Claiming travel expenses for your SMSF property
03/11/2016 Bobbie Adams, Senior Accountant
Purchasing property within a self managed superannuation fund (SMSF) is becoming increasingly prevalent; however determining what you can and cannot claim for, especially when it comes to incurred travel expenses related to the property, can be difficult. One such issue relates to whether or not a trustee to the SMSF can claim deductions in the SMSF’s tax return for costs incurred during inspections of the property, particularly for properties located inter-state.
For tax law purposes, the rules regarding deductions are similar to those that apply to individuals who own an investment property. However when the investment property is owned inside a SMSF, it is important that extra care is taken to comply with the requirements of the Superannuation Industry (Supervision) Act as well.
The sole purpose test
When considering the deductibility of travel expenses incurred when visiting your SMSFs rental property, it is important to look at whether the ‘sole purpose’ test has been met; that is, your SMSF needs to be maintained for the sole purpose of providing retirement benefits to its members ( per SMSFR 2008/2 paragraph 86-90).
Contravening the sole purpose test is very serious and may lead to trustees facing civil and criminal penalties (in addition to the SMSF losing its concessional tax treatment). Factors such as the length of the trip need to be considered; for example a one day, one night trip from Adelaide to Melbourne to inspect the rental property may be appropriate, however a five day trip including sight seeing may not.
The dollar value of the expenses relative to the size of the SMSF is also a factor; the larger the claim the larger the risk of inquiry from the Australian Taxation Office (ATO).4 According to Ivan Filipovic of Redwood Advisory*, “this will be measured by an external auditor or the tax office in proportion to the overall value of the fund. Ensure your travel and deductions are realistic and can be substantiated”.
Consider the risks
When claiming deductions, you need to ask yourself whether it’s worth the risk of claiming $1,000 in travel costs for a $150 tax saving when ATO penalties for non-compliance are so severe (assuming the SMSF is in accumulation phase and paying tax at 15%). At the end of the day, it is a wise to think about the big picture. If you are unsure if the SMSF should really be paying the expense and claiming a deduction, it’s safer not to make the claim or seek professional advice on the matter.
What can the SMSF claim?
As a trustee (or director of a corporate trustee) you may be able to claim a deduction in the SMSFs tax return for expenses incurred in travelling to and from your SMSFs rental property if:
- your SMSF owns a rental property that is far away from where you live
- it would be unreasonable to expect you not to stay near the rental property overnight when making an inspection
- your sole purpose in travelling was to inspect the rental property
In instances where you stay overnight, you may claim meals and accommodation.
Where your trip is mainly for private purposes (for example, having a holiday) and inspecting the property is incidental to that main purpose, you cannot claim the costs of getting there or the return trip. You can only claim local expenses directly related to the property inspection such as taxi fares to the rental property and a proportion of accommodation expenses. 1 Where travel is for personal and SMSF property purposes the cost of travelling there and back may be apportioned between the two purposes per TR 93/17 and therefore only part of the expense will be deductible.
Example of an interstate property inspection and claimable expenses
Ian and Pamela Short are trustees of a SMSF that owns a rental property in a resort town in Queensland. They spent $1,700 on airfares and $1,400 on accommodation when they travelled from their home in Melbourne, mainly for the purpose of holidaying in the resort town but also to inspect the property. They also spent $150 on taxi fares from the hotel to the rental property and back. In Queensland, the Shorts divided their time in the following manner:
- one day (10% of their total time in Queensland) on matters relating to the rental property
- nine days (90% of their total time in Queensland) swimming and sightseeing
The SMSF cannot claim a deduction for any part of the $1,700 airfares in their SMSF because the main purpose of the trip was a private holiday and the property inspection was incidental.
The SMSF can claim deductions for the $150 taxi fare and a reasonable apportionment of the accommodation expenses (that is $140 of the $1,400).
The SMSFs total claimable amount for this trip is $290.2.
Alternatively, if the couple stayed for a shorter period, say two days, and the sole purpose of the trip was to inspect the property, then all of the airfare can be claimed along with the accommodation and taxi fare.
Or, if the trip included a significant amount of time devoted to the rental property as well as some private holiday time, they could apportion some of the airfares and accommodation between deductible expense of the SMSF and private expense.
What the SMSF cannot claim
The SMSF cannot claim a deduction for trustees’ travel costs to inspect a property before the SMSF buys it.
The SMSF also cannot claim for travel to (or other costs for) rental seminars about helping you find a rental property to invest in.
Seminars are only tax deductible if they relate to producing income from the property. So, when a seminar teaches you how to locate a suitable rental property to buy, you cannot claim a deduction against rental income for the cost of the seminar.
What written evidence do you need when claiming?
If you travel to inspect a rental property, you need written evidence to prove you travelled and what expenses you incurred.
Written records can include:
- a travel diary
- receipts for
- airline tickets
- other purchases while travelling
- items you used for repairs and maintenance you purchased when you travelled to or stayed near the rental property.
If you spend six or more nights away from where you live, you must keep a travel diary or similar document that shows the nature of the activities, dates, places, times and duration of your activities and travel. 2 Per Ivan, “All expenses must be directly attributable to income earning activity of the fund”.
How can my SMSF actually pay for the expenses?
Payment of the SMSFs expenses must be made directly from the SMSFs bank account, by way of a contribution where payment is made by a trustee on behalf of the SMSF or a reimbursed immediately to a trustee.4
What about personal expenses?
Where the trip to inspect the investment property requires apportionment between deductible expenses of the SMSF and private expenditure for the trustees, it is suggested the expenses are paid by the individual from their personal funds initially. This will avoid any risk of illegal withdrawal of SMSFs moneys if the expenses are paid directly from the SMSFs bank account and it is later found there was a private component to the trip. The amount deductible to the SMSF can then be calculated and treated as a contribution to the SMSF or can be reimbursed by the SMSF at a later date.
Getting the right advice
The information in this article is general in nature only and we suggest you seek advice for your specific circumstances from an experienced and professional Accountant to ensure the correct steps are taken when paying for travel expenses related to your SMSFs investment property.
The potential penalties that may apply to trustees if the ATO becomes aware of a breach are severe, therefore it is important to consider whether the tax savings are worth taking the risk.
If you would like more information on the matters raised in this article, or would like to speak with someone in relation to any SMSF or accounting matter, please call our office on 1300 726 082 and ask to speak with one of our accountants at The Hopkins Group who will be able to assist or email us at firstname.lastname@example.org.
* Ivan Filipovic, SMSF auditor and Director at Redwood Advisory www.redwoodadvisory.com.au
4. Paragraph 86 – 91 and 129 – 132 of SMSFR 2008/2 http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~SMSFR~basic~exact&target=EF&style=java&sdocid=SFR/SMSFR20082/NAT/ATO/00001&recStart=1&PiT=99991231235958&recnum=7&tot=23&pn=ALL:::RDB
Disclaimer – This content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. The author, The Hopkins Group and Redwood Advisory disclaims responsibility for reliance on the information detailed in this article.
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