DUNLOPS
EXPRESS
TAXMAN ALLOWS A
HOLIDAY
Dunlops Taringa
In a rather generous decision, the
Administrative Appeals Tribunal (AAT)
allowed a teacher a tax deduction of
$15,000 for an overseas “self-guided
educational tour”.
PO Box 345
INDOOROOPILLY QLD 4068
In 2004, Peter Lenten used his long service
leave to travel through Asia, the UK and
Europe—a trip that he said helped him
receive a promotion to head of the Studies
of Society and the Environment faculty the
next year.
Ph (07) 3871 1522
Fax (07) 3871 1533
www.dunlops-taringa.com
The travel was non-mandatory, and
consisted of “general package tours and
self-guided expeditions to places mainly of
historical interest and significance,
including visits to World War II and
medieval sites”.
Mr Lenten did not attend any professional
conferences or lectures, or visit any
educational institutions during the course of
the trip, but he did attend lectures at
museums.
The AAT said that the dominant purpose of
Mr Lenten’s travel was to improve his
knowledge and skill levels as a teacher “for
the purpose of enhancing his promotional
opportunities within the school at which he
was employed”.
In this issue:
Taxman allows a holiday
1
Borrowing by Super Funds
2
When is a shed a house?
2
They allowed Mr Lenten to claim 75% of
his expenses as a tax deduction, after a 25%
allowance for the “inevitable recreational
character” of some of the travel.
Taxation of Super Fund Death
Benefits
3
Rental property tax tips
3
Fixed Fee Service
4
Portfolio Administration
Service
4
BORROWING BY
SUPER FUNDS
Until
recently,
self
managed
superannuation funds (SMSF’s) could not
borrow to buy assets, for example
commercial or residential property.
MAY 2008
This
prohibition
was
considered
necessary to protect members’ benefits
from what was regarded by the regulators
as a risky strategy.
This situation was changed late last year,
when amendments to the legislation were
made to allow SMSF’s to borrow to
acquire property as long as they comply
with a number of provisions, including:

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The legal title to the property is held
by a trust, and the beneficial
ownership is held by the SMSF.
The lender must lend the money on
a “limited recourse” basis. (ie The
lender’s recourse is limited to the
property being acquired.)
Rent from the property is paid to the
SMSF, which makes the repayments
on the loan.
Here is an example of the application of
these new provisions. James and Jody
Jackson have an SMSF worth $300,000.
They are not keen on the sharemarket,
and don’t have sufficient funds to buy a
decent property so the money is sitting in
fixed deposit with the bank.
The Jacksons are excited when they hear
about the new borrowing provisions.
They have been keen to buy a duplex for
about $550,000 as an investment for their
super fund, but previously the borrowing
restrictions have ruled this out.
In conjunction with their accountant,
James and Jodie set up the necessary
structure, and borrowed sufficient funds
to purchase the property.
The rent of $36,000 a year is paid into the
SMSF’s bank account which applies it to
making the loan repayments of $41,000 a
year. (The shortfall would be made up by
further contributions to the fund each
year.)
Assuming an increase in property value
of 6% a year, in 10 years the Jacksons
would have a debt-free property worth
$948,966.
It’s important to note that the structure
for the borrowing strategy needs to be
“spot on” to avoid compliance issues.
Please contact us for further information.
WHEN IS A SHED A
HOUSE?
We all know that our principal residence
is exempt from capital gains tax, but what
is a residence?
An unusual case regarding this question
involved a Ms Summers, who was
described by the Administrative Appeals
Tribunal (AAT) as ”an interesting lady
with somewhat unusual working and
living habits”. “She is 44, unmarried and
has worked at two jobs for most of her
working life. She does not cook, buying
all her meals, has always showered using
the facilities at work and has never
owned a rubbish bin”.
The case involves a dispute between the
Tax Office and Ms Summers, as to the
assessable amount of capital gain.
The basic facts were not in dispute:


