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Legal shift disqualifies popular SMSF tax deduction

Elizabeth Wang  |  09 Jan 2018Text size  Decrease  Increase  |  
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Recent legislation changes to allowable tax deductions may have implications for SMSF trustees who hold investment property in their fund, writes Elizabeth Wang.

Can trustees claim a tax deduction for their air fare to the Gold Coast for their holiday because their self-managed super fund (SMSF) happens to own an investment unit there?

Purchasing property within a SMSF under a limited recourse borrowing arrangement is becoming increasingly prevalent. However, determining what an SMSF can and cannot claim for, especially when it comes to travel expenses incurred by a member of the fund, is important due to the recent changes surrounding this area of law.

Prior to the 2017-2018 Budget, the existing law allowed deductions for travel relating to income produced or gained from residential investment properties.

In the 2017-2018 Budget, the Government announced that it intended to deny all travel deductions relating to inspecting, maintaining, or collecting rent for a residential investment property from 1 July 2017.

These changes mean travel expenditure incurred by individual investors inspecting and maintaining residential investment properties is no longer deductible.

However, expenses incurred by an investor to engage third parties, such as real estate agents, to provide any necessary property management services will remain deductible.

Why has this changed?

The Government’s reasoning for the disallowance of the deduction of travel expenses for residential rental properties was examined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017.

The position taken was that by disallowing travel expenditure incurred by individual investors, it would combat the ‘widespread abuse around excessive travel expense claims relating to residential investment properties’ in order to ‘improve the integrity of the tax by addressing the systematic risk of excessive and incorrect claims for travel expenses associated with residential investment properties’.

An SMSF may continue to deduct travel expenditure if the losses or outgoings are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.

Note that travel expenses can still be claimed by other investment vehicles, such as:

  • a corporate tax entity;
  • superannuation plan that is not a self-managed superannuation fund;
  • a public unit trust;
  • a managed investment trust; or
  • a unit trust or a partnership, all of the members of which are entities of a type listed above.

Most importantly, when considering if it is appropriate for the fund to pay a particular expense, it is important to ensure the payment is in accordance with a properly formulated investment strategy, allowed under your trust deed and the super laws.

Elizabeth Wang is a solicitor with Townsends Business & Corporate Lawyers.

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