Q&A: Interest and Other Expenses Where Property Is Negatively Geared

/in /by

Q. I have recently purchased a house for approximately $800,000. I intend to redevelop it as a family home. Ninety per cent of the purchase price was financed by a loan. In due course, I will engage an architect to draw up plans for a new house and then lodge a development application with the local council. When the new house is finished, my family will move in. The whole process could take a couple of years. In the meantime, I will rent out the house for approximately $350 to $400 a week.

The outgoings in relation to the property (interest payments, local government rates, water rates, maintenance costs, etc) will exceed the rental income. Can I claim a deduction for the outgoings while it is rented out?

A. The Commissioner’s views on whether interest and other outgoings can be deducted where a property is negatively geared are set out in Taxation Ruling TR 95/33Relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings.

The points made in the Ruling are listed below.

Taxation Ruling TR 95/33

  • If the outgoings produce no assessable income, or the amount of assessable income is less than the amount of the outgoings, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoings are wholly deductible, including the taxpayer’s subjective purpose, motive or intention in making the outgoing.
  • If it can be concluded, after weighing all the circumstances, including the direct and indirect objectives and advantages, in a commonsense and practical manner, that the expenditure is genuinely, and not “colourably”, used in an assessable income-producing activity, a deduction is allowable for the loss or outgoings.
  • If, however, it is concluded that the disproportion between the outgoing and the assessable income is essentially to be explained by reference to the independent pursuit of some other objective (eg to derive exempt income or to obtain a tax deduction), the outgoing must be apportioned between the pursuit of assessable income and the other objective.
  • When considering the subjective purpose, motive or intention in incurring a loss or outgoing, regard must be had to the purpose or motive that the taxpayer had in mind when the loss or outgoing was incurred.
  • A reference to the relevant assessable income or allowable deductions does not necessarily refer to income produced, or the expenditure incurred, in a particular income year. For example, if income is expected to be produced over a number of years from a single transaction, it will be necessary to total the relevant assessable income reasonably likely to be produced during that period and compare it with the total expenditure reasonably likely to be incurred.
  • When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both “fair and reasonable” in the circumstances.

Fletcher v FCT

Note also that TR 95/33 was issued following the decision of the High Court in Fletcher v FCT (1991) 22 ATR 613 in which the Court held that it was necessary to apportion outgoings in relation to an annuity scheme that was not intended to run its full course and generate positive assessable income to the investor – with the result that there was a “significant disproportion between the deductible outgoings and the assessable income”. However, if the “disproportion” was to be explained by the pursuit of some other objective (a “colourable purpose”) it would be necessary to apportion the outgoing between the pursuit of assessable income and the other objective.

Analysis

The first question to consider is whether the interest is deductible. Whether interest is deductible is determined by looking at the purpose of the loan and how the loan is used. Ordinarily, the purpose of the loan can be ascertained from the use to which the loan is put.

In this case, the loan was taken out to acquire a property that is to become the family home. This suggests that the interest payments would not be deductible as the loan money is to be used for private and domestic purposes. However, as the property will produce income in the meantime, it is arguable that some, if not all, of the interest payments may be deductible during the period the house is rented out and income is being earned.

An apportionment of the interest and other outgoings may be appropriate in this case for the reasons listed below.

  1. There is likely to be a “significant disproportion between the deductible outgoings and the assessable income over the relevant period”.
  2. The rental income producing activities are clearly intended to end at a specified date (within a couple of years) when the house is knocked down so it can be rebuilt (similar to the annuity arrangement in the Fletcher case).
  3. The subjective purpose exercise required in such circumstances would suggest that the incurrence of the outgoings is “coloured” or motivated by another purpose or objective – perhaps something akin to “holding costs” for the construction of a non-income producing asset, namely your new home.
  4. The arrangement does not appear to be the “commonly encountered” kind of negative gearing arrangement in terms of a “commonsense or practical weighing of all the factors surrounding the acquisition of the property” – especially as it is stated that the property was acquired for the purpose of building the taxpayers’ new home.
  5. If there is, in fact, a relevant “disproportion” between assessable income and outgoings and this is explicable or coloured by a non-income producing (subjective) purpose on the part of the taxpayer, it will presumably be necessary to apportion the outgoings on a “fair and reasonable” basis in the circumstances. It may be appropriate to limit the deduction for the relevant outgoings to the amount of income derived. This may also be appropriate in a case such as this where the outgoings seem more akin to “holding costs”.

