The Australian Taxation Office (ATO) is setting their sights on the large number of mistakes, errors and false claims made by rental property owners who use their own property for personal holidays.

“As Australians enjoy the Easter break, they should be aware that the ATO is focusing on taxpayers who claim deductions for holiday homes that are not actually available for rent or only available to friends and family,” Assistant Commissioner Kath Anderson said.

“While private use by family and friends of a holiday home is entirely legitimate, it does reduce your ability to earn income from the property. This in turn impacts the deductions you can claim.

“You can only claim deductions for your holiday home if your property is genuinely available for rent. You cannot claim for times when you were using it for your own personal holidays or letting friends and family stay rent-free. It’s not ok to expect everyone else to pay for your holiday.

“Holiday home owners also need to remember that if their property is rented to friends and family at mates rates, they can only claim deductions for expenses up to the amount of the income received.”

Besides holiday rentals, the ATO is also focused on other times when a property is not rented or genuinely available for rent. Ms Anderson said some taxpayers claim their property is available for rent, but when the ATO investigates, it is clear they have little intention of renting it out.

“We see things like unreasonable conditions placed on prospective renters, rental rates set above market rates, or failing to advertise a holiday home in a way that targets people who would be interested in it,” Ms Anderson said.

“Incorrect rental property claims will not go unnoticed. Whether it is a genuine mistake or a deliberate attempt to over-claim, new technology, data matching and other systems allow the ATO to identify unusual claims.

“Where something raises a red flag, it will be investigated. Property owners whose claims are disproportionate to the income received can expect scrutiny from the ATO.”

Ms Anderson said all rental property owners should double-check their claims before lodging their tax return, even if submitting through a tax agent.

“Make sure that you declare all rental income and only claim deductions for periods that the property is rented or was genuinely available for rent at market rates,” Ms Anderson said.

“Be sure to keep accurate records of the income you receive from your rental property, expenses you incur, and evidence of the property being rented or genuinely available for rent at market rates. You should also records of who stayed at the holiday home and when, including the time you and your family stay at the property.”

For more information on holiday homes, visit ato.gov.au/holidayhomes

For more general information on rental properties, visit ato.gov.au/rental

Deductions are available if the property is genuinely available for rent. However, different rules apply if you’re renting out your private residence. For more information, visit ato.gov.au/sharingeconomy

The ATO has announced that it has extended the due date for lodgment of 2016-17 SMSF annual returns to 30 June 2018. The ATO said it has made this decision in recognition of the major decisions that SMSF trustees and their advisers need to make in this first financial year of operation of the super reforms.

Deputy Commissioner James O’Halloran said the ATO has received feedback that accounting and advisory firms are currently focused on helping SMSF trustees to make informed decisions in relation to the major super changes being implemented as part of the 2016-17 annual return, such as eligibility for transitional CGT relief. Accordingly, the ATO has decided to extend the lodgment date for 2016-17 SMSF annual returns to 30 June 2018. Mr O’Halloran said this will relieve some of the compliance burden so that SMSF trustees and their advisers can focus on these important matters.

The extended lodgment timeframe will mean that all SMSFs who are eligible for transitional CGT relief as a result of the $1.6 million pension transfer balance cap (and the transition to retirement income stream (TRIS) changes) will have additional time to make the relevant elections before the due date for lodgment of their 2016-17 SMSF annual return.

As 30 June 2018 falls on a Saturday, the lodgment due date is effectively Monday, 2 July 2018. Under the existing tax agent lodgment program, annual SMSF returns would generally be due by 15 May 2018, provided that the SMSF return was not required to be lodged earlier.

Transitional CGT relief is available for complying superannuation funds (including SMSFs) with pension assets impacted by the $1.6 million pension transfer balance cap or the TRIS reforms. Broadly, a fund’s assets supporting a superannuation income stream may need to be reallocated or reapportioned to accumulation interests before 1 July 2017 to comply with the pension cap reforms. The CGT relief enables a complying fund to preserve the income tax exemption for capital gains accrued, but not yet realised, on CGT assets held by a fund throughout the period 9 November 2016 to 30 June 2017.

The CGT relief is not automatic and applies on an asset-by-asset basis. The fund must choose for the relief to apply. The choice is irrevocable, and must be made by the time the trustee is required to lodge the fund’s 2016-17 SMSF annual return. The approved form for making the choice is the CGT schedule as part of the fund’s annual return.