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Ms Summers purchased a vacant
block of land on 31 July 1996 for
$166,000.
In June 2002, she entered into a
contract with a builder to erect a
dwelling on the land.
In September 2002 the building
contract was terminated, but, in the
meantime the builder had erected a
two room shed on the property.
Ms Summers moved into the two
room shed for approximately four
months from (about) 1 January
2003.
On 24 June 2004, Ms Summers sold
the property for $380,000.
In relation to the shed she claimed was
her residence for 4 months, Ms Summers
said it was erected and left by the builder.
The issues involved were:


Whether the shed was Ms Summers’
main residence;
Whether she moved into the shed as
soon
as
practicable
after
construction, so as to have the
benefit of the four year concession.
The Decision
1. Shed = Residence
The AAT stated that it accepted the
evidence of Ms Summers that the shed on
the property at Kallista was her main
residence for approximately four months
from January 2003.
“While her living conditions might be
regarded as unusual and were temporary,
I am satisfied that for this unusual and
interesting lady, they were regarded by
her as normal and reasonable”.
It was, at the time, her only residence to
which she returned each day to sleep and,
to her, was not significantly different to
many other places in which she had
resided.
2. Didn’t move in soon enough—so, she
doesn't get the 4 year exemption
At the time the shed was completed, Ms
Summers had no intention of living in it.
It was only in January 2003, after a
disagreement with the person she was
living with, that she decided to move to
the Kalista shed.
While the time gap may have been four
months only, it cannot be said that she
resided there as soon as practicable after
completion of the building.
The result of this is that the preceding
four year period is not available.
However, she was able to treat it as her
main residence from the date she moved
in until she sold it.
The total period of ownership, from 1
November 1996 to 24 June 2004, is 2792
days. The period up to the date of use as
a main residence (assumed to be 1
January 2003) was 2252 days. This
means that Ms Summers was taxable on
2252/2792 of the gain, but the balance
was exempt.
TAXATION OF SUPER
FUND DEATH
BENEFITS
The Simpler Super changes, which
applied from 1 July 2007 have had a
major impact on the taxation of
superannuation benefits on the death of a
member.
Death benefits paid from a fund to a
“dependant” of a member are tax-free,
irrespective of the member’s age and the
amount paid.
Problems can arise, however, when
benefits are paid to non-dependants, such
as adult children.
Consider the example of Bob, who dies
aged 64, and who is the sole member of
his super fund. Bob’s fund was worth $1
million, and it contained no “undeducted”
amounts.
The trustees of Bob’s fund pay the $1
million to his adult sons, Tim and Peter.
As they are all classified as “nondependants”, Tim and Peter have to pay
16.5% tax, $165,000, on their benefit.
How could this tax slug have been
avoided? Well, if Bob had known he was
going to die, he could have withdrawn
the $1m tax-free, and given it to the boys
with no tax consequences.
However, as it is not normally possible to
foresee one’s death, Bob could have
implemented a “recontribution strategy”
a few years earlier. After he turned 60,
Bob could have withdrawn $450,000
from his fund tax-free and recontributed
it as “non-concessional” (previously
called undeducted contributions.).
Bob’s fund would then comprise
$550,000 taxable and $450,000 non
taxable contributions. On Bob’s death,
$450,000 of the payment to the boys
would be tax free, saving $74,250 tax.
3. Depreciable assets of between
$300 and $1,000
Subject to certain conditions, these assets
can be ‘pooled’ and the total cost
depreciated at 37.5 per cent, which may
be more favourable than separately
depreciating them.
4. Allocating total purchase price
If, three years after contributing the
$450,000, Bob could contribute a further
$450,000, his fund would then comprise
a $900,000 tax-free component, saving a
total $148,500 tax.
RENTAL PROPERTY
TAX TIPS
If you purchase property with depreciable
assets (eg dishwasher, clothes dryer etc),
you must allocate the total purchase price
between the property and other items on a
reasonable basis.
5. Part of the building
Items such as built-in wardrobes,
swimming pools, electric cabling and
security screens are treated as being part
of the building and are non depreciable
assets. Expenditure on ‘capital works’
(eg the building and surrounding
structures, driveways etc) is generally
deductible over 40 years at 2.5 per cent.
6. Improvements and repairs
When determining what you can and
can’t claim in relation to a rental
property, we recommend that you
consider the following tax tips.
1. Be able to justify your claim.
Make sure you have the receipts to justify
the deductions you are claiming, and can
justify the connection between the
expense and deriving the rental income
(eg It wasn’t also for a private purpose.)
2. Low cost depreciable assets of
$300 or less
You generally get an immediate
deduction for depreciable assets costing
$300 or less. However, if you purchased
other items during the tax year and
together they form part of a set, or are
substantially identical and the combined
cost is more than $300, each item must
be separately depreciated.
Repairs to the property are deductible,
buy improvements are not. However,
they add to the cost base for Capital
Gains Tax.
10. Travel to inspect property
You can claim a deduction for the cost of
travel to inspect the rental property. If
there was also a private purpose to the
trip (eg A holiday or to visit family or
friends) then you can only deduct a
portion of the travel cost, and potentially
none if the property inspection was
merely incidental to the private purpose
for the trip.
11. Below market rent
If the property is rented to family or
friends for below market rent, the ATO
will treat this as a ‘private’ arrangement
and only allow you to claim sufficient
deductions to offset the rent, but not to
make a tax loss.
12. Mortgage with redraw facility
If the mortgage to purchase the property
has a redraw facility, think carefully
before redrawing to fund something
private such as buying a car or a holiday.
The interest expense must be apportioned
between the ‘deductible’ and the ‘private’
portion of the total borrowings.
13. Selling the property
Make sure you declare any capital gain
when you sell the property.
7. Repairing existing wear/damage
The cost of renovations or repairs to fix
damage or wear in existence at the time
you purchased the property are generally
considered capital and not deductible.
8. Renovate and sell
If your intention was to renovate and sell
at a profit, rather than a long-term income
producing investment, you may be taxed
on the entire profit as a “profit making
scheme”. This falls outside the capital
gains tax (CGT) rules, so you will not be
eligible for the 50 per cent CGT
concession.
9. Body corporate fees
These fees are generally deductible.
However, if a component is for a specialpurpose sinking fund rather than general
running of the complex, it may be
considered capital and not deductible.
FIXED ACCOUNTING
FEE
In common with over 95% of accounting
firms, we have always based our charges
on hourly rates.
We would rather give you the option of
an agreed price before we commence
your work, rather than bill you upon
completion for an amount not agreed on.
This process will be introduced in the
2008/09 financial year for clients who
would like this option.
Please contact us if you would like
further information.
PORTFOLIO
ADMINISTRATION
SERVICE
A number of clients who have share
investments have mentioned that they
feel overwhelmed by the paperwork
associated with their portfolio.
To simplify matters for you we offer a
full Portfolio Administration Service, as a
cost-effective solution to relieve you of
the paperwork associated with share
ownership.