Contact us

The above is a discussion only and further advice should be obtained. Please contact our office on 02 9954 3843. to discuss your circumstances and to obtain professional advice.

This article is adapted from Thomson Reuters Tax Q&A service.

Client Alert Explanatory Memorandum (August 2016)

/in /by

CURRENCY:

This issue of Client Alert takes into account all developments up to and including 13 July 2016.

ATO small business benchmarks updated

The ATO has announced the latest benchmarks for small businesses, updated for the 2013–2014 financial year. These benchmarks are a guide to help businesses compare their performance against similar businesses in the same industry. The benchmarks can also be used by the ATO to identify businesses that may not be meeting their tax obligations.

The benchmarks:

  • are calculated from income tax returns and activity statements from over 1.3 million small businesses and, according to the ATO, are verified as statistically valid by an independent organisation;
  • account for businesses with different turnover ranges (up to $15 million) across more than 100 industries; and
  • are published as a range to recognise the variations that occur between businesses due to factors such as location and business circumstances.

ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind. “If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr Bambrick said.

Mr Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr Bambrick said.

According to the ATO, if a business is reporting above the benchmarks, it may mean the expenses of the business are high relative to its sales. This may indicate that:

  • there is high wastage;
  • business competitors may be able to source inputs at lower cost;
  • the volume of sales is too low (for rent and possibly labour);
  • the mark-up is lower than business competitors’;
  • not all sales have been recorded; and/or
  • internal cash controls may need to be examined.

If a business is reporting below the benchmarks, it may mean the expenses of the business are low relative to its sales. This may indicate that:

  • expenses may be recorded under the wrong label;
  • some expenses may have not been recorded;
  • the mark-up is higher than business competitors’; and/or
  • there is less wastage.

 

 

When the ATO sees that a business is outside the key ratio for the industry, it may indicate something is unusual, prompting the ATO to obtain further information from the business, its suppliers or its customers.

The benchmarks are available on the ATO website at https://www.ato.gov.au/business/small-business-benchmarks/

Source: ATO media release, “ATO benchmarks helping build small business”, 24 June 2016, https://www.ato.gov.au/Media-centre/Articles/ATO-benchmarks-helping-build-small-business/.

ATO benchmarks in action

If a business doesn’t have evidence to support its return, the ATO may use the benchmarks to determine income that has not been reported. For each industry, the ATO will highlight the benchmark it will use to predict income or turnover.

The following recent Administrative Appeal Tribunal (AAT) case highlights the ATO’s use of industry benchmarks.

Income tax and GST and associated penalties broadly affirmed

The AAT has affirmed the Commissioner’s income tax and associated penalty decisions imposed on a taxpayer. However, it also decided to vary the GST and associated penalty decisions to reflect a reduced GST liability, as conceded by the Commissioner before the hearing.

Background

The taxpayer operated a milk bar and contended it also operated a business providing homestay accommodation for foreign students. Following an ATO audit, the Commissioner was not satisfied that the taxpayer had reported its true taxable income for the 2010–2011 and 2011–2012 income years, nor that the taxpayer had reported its true GST net amounts for the quarterly periods from 1 April 2010 to 30 June 2012. The evidence of sales and purchases manually kept in books and cash register roll totals did not reconcile to the taxable amounts reported, and were less than the amounts the Commissioner contended could be expected if industry norms or expectations were applied to the purchases reported.

In this case, the Commissioner applied the tobacco retailing industry benchmarking figures to determine the taxpayer’s business income. The Commissioner did not accept that the taxpayer operated a homestay business and excluded all reported income and expenses relating to homestay activities. The Commissioner also disallowed expenses relating to two cars, and purchases that were not supported by a valid tax invoice. The amounts in dispute before the AAT totalled some $27,000 (primary tax and penalties).

Decision

The AAT held the taxpayer had failed to discharge the onus of proving that the income tax and GST assessments and amended assessments were excessive. The AAT was of the view there was a lack of evidence to prove otherwise. It said, “The combination of the accounts book, invoices led in evidence, inconsistent cash register rolls and absence of commitment to amounts of taxable income and supplies, or particular sources from which these amounts can be determined with confidence, make determination of the [taxpayer’s] taxable income and supplies little, if at all, more than guesswork. This being the case, it is impossible to say by what amount the assessments are excessive.”