The CGT rules are subject to different conditions depending on whether the superannuation fund uses the segregated method or the proportionate method to calculate its exempt current pension income. The rules are complex and require careful consideration against the specific circumstances of each fund.

The SMSF Association has called for the active member test to be excluded from the residency requirement for a superannuation fund to qualify for concessional tax treatment.

SMSF Association CEO John Maroney said the super fund residency test effectively compels self-managed super fund (SMSF) members who are temporarily living overseas to switch to an APRA-regulated fund while they are outside the country. Mr Maroney said the definition of an “Australian superannuation fund” in s 295-95 of the ITAA 1997 means SMSF members who continue contributing to their fund while overseas face penalties, as well as having it taxed as a non-complying fund at 47%.

There are currently 3 elements to the residency test that a fund must satisfy to be treated as an “Australian superannuation fund” – (i) it must be established in Australia; (ii) central management and control of the fund is in Australia; and (iii) the “active member” test relating to contributions made to the fund by non-resident active members for taxation purposes (they can’t exceed 50%): Ruling TR 2008/9. If a fund fails to satisfy any one of the 3 tests, it will not be an Australian superannuation fund.

The SMSF Association argues that removing the active member test in s 295-95(2)(c) would ensure that SMSF members who are working overseas could still contribute to their fund where their SMSF balance exceeds 50% of the fund’s assets. Rather, the Association believes that the residency of a super fund should be determined on the same principles as all other entities for income tax purposes, that is, the place of establishment and the location of the management and control of the entity.

AUSSIEGOLFA PTY LTD (TRUSTEE) V FCT

The Federal Court has ruled that a self-managed superannuation fund (SMSF) investment in a property trust to acquire a fractional interest in a property (to be leased to the member’s daughter) breached the sole purpose test and in-house asset rules under ss 62 and 71 of the SIS Act: Aussiegolfa Pty Ltd (Trustee) v FCT [2017] FCA 1525 (Federal Court, Pagone J, 14 December 2017).

Background

In March 2015, the applicant, as the trustee of a single-member SMSF, invested $28,080 in units in the DomaCom Fund, being a managed investment scheme (MIS) that enables investors to hold fractional interests in property. The invested money was originally held in a cash pool within DomaCom pending the acquisition of a property to be selected by the SMSF trustee. The DomaCom Fund in turn created units in a sub-fund that enabled the SMSF to hold 25% of a property purchased in July 2015 by the responsible entity for $104,000. The property was student accommodation in Burwood Victoria. The other 50% of the units in the sub-fund were held by the mother of the SMSF member (with the other 25% held by his sister’s SMSF).

The custodian of the DomaCom Fund entered into an exclusive leasing agreement with a student housing authority which rented the property to students unrelated to the SMSF for $869 per month. Subsequently, in April 2017, the SMSF member arranged for the student housing authority to lease the property on the same terms to his daughter (a teaching student). The SMSF member was also an employee of the DomaCom Fund and essentially commenced the court proceedings to test the related party use of residential property by SMSFs.

The ATO considered that the leasing arrangement with the daughter breached the sole purpose test and the in-house asset rules as the units amounted to an investment in a “related trust” of the SMSF for the purposes of Part 8 of the SIS Act. The Commissioner also made a determination under s 71(4) of the SIS Act that the units held by the SMSF trustee in the DomaCom sub-fund were to be treated as an investment in a related trust. The SMSF trustee contended that the relevant investment was in the DomaCom Fund (rather than the Burwood property sub-fund) which did not breach the 5% limit for in-house assets under s 82 of the SIS Act, and it was an exempt “widely held unit trust” (s 71(1)(h)).

Decision

In dismissing the SMSF’s application for declaratory relief, the Court ruled that the investment in the units breached the sole purpose test in s 62 of the SIS Act due to the leasing arrangement with the daughter of the SMSF member. The Court found that the investment in the units in the DomaCom Fund was for the collateral purpose of providing housing for a relative, which was not a core purpose, or ancillary purpose, in s 62.

The Court considered that the investment was inconsistent with the underlying objective of s 62 of not providing present benefits or use to members of a SMSF or their relatives. The Court noted that a high standard was adopted by s 62 of the SIS Act as an important pillar to ensure that superannuation funds achieve the objectives of providing retirement benefits and not current day use or benefits. In this respect, the Court said that the reasoning in the landmark “Swiss Chalet” case (AAT Case 10,301 (1995) 31 ATR 1067) remained apt and broadly applicable despite the different facts. While there may be circumstances in which a lease to a related party would not breach the sole purpose test, the Court said the evidence of this case was that the purpose of the SMSF investment in the student accommodation through the DomaCom Fund was, in part, to provide housing for the member’s daughter.