This is how the service works:
Note that investment advice is not a part
of this service. All investments remain in
your own name. If you wish, you can
continue to receive your investment
correspondence, and we’ll take care of
the recording.

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This paperwork consists of dividend
advices, notices of meetings, proxies,
takeover offers, Tax File Number
notification and so on.

All mail in relation to your
investment is sent to us
We set up a detailed investment
register for you and send you reports
as required
We
receive
all
investment
correspondence and update the
register as required
Any items requiring decisions are
discussed with you (this would
include correspondence regarding
rights issues, buybacks, floats etc)

The
Capital
Gains
Tax
consequences of any sale is known
at any time
The information is in a form which
facilitates the preparation of your
income tax return.
Costs for the Portfolio Management
Service vary according to the number of
investments held.
MAY 2008
STAFF EMAIL ADDRESSES
David Adams: fdadams@dunlops-taringa.com
DUNLOPS TARINGA
PO Box 345
TARINGA QLD 4068
Phone: 07) 3871 1522
Fax: 07) 3871 1533
Karen Cole: kfcole@dunlops-taringa.com
Toolah Olsen: toolah@dunlops-taringa.com
Darren Bonney: darren@dunlops-taringa.com
Felicia Vendijanto: felicia@dunlops-taringa.com
www.dunlopstaringa.com.au
Patrice Hunter: advice@dunlops-taringa.com
Megan Rasmussen: megan@dunlops-taringa.com