The AAT also affirmed the penalty imposed for failure to take reasonable care. Among other things, the AAT heard the taxpayer’s evidence that taxable income amounts were made up as it was told (allegedly) by its tax agent that the ATO did not like to see losses, so that would bring unwanted attention. In affirming the penalty decisions, the AAT said, “In circumstances where a fabricated income figure is used in relevant tax filings it is difficult to see how reasonable care could be demonstrated. Further, there being no evidence of what the tax agent did or did not do makes a finding that the tax agent took reasonable care impossible to make.” The AAT also concluded that there were no grounds for remission.

In making its decisions, the AAT noted the outcomes of the case should not be taken as acceptance of whether the taxpayer did (or did not) carry on a homestay business.

Accordingly, the AAT affirmed the income tax and associated penalty decisions noting the Commissioner’s “concession” to vary the GST and associated penalty decisions to allow further input tax credits in respect of a small range of acquisitions.

Re H J International Trade Group Pty Ltd and FCT [2016] AATA 450, http://www.austlii.edu.au/au/cases/cth/AATA/2016/450.html.

 

 

SMSF early voluntary disclosure service for contraventions

The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service.

Each year, an approved SMSF auditor must audit the fund. The auditor is required to report certain regulatory contraventions to the ATO via the auditor/actuary contravention report (ACR). The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees and professionals to engage early with the ATO in relation to unrectified contraventions. SMSF trustees, SMSF auditors and SMSF professionals (such as tax agents, accountants, financial planners, lawyers and fund administrators acting on behalf of SMSF trustees) can use the service.

The ATO says the new disclosure service should only be used when it is clear there has been a contravention of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or regulations that remains unrectified at the time the SMSF auditor reports it to the ATO. Before using this service, the ATO says, trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure.

The SMSF auditor is still required to report regulatory contraventions via an ACR. However, the ATO says it will not commence an audit based on an ACR if the issue has been resolved through a voluntary disclosure, unless it receives additional information that requires further investigation.

The ATO warns that SMSFs should not use this service if they have already received notification of an ATO audit or review in relation to the contravention. The ATO also notes that where disclosures are made about contraventions that occurred in previous years, any outstanding SMSF annual returns must be lodged.

Source: ATO, SMSF early engagement and voluntary disclosure service, 26 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/SMSF-early-engagement-and-voluntary-disclosure-service/.

ATO case studies

The ATO has provided the following case studies to illustrate the benefits of its early engagement and voluntary disclosure service.

Example 1: overdrawn bank account

The Stephens Superannuation Fund bank account was overdrawn twice during the 2014–2015 financial year. After rectifying the breach, the trustee engaged an SMSF auditor and disclosed the breaches to ATO via the SMSF early engagement and voluntary disclosure process.

The ATO advised the trustees that, given that the contraventions were rectified, there was no need for them to use the service. By raising the breaches with their approved auditor they had discharged their reporting obligations. The trustees also put controls in place to prevent the fund bank account being overdrawn in the future.

Given it was a reportable contravention, the SMSF auditor lodged an ACR. As a result of the ACR, the ATO sent an education letter to the fund in relation to the breach.

Example 2: breach of LRBA rules

The approved auditor for trustees Emma and Jonas Klein identified a limited recourse borrowing arrangement (LRBA) breach in relation to the Klein Superannuation Fund for the 2014–2015 financial year.

The breach arose because the Klein Superannuation Fund entered into an LRBA that had not been structured correctly. A holding trust did not hold the property on trust for the fund trustees and the LRBA was with a non-related party. The trustees made a voluntary disclosure of the breach and provided all relevant facts and supporting documentation. They also provided a proposed undertaking to rectify the contravention within six months.

The trustees actively engaged with the ATO throughout the resolution process and lodged the outstanding returns. The Commisisoner accepted their undertaking to rectify the contravention. The terms of the enforceable undertaking were that the property was to be transferred into the holding trust within six months. SMSF administrative penalties were imposed and remitted in full, given that the trustees made a voluntary disclosure.