In-house asset rules

The Court also ruled that the SMSF breached the in-house asset rules under ss 71(1) and 82 of the SIS Act after finding that the relevant investment was the units in the Burwood property sub-fund which was separate from the DomaCom Fund.

Notwithstanding that the DomaCom Fund Constitution (as amended) expressly provided that no unit or class of units “gives rise to a distinct trust”, the Court found that the Constitution and product disclosure statements (PDS) created a separate trust in respect of the Burwood property sub-fund. While the responsible entity had trust obligations to other beneficiaries, the Court said it owed no fiduciary duties to the other beneficiaries in respect of the Burwood property which it held for the benefit of the unit holders of the sub-fund. The Court also noted that the rights and entitlements of the units in the sub-fund included 100% of the distributable income or capital in relation to the Burwood property.

In finding that the Burwood property sub-fund was a separate trust, the Court said it was not an exempt “widely held unit trust” under s 71(1)(h) of the SIS Act. A unit trust does not become a widely held unit trust just because it is held by a trustee who holds other funds on trust with similar fiduciary duties to others, the Court said.

The Court further held that the Burwood property sub-fund was a “related trust” under s 10(1) of the SIS Act as the group of Part 8 associates in relation to the SMSF had a fixed entitlement to more than 50% of the capital or income of the trust and, therefore, controlled it under s 70E(2). Accordingly, the Court ruled that the investment in the Burwood property sub-fund (representing 7.83% of the SMSF’s assets), breached the 5% limit for in-house assets.

The Australian Taxation Office (ATO) is warning self-managed superannuation fund (SMSF) trustees and retirees about the risks of some emerging retirement planning arrangements that they may consider, or be approached about.

ATO Deputy Commissioner James O’Halloran said the ATO knows most people do the right thing and work hard to save for their retirement.

“If a taxpayer becomes involved in any illegal arrangement, even by accident, they may incur severe penalties, jeopardise their retirement savings and risk losing their rights as a trustee to manage their own fund.”

For this reason, today we are releasing further information on these arrangements through our Super Scheme Smart program.

Super Scheme Smart is designed to give taxpayers access to relevant case studies and information packs to ensure they are well-informed about illegal arrangements, explain the significant risks associated with those arrangements, what warning signs to look for and where to go for help.

Mr O’Halloran said, “We are working hard to shut down illegal arrangements quickly, but the best defence for taxpayers and their advisers is to be aware. Promoters of the arrangements may overtly target SMSF trustees and self-funded retirees, including small business owners and those involved in property development with significant assets.”

“The arrangements may be cleverly disguised to look legitimate, involve a lot of paper shuffling and framed as being designed to give a taxpayer a minimal or zero amount of tax or even a tax refund or concession” Mr O’Halloran said.

“Just because an arrangement is structured in a way which appears to satisfy certain regulatory rules does not mean it is legal. Such arrangements can put SMSFs at significant risk of breaching the superannuation regulatory rules as well as the taxation law.”

The ATO has previously raised concerns about dividend stripping arrangements and contrived arrangements involving diversion of personal services income to an SMSF. There are some emerging arrangements the ATO also wants to bring to people’s attention, including:

Artificial arrangements involving SMSFs and related-party property development ventures.
Arrangements where an individual or related entity grants a legal life interest over a commercial property to an SMSF. This results in the rental income from the property being diverted to the SMSF and taxed at lower rates whilst the individual or related entity retains legal ownership of the property.
Arrangements where individuals (including SMSF members) deliberately exceed their non-concessional contributions cap to manipulate the taxable component and non-taxable component of their fund balance upon refund of the excess.
Mr O’Halloran said “Remember, if it looks too good to be true, it usually is.”

If you have information about these arrangements or would like to make a voluntary disclosure, phone 1800 060 062 or email reportataxscheme@ato.gov.au.

After detailed consultation with the self-managed super fund (SMSF) sector, the ATO announced today that its implementation of SMSF event-based reporting from 1 July 2018 will be limited to those SMSFs with members with total superannuation account balances of $1 million or more.

Deputy Commissioner James O’Halloran said that this means that SMSFs whose members’ total superannuation balances are less than $1 million can choose to report events which impact their members’ transfer balances at the same time that the SMSF lodges its SMSF annual return.

“As a result of this approach it is estimated that up to 85% of the SMSF population will not be required to undertake any additional reporting outside of current annual reporting timeframes for the foreseeable future.” Mr O’Halloran said.

