Demystifying SMSF investment property deductions

By Lucy Dean

January 08 2018
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Following the government’s decision to deny tax deductions for SMSF trustees’ travel expenses when visiting investment properties, a solicitor has highlighted which investment vehicles can still claim travel expenses.

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Solicitor at Townsends Business & Corporate Lawyers, Elizabeth Wang said SMSF trustees should be aware that the federal government’s 2017-18 budget revealed government intentions to deny all travel deductions associated with the inspection, maintenance or rent collection for residential investment properties.

“As a result of these changes, travel expenditure incurred by individual investors inspecting and maintaining residential investment properties is no longer deductible,” Ms Wang said.

“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.”

Noting that purchasing property within SMSFs is a growing trend, Ms Wang said it’s critical that SMSFs understand the laws governing what can and cannot be claimed, “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”.

Continuing, Ms Wang explained that an SMSF can deduct travel expenditure in the case that losses or outgoings are “necessarily incurred” while maintaining a business with a purpose of gaining or producing assessable income.

She added that there are other investment vehicles outside of SMSFs that can still claim travel expenses.

These include corporate tax entities, public unit trusts and managed investment trusts. Superannuation plans outside of SMSFs can also claim the deduction, as can unit trusts or partnerships in which all the members are entities of any of these investment vehicles.

“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,” Ms Wang added.

Why the change?

The solicitor noted that the verdict on SMSF property travel deduction was the result of individual SMSFs' abuse of the system.

Quoting the Treasury Laws Amendment Bill 2017, Ms Wang said: “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’.”

The Australian Taxation Office in November 2017 also revealed that 9 per cent of SMSFs in the 2013-14 and 2014-15 financial years failed to “meet their regulatory and income tax lodgement obligations”.

Noting that SMSFs accounted for not even 1 per cent of the office’s total collectable debt, the ATO said its 2016-17 focus was on “working closely with the sector in implementing the new superannuation measures and associated support and guidance products”.

In doing so, the ATO worked to provide guidance on each stage in the fund cycle including the start-up, accumulation, retirement planning, benefits payment and winding up.

“To ensure protection of retirement benefits, our primary focus in SMSF regulatory and income tax compliance is on prevention rather than correction,” the ATO said.

“We aim to help SMSFs avoid contraventions in the first place or make voluntary disclosures, rather than penalise them afterwards.”

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Retirement