Example 3: money lost in investment scam

The trustees made an SMSF voluntary disclosure that the Okafor Superannuation Fund had not lodged annual returns for four years because all its money was lost in an investment scam. The trustees made their disclosure prior to the notification of an ATO SMSF review or audit and provided all relevant facts and

 

 

supporting documentation, including bank statements. The trustees provided an undertaking to wind up the fund and not to act as trustees of another SMSF in the future.

The trustees actively engaged with the ATO throughout the process and the ATO verified the investment scam claims. The Commissioner accepted the undertaking and the SMSF was wound up.

Source: ATO, “Early engagement and voluntary disclosure”, 27 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-case-studies/Early-engagement-and-voluntary-disclosure/.

New tax governance guide for SMSFs

When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and super laws. The ATO has released a new tax governance guide for use by SMSFs. The ATO says it has been working with businesses, tax advisers and agents to design the guide and help private groups with tax governance.

The ATO says SMSF trustees and professionals can use this guide to develop an effective governance framework and identify ways to improve existing governance practices within their SMSFs.

Issues covered in the guide include:

  • corporate governance and tax governance;
  • starting your business;
  • business expansion;
  • funding and finance;
  • philanthropy;
  • succession planning;
  • exiting a business;
  • retirement planning, including SMSFs and CGT small business concessions; and
  • estate planning.

Among other things, the guide says that SMSF trustees must ensure that their funds meet the definition of an SMSF at all times and remain complying. This includes meeting requirements for fund structure, members and trustees; and governing fund compliance with rules for contributions, investments and payment of benefits. Where an SMSF auditor or other adviser identifies issues with a fund’s compliance, trustees should take immediate steps to correct them, the ATO warned.

The fund’s financial statements and regulatory compliance need to be audited before the SMSF annual return is lodged. An audit is required even if no contributions or payments are made in the financial year. The ATO recommends that trustees ensure all documents are provided to the SMSF auditor with sufficient time for the audit to be completed within the legislated period.

The ATO encourages trustees to work closely with their SMSF advisers and auditors. The auditor will give the trustee a report on their SMSF’s regulatory compliance, including any contraventions. Any material contraventions must be reported by the auditor to the ATO. Trustees should also periodically verify that their SMSF satisfies the requirements of a regulated super fund, including requirements around contributions, investments and paying out benefits.

The ATO suggests that trustees formulate an exit strategy so they are prepared should the time come that they no longer want an SMSF and need to wind it up. Matters such as disposal of assets, paying out or rolling over benefits, arranging the final audit, lodging the final SMSF annual return, paying outstanding tax, closing bank accounts and cancelling ATO registrations should be considered.

Source: ATO, “SMSF governance”, 31 May 2016, https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/Tax-governance/Retirement-planning/Self-managed-super-funds/.

Property developer entitled to capital gain tax concession

A taxpayer has been successful before the AAT in arguing that a commercial property it acquired and developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit – despite the fact that the AAT indicated the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the CGT 50% discount.

 

 

In coming to this conclusion, the AAT noted that even though the taxpayer’s property development business involved purchasing properties for resale at a profit, the business carried on by the taxpayer involved far more than this. A “wide survey and an exact scrutiny of the activities” of the taxpayer showed that over a 40-year period they involved everything from the acquisition, development and sale of residential properties to the acquisition and development of commercial properties to hold as capital assets for the purpose of deriving rental income. As a result, the AAT rejected the Commissioner’s basic claim that the taxpayer was carrying on “a business of the acquisition, development and disposal of properties for a profit”.

Moreover, the AAT found that in relation to the “discrete” transaction in question (which it was required to consider for the purpose of determining the issue), all the evidence pointed to the fact that the taxpayer intended to develop the original vacant car park into commercial property to lease to government agencies, for which there was growing demand at the time. This evidence included:

  • the uncontradicted evidence of the father and son controllers of the business (who historically had adopted the approach of individually assessing the best profitable use of a particular property and then putting the property to that use);
  • contemporaneous bank records (which noted that the building was to be “retained on completion for investment”);
  • that a 15-year lease agreement was originally entered into; and
  • that the intention to eventually sell (despite the father’s original resistance and his historical preference to generate income by rental returns) was because the offer to sell “was simply too good”.