“From 1 July 2018 those SMSFs that do have members with total superannuation account balances of $1 million or more will be required to report events impacting members’ transfer balances within 28 days after the end of the quarter in which the event occurs.

“However, it is important to restate that in all cases, regardless of the reporting timeframe that applies, reporting is only required if an event that impacts a member’s transfer balance cap actually occurs – for example, when a SMSF member first starts to receive a pension from their fund.”

Mr O’Halloran said “On 22 August 2017 we issued a public position paper about SMSF event-based reporting. The feedback we received highlighted concerns about the effort and costs that may be associated with the proposed approach.

“The ATO has listened carefully to this feedback, and in considering these concerns we have decided to provide an annual reporting timeframe for SMSFs with members with lower superannuation balances and to allow a quarterly reporting timeframe for other SMSFs.

“The ATO believes that the combination of these approaches sensibly balances administrative ease and efficiency with the increased need for transparency across the superannuation system.”

As part of our normal practice, the ATO will continue to evaluate benefits and risks arising from this change to SMSF event-based reporting. Should further change be considered to this arrangement or a change to the expectations on the broader SMSF sector, this would be the subject of community consultation.

Mr O’Halloran noted that it remains important for all SMSF trustees and members to self-monitor and track events impacting upon their transfer balances on an ongoing basis, as envisaged by the transfer balance cap legislation.

“This is vital to ensure that SMSF members are in the best position to make informed financial decisions in light of the cap. The financial circumstances of individuals and their superannuation balances can change. It is important that SMSF members are aware of their position in relation to the transfer balance cap to mitigate the risk of them inadvertently exceeding the cap and being exposed to an excess transfer balance cap liability.”

The ATO will continue to engage and work closely with the SMSF sector over the coming weeks and months to support the sector in transitioning to the event-based reporting arrangements announced today.

Almost 300,000 small businesses have taken advantage of the Government’s $20,000 instant asset write-off according to 2015-16 Tax Office data, Minister for Small Business Michael McCormack says.

In 2015-16, the Minister said the number of claims increased by 50,550 and the average amount claimed increased by $4,065 to $9,000.

In the 2017-18 Federal Budget on 9 May 2017, the Government announced an extension to the 2015-16 Budget measure providing an instant asset write-off provision for small business –

Small businesses can immediately deduct the business portion of most assets if they cost less than $20,000 and were purchased between 7:30PM on 12 May 2015 and 30 June 2018 (the threshold amount had been due to revert to $1,000 on 1 July 2017). This deduction is used for each asset that costs less than $20,000, whether new or second-hand.

The Full Court of the SA Supreme Court has upheld a superannuation binding death benefit nomination (BDBN) after finding that it had been given to the corporate trustee of the self-managed superannuation fund (SMSF) in accordance with the trust deed: Cantor Management Services P/L & Ors v Booth [2017] SASCFC 122 (Supreme Court of South Australia, Full Court, Kourakis CJ, Peek and Nicholson JJ, 22 September 2017).

Background

The deceased (Malcolm Cantor) was the single member of his SMSF. The deceased’s brother (Christopher Cantor) was the sole director of the corporate trustee of the SMSF (the appellant) pursuant to an enduring power of attorney (EPOA) executed by the deceased during his lifetime. This corporate trustee and EPOA structure was adopted as the deceased frequently resided outside Australia. The main asset of the SMSF is an industrial shed at Coolum Beach in Queensland that is used by a company controlled by Christopher Cantor under a market value tenancy.

The deceased had executed a BDBN in which he nominated his siblings as the beneficiaries of his superannuation benefits. In September 2012, he completed a second BDBN (the 2012 BDBN) but this time he nominated his “Legal Personal Representative” (LPR) as the beneficiary. In February 2013, the deceased executed his last will in which he acknowledged the 2012 BDBN and directed his executors to hold that benefit for his wife in accordance with a family will trust.

Following the deceased’s death in April 2013, the respondent (Dr Susan Booth), as the executor of her cousin’s estate, brought an action for declarations that the appellant was bound by the 2012 BDBN and that it held the land in Queensland on trust for the deceased’s estate. The appellant, as the corporate trustee of the SMSF, argued that the 2012 BDBN was not effective on the grounds that it had not been given to the trustee in accordance with the trust deed.

At first instance, the SA Supreme Court held that the 2012 BDBN was effective and that Dr Booth, as the executor of the will of the deceased, was the LPR for the purposes of the BDBN: Booth v Cantor Management Services Pty Ltd & Ors (unreported, SA Supreme Court, 18 March 2016).

