Practice Update November 2008
Please read this update and contact this office if you have any queries
Super funds coming unstuck with loans to members
The Tax Office has reported that, when it comes to the investment restrictions
that apply to SMSFs, the most common contravention continues to be loans
to members of funds and their relatives.
In addition, many SMSF trustees are claiming their loan arrangements are
arm’s length loans to non-related parties. However, the ATO has found
that, in over 20% of its audit cases, the loan arrangements had not been
conducted at arm’s length.
Case Study – accessing funds to prop up a business
Editor: The following example provided by the ATO highlights an instance
of non-compliance and what they did about it.
The approved auditor of a fund reported a contravention because the fund
had made a loan to a related party for the year ended 30 June 2005.
The related party was a company of which the trustees of the fund were
also the directors. The company had run into liquidity problems so the
trustee lent the money to the trading company. The loan was for $126,000,
which equated to 99% of the fund’s total assets.
Attempts were made throughout the case to get the trustees to rectify
the contravention, and, earlier this year, the trustees proposed an enforceable
undertaking to rectify by June 2010. However, this was not accepted by
the ATO as the timeframe was unreasonable, and they proceeded to make the
fund non-complying.
Superannuation and Business Real Property
Trustees of SMSFs are generally prohibited from acquiring assets from
related parties and may only maintain 'in-house assets' (i.e., assets involving
dealings with related parties) when their value is less than 5% of the
total value of the fund’s assets.
An exclusion from both of these requirements applies in relation to 'business
real property'.
When considering whether or not a particular property is business real
property, most trustees usually need guidance regarding the 'business use
test', which requires that the real property be ‘used wholly and
exclusively in one or more businesses’ carried on by any entity.
A new draft ruling released by the ATO to assist trustees contains a number
of examples that highlight the importance of understanding business real
property, including the following.
Business real property examples
Letting holiday flats – no business
Ms Hend owns two holiday flats, which she lets for short-term accommodation
at a popular holiday destination. Ms Hend and her partner manage and maintain
the flats, which includes cleaning and repairing the flats, and financial
tasks such as banking.
Ms Hend and her partner set up the Hend Super Fund and both become members
of the fund. They propose that the Hend Super Fund acquire the flats from
Ms Hend.
The elements of repetition and continuity of acts and transactions indicate
the possibility of there being a rental property investment business being
carried on.
However, the scale of the operation is such that it is not considered
to be a business.
As there is no business conducted in respect of the premises, the property
is not business real property, and so the Hend Super Fund cannot acquire
the flats from Ms Hend (a related party).
Bed and breakfast – business
Dean Lamont owns a house with five bedrooms and two living areas. He uses
one of the bedrooms himself. The other four bedrooms are let year-round
as part of a bed and breakfast business. One living area is set aside for
the exclusive use of guests. Breakfast is included in the room cost and
other meals are available by arrangement.
Dean advertises his rooms with Worldwide B&B Internet bookings agency.
Dean has a business plan, pays tax, and has three permanent part-time employees.
The business has operated since Dean acquired the house 17 years ago.
In this case, a business is being carried on. Dean's non-business use
of the property is incidental and relevant to that business. Therefore,
the property is used 'wholly and exclusively' in the business and is business
real property.
Overseas holidays deductible!
Editor: The following case shows that even unusual claims can be successful,
as long as you are able to get your evidence in order, and can show a clear
connection between an expense and your income earning activities.
The taxpayer was a sales consultant in a travel agency who undertook domestic
and overseas travel during the 2004/05 tax year, including a round the
world trip and a trip to the USA.
He claimed a tax deduction for his travel expenses of $9,985, but the
claim was eventually disallowed by the Tax Office after an audit.
The taxpayer's argument
His primary reason for taking the particular flights that he did was because
his employer expected employees to travel on their own time. Also, by using
a particular round the world ticket offered to his travel agency exclusively,
he came to understand its benefits and how to make the ticket “work
for customers much better”.
After travelling on the ticket and having the knowledge and confidence
to recommend it, he said he “sold literally hundreds of them”,
which provided good bonuses to him.
The Tax Office's argument
The Tax Office conceded that the experience gained on the overseas trips
would likely have benefitted the taxpayer to some extent in his occupation
as a travel agent. However, the trips undertaken were 'holidays'. Also,
while overseas, he did not visit a single travel agency to see how they
did business.
The Decision
The Senior Member of the Tribunal stated that the trips clearly assisted
the taxpayer in his occupation as a travel agent, that they were not simply
holidays, and that he did not need to visit any travel agencies as he was
a sales consultant employed to sell holiday related travel products.
In addition, his remuneration increased overall each year, largely because
of the receipt of bonuses.
Therefore, "none of (his) overseas travel expenses were of a private
nature" (even though he spent three days out of seven in a town in
Spain in which he had relatives), but the claim of $9,985 was reduced to
$8,337 basically due to problems with substantiation (e.g., receipts).
New benchmarks
In addition to the benchmarks released for the painting, roofing, tiling,
floor sanding and polishing, and taxi industries, the Tax Office has now
issued benchmarks for the concreting industry.
These benchmarks indicate an expected range of income for concreters based
on the labour and materials used, and apply to concreters who work directly
with household customers.
FBT on laptops and GPS receivers
The Tax Office has confirmed that, after the Government's changes to the
FBT laws from 13 May 2008, a GPS navigation receiver provided to an employee
can be a 'portable electronic device' and can therefore be exempt from
FBT as an 'eligible work related item'.
Also, a laptop provided to an employee can still be 'primarily for use'
in their employment, and exempt, even if they sometimes use it for private
purposes and the employer has no private use policy.
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