In this regard, the AAT also noted that as part of the sale deal, the purchaser offered the taxpayer the opportunity to acquire substitute investment commercial properties – and that the three properties subsequently acquired by the taxpayer as part of this arrangement were still owned by the taxpayer, almost nine years after the relevant transaction. In arriving at its decision, the AAT noted that it is always possible that the owner of an asset will sell it, “but to elevate that possibility into an intention to make a profit by selling the property is to draw a long bow indeed” – particularly in the circumstances of this case and given the nature of the transaction in question.

Accordingly, the AAT found that while the transaction by which the property was disposed of was not a transaction undertaken in the ordinary course of the taxpayer’s business activities, having regard to the overall wide scope of its business activities, in terms of examining the specific transaction and its “discrete” nature, nor was the property acquired for the “purpose of profit-making by sale”. As a result, the AAT concluded that the profit from its sale was to be accounted for as a capital gain and not revenue profit.

Re FLZY and FCT [2016] AATA 348, , 27 May 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/348.html.

Superannuation concessional contributions caps must be observed

An individual taxpayer has been unsuccessful before the AAT in seeking to have excess concessional contributions for the 2014 financial year disregarded or reallocated pursuant to s 291-465 of ITAA 1997.

Background

The taxpayer was a full-time employee in the Victorian Public Service and also worked a number of part-time, casual jobs with approximately four employers. As at 30 June 2014, he was 56 years of age and his concessional superannuation cap was $25,000. He salary sacrificed $100 per week of his full-time earnings into one super fund and salary sacrificed all of his casual earnings with another super fund. The taxpayer did not check his super fund balances.

In June 2015, the taxpayer received a notice of amended assessment for the 2013–2014 financial year that included excess concessional contributions of $11,055. The amended assessment detailed the increase of taxable income from $88,075 to $99,130, an excess concessional contributions tax offset of $1,658 and an excess concessional contributions charge of $250. The taxpayer had previously received a notice of assessment for 2012–2013 financial year detailing excess concessional contributions of $7,656 and excess concessional contributions tax of $2,411.

The taxpayer submitted that he worked additional casual jobs and salary sacrificed his super to provide for his retirement and for his family. He did not have the predictability of knowing what he would earn through his casual jobs, which depended on having shifts allocated. The taxpayer submitted that the rules were difficult to comprehend and he had made an inadvertent mistake. Had he been aware he was approaching his concessional super contribution cap, the taxpayer submitted that he would have stopped the salary sacrifice arrangements, and that his ultimate tax bill would have been the same, albeit the tax bill would have been met by PAYG deductions over time.

Decision

The AAT said, “In a system where there are limits on what can be contributed to a superannuation fund while retaining concessional treatment, to waive compliance in this case would effectively provide [the taxpayer] with an advantage in the form of being allowed to contribute extra to his superannuation funds, and to enjoy the benefit of that without any cost associated with the excess, to the advantage of other taxpayers in the community who observe the limits.”

The AAT said that while the taxpayer’s “motives for working hard and stowing money away for retirement income are admirable, his predicament [did] not amount to a special circumstance”. It added that inadvertent mistakes were not special circumstances and that the “complexities of the system of taxation of retirement income and providing for retirement income are complexities the whole community has to deal with”. Accordingly, the AAT affirmed the Commissioner’s decision.

Monitoring the limits: taxpayer’s submission

During the hearing, the taxpayer suggested that the ATO might do more to advise what was required. The taxpayer suggested that in other settings there are apps available for use with modern technology that let people know their progressive use of facilities such as data volume downloaded from the internet, and something similar could be adopted in a taxation setting. The AAT said that submission was not for it to deal with; however, it suggested that it was “possibly one that the ATO might wish to explore for the future”.

Re Azer and FCT [2016] AATA 472, 4 July 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/472.html.

Help the kids buy homes, but watch for land tax

A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal (QCAT) in arguing that there was a “constructive trust” in relation to three properties.

Background

The taxpayer had purchased three residential properties, one for each of his three children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the properties would each be left to the respective child.

The Commissioner assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The taxpayer objected, arguing that he was the trustee of each property for each child and that land tax (if any) should be assessed separately in respect of each property. The Commissioner contended that there was no “constructive trust” as was argued by the taxpayer, and that the taxpayer – as “owner” of the land – was liable to land tax on an aggregate basis.