Decision

In dismissing the appeal, the Full Court affirmed the first instance decision that the BDBN had been given to the trustee in accordance with the trust deed and was effective upon the member’s death. In terms of the finding that the respondent, as the executor of the deceased’s will, was the LPR for the purposes of the BDBN, the Court noted that the EPOA granted to the brother had automatically terminated upon the death of the EPOA grantor.

While the BDBN nominated the deceased’s LPR as the beneficiary, the Court noted that the brother, as the donee of the EPOA given by the deceased, was only the LPR of the deceased during his lifetime. The Court said it is well established at law that an EPOA is terminated upon the death of the donor. Accordingly, it followed that upon the member’s death and the consequential termination of the EPOA granted to the brother, the SMSF trust arrangement ceased to comply with s 17A(3)(b) of the SIS Act. In these circumstances, the Court said the LPR of the deceased’s estate must assume the directorship of the corporate trustee for the SMSF to remain compliant pursuant to s 17A(3)(a) of the SIS Act. In making this point, the Full Court cited Negline T, The Essential SMSF Guide 2016-17 (Thomson Reuters) which states that, “If an enduring power of attorney is terminated for any reason then the attorney would need to step down as the SMSF trustee and the member would have to be re-appointed.”

Requirement to “give” BDBN to trustee

While the trust deed defined a BDBN as a document which is “given by a member to the trustee”, the Court noted that the deed in this case did not expressly prescribe any particular form of service. Rather, it simply required a BDBN to be “given” to the trustee to be effective. The Court considered that the word “given” should take its ordinary meaning. Although the trust deed did not incorporate the service of documents rules in s 109X of the Corporations Act 2001, the Court observed the well-established practice of service on the registered office of a corporation to inform its interpretation of the deed provisions.

The Court held that the evidence supported a finding that the BDBN had been “given” to the corporate trustee. In this regard, the Court said that a document executed before, and then left with, a person, is “given” to him or her. After the BDBN was signed, it was left in the possession, management and control of the deceased’s accountants at their place of business, which was also the registered office of the SMSF corporate trustee.

According to the Court, leaving the BDBN at the registered address with the accountants (also engaged by the SMSF corporate trustee) puts the question beyond doubt. Having regard to the working practices of accountants in these circumstances, the Court said the accountants who witnessed the execution of the BDBN took possession of it, and filed it, for the purposes of both the SMSF corporate trustee and the deceased. The accountants were then duty bound to keep the BDBN safe and to bring it to the attention of their client (the appellant), the Court said.

IN BRIEF

The Tax Practitioners board (TPB) has released for comment a draft practice note which aims to assist registered tax practitioners understand obligations under the Code of Professional Conduct in relation to the use of outsourcing and offshoring.

The TPB has developed this practice note to assist tax practitioners to understand their obligations under the Code, raising awareness of relevant considerations when entering into arrangements involving outsourcing and offshoring and providing a consolidated listing of further reference information.

The TPB suggests that registered tax practitioners may wish to consider the following general factors:

• if there is a clear definition of duties, obligations and responsibilities of the parties involved in the arrangement, including sufficient detail and review provisions to provide assurances for security and confidentiality;
• the details of any limitation of liability and indemnity insurance arrangements for the parties (for example, clauses contained in the terms and conditions of outsourced provider agreement(s) or terms of use);
• if the outsourced provider is allowed to unilaterally change relevant terms of the agreement (that is, without input from the registered tax practitioner), including in relation to change in business and/or ownership structure, how or where data is stored or managed, and review processes;
• if there is flexibility to allow for changes / developments in technology and operations;
• how  information is being transferred between various systems and whether data integrity is being maintained;
• how information is being stored and accessed;
• the processes in place in relation to the backup and archiving of information (such as multiple backup servers);
• if there are any relevant legislative and regulatory requirements associated with having any information held offshore (that is, information stored or processed in equipment not located in Australia).

The Board notes that while the Code does not specifically deal with outsourcing and/or offshoring, a number of its obligations are relevant eg Code item 6 (disclosure by a tax practitioner), Code item 7 (provision by practitioner of service competently), Code item 9 (taking reasonable care in ascertaining a client’s affairs) and Code item 10 (taking reasonable care to ensure tax laws are applied correctly to the circumstances in relation to which they are providing advice to a client).

Comments

Comments on the draft are due by 12 October 2017