travel costs for the private
purpose of travel. However, it will negatively affect some honest tax payers as they cannot
deduct justified expenses. This amendment will have significant adverse effect on the
housing market as 1.3 million Powerful groups of Australia are negatively geared landlords
which will now unable to claim travel costs for examining their housing properties.

REFERENCES
Books and Journals
James, K. 2016. The Australian Taxation Office perspective on work-related travel expense
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Bayes, A. J., McClure, G., and Parker, G. B. 2016. Differentiating the bipolar disorders from
borderline personality disorder. Acta Psychiatrica Scandinavica, 133(3), 187-195.
Fishman, S. 2016. Every Landlord's Tax Deduction Guide. Nolo.
Brennan, P., and Siagian, F. 2016. Business Travel or Recreation: The RV Case. Journal of
Case Studies, 34(1), 58-72.
Beale, H., Financial, O., and House, H. 2016. BUDGET.
Chardon, T., Freudenberg, B., and Brimble, M. 2016. Tax literacy in Australia: not knowing
your deduction from your offset.
Ong, R., Dalton, T., Gurran, N., Phelps, C., Rowley, S., and Wood, G. A. 2017. Housing
supply responsiveness in Australia: distribution, drivers and institutional settings.
Li, Y. T., and Whitworth, K. 2016. When the State Becomes Part of the Exploitation:
Migrants’ Agency within the Institutional Constraints in Australia. International
Migration, 54(6), 138-150.
Chung, E. 2017. Travelling costs and the new withholding tax on a property purchase. REIQ
Journal, (Feb 2017), 34.
Online
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IBDO Australia. 2017. Removal of expensive deductions for rental properties. Retrieved from
https://www.bdo.com.au/en-au/federalbudget2017/housing-affordability/removal-expensive-
deductions-rental-properties