Decision

The QCAT affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, s 20(1) of the Land Tax Act 2010 (Qld) to separately assess trust land did not apply. However, in doing so, the QCAT hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or QCAT otherwise. It also noted the possibility of a future express declaration of trust with consequential changes to the wills, which could affect future land tax liabilities.

Harrison v Comr of State Revenue [2016] QCAT 150, http://archive.sclqld.org.au/qjudgment/2016/QCAT16-150.pdf.

 

 

 

 

 

Thomson Reuters would like to hear from you

Subscribers are invited to submit topics for articles for future publication. Information should be sent to:

Publisher – Client Alert

Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668
PO Box 3502, Rozelle NSW 2039

Tel: 1800 074 333

Product Manager – Steven Jones

Email: SupportANZ@thomsonreuters.com

Website: www.thomsonreuters.com.au

 

Client Alert (August 2016)

/in /by

ATO small business benchmarks updated

The ATO has announced the latest benchmarks for small businesses. Based on the data from 2014 income tax returns and business activity statements, the benchmarks cover over 1.3 million small businesses.

ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind.

“If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr Bambrick said.

Mr Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr Bambrick said.

TIP: Business owners can use the benchmarks to compare their businesses with other similar businesses. They can also be used by the ATO to identify businesses that may not be meeting their tax obligations.

SMSF early voluntary disclosure service for contraventions

The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service. Each year, an approved SMSF auditor must audit a fund. The auditor is required to report certain regulatory contraventions to the ATO using the auditor/actuary contravention report. The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees to engage early with the ATO in relation to unrectified contraventions.

TIP: Beforeusing this service, the ATO says trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure. Please contact us for further information.

New tax governance guide for SMSFs

The ATO has released a new tax governance guide that can be used by SMSFs. The ATO has worked with businesses to design a guide to help private groups with tax governance. The guide also provides practical guidance about the key elements of SMSF governance. When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and superannuation laws.

SMSF trustees can use this guide to develop an effective governance framework and to identify ways to improve existing governance practices within their SMSFs. Issues covered in the guide include:

  • corporate governance and tax governance;
  • starting your business;
  • business expansion;
  • funding and finance;
  • philanthropy;
  • succession planning;
  • exiting a business;
  • retirement planning (covering SMSFs and CGT small business concessions); and
  • estate planning.

Property developer entitled to capital gain tax concession

A taxpayer has been successful before the Administrative Appeals Tribunal (AAT) in arguing that a commercial property it acquired, developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit. The AAT reached this decision despite indicating that the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the 50% capital gains tax (CGT) discount.

TIP: This case is a good example of the need to maintain contemporaneous documentation should there be a dispute with the ATO. The ATO has recently reiterated its focus on trusts developing and selling properties as part of their normal business and incorrectly claiming the 50% CGT discount.

Superannuation concessional contributions caps must be observed

An individual taxpayer has been unsuccessful before AAT in seeking to have excess superannuation concessional contributions for the 2014 financial year ignored. In addition to having a full-time job, the individual also held a number of casual part-time jobs. To grow his retirement savings, he salary sacrificed super, but he did not check on his super balances. In June 2015, the individual was advised by the ATO that he had excess concessional contributions of around $11,000 for the 2014 financial year, an amount which was added back to his taxable income. He was therefore charged interest of $250. The AAT praised the individual’s efforts to save for his retirement, but it said the circumstances did not amount to “special circumstances” in which it could invoke its powers to ignore the excess contributions.

TIP: The taxpayer’s ultimate tax bill in this case would have been the same if he had stayed under the relevant cap, albeit the tax bill would have been met by PAYG deductions over time. Even so, this case is a good reminder for to monitor your super balances to ensure you don’t have a tax burden caused by extra contributions being added back to your taxable income.


Help the kids buy homes, but watch for land tax

A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal in a land tax dispute in arguing that there was a “constructive trust” in relation to three residential properties. The taxpayer, a father, had purchased the properties for each of his three adult children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the property would be left to the respective child. The Queensland Commissioner of State Revenue assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The Tribunal affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, it held the exemption under the Land Tax Act 2010 (Qld) to assess separately trust land did not apply. In this case, the Tribunal hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or Tribunal otherwise.

TIP: For parents looking to assist their adult children with buying homes, this case highlights the need to consider land tax implications. It is important to note that the land tax regimes differ from state to state. Please contact our office for assistance.