Archives: Investax FAQs

Yes, you can purchase a car in the name of your trust. However, whether you can claim a tax deduction for it is not a straightforward answer. It depends on how the car is used and the nature of your trust’s activities.

What Does Your Trust Do?

🔹 Investment Trust (Property or Shares):

If your trust is primarily used for passive income activities, such as holding rental properties or shares, then there is no clear business connection to justify claiming tax deductions for the vehicle. In this case, the car is likely to be used for personal purposes, which means deductions are generally not allowed.

🔹 Active Business Trust:

If the trust actively operates a business—such as a consulting firm, construction company, or retail store—then there may be a valid business reason for purchasing the vehicle. In this case, tax deductions may be available, provided the car is genuinely used for business purposes.

Fringe Benefits Tax (FBT) Considerations

Owning a personal-use vehicle in a trust can sometimes create additional tax reporting requirements because Fringe Benefits Tax (FBT) may apply.

If the trust provides a car to a trustee, employee, or beneficiary for personal use, the trust may be liable for FBT. This tax applies when a vehicle is used for non-business purposes, and it can significantly impact the overall tax benefit.

Vacant Residential Land Tax (VRLT) applies as an additional levy on properties that remain vacant for more than six months in a year in Victoria. VRLT is separate from land tax and distinct from both the absentee owner surcharge and the federal annual vacancy fee. However, if a property is exempt from land tax, it is also exempt from VRLT.

From 1 January 2025, a progressive rate of VRLT applies to non-exempt vacant residential land across all of Victoria. VRLT is calculated on the Capital Improved Value (CIV) of taxable land. Capital Improved Value (CIV) is the value of the land, buildings and any other capital improvements made to the property as determined by the general valuation process. It is displayed on the council rates notice for the property.

The VRLT rate increases the longer a property remains vacant:

• 1% of CIV in the first year it becomes liable.
• 2% of CIV if the property is vacant for a second consecutive year.
• 3% of CIV if the property remains vacant for a third consecutive year or more.

From 1 January 2026, Unimproved residential land in metropolitan Melbourne that has remained undeveloped for at least 5 years and is capable of residential development may attract VRLT from 1 January 2026 onwards.

If you would like to know more about the VRLT please feel free to read our article Vacant Residential Land Tax (VRLT) In Victoria. 

Yes, you can build a granny flat on your SMSF investment property, even if it is under an LRBA, provided it does not alter the fundamental character of the asset.

Under an LRBA, the acquired investment property must remain essentially the same throughout the loan term. Significant modifications, such as major renovations, structural alterations, or developments, are generally not allowed. This means you cannot:

• Completely remodel the kitchen or bathroom.
• Add new rooms or significantly alter the existing structure.
• Subdivide the land or undertake a knockdown rebuild.

However, according to SMSFR 2012/1, constructing a granny flat on the same land as the SMSF investment property is permitted. For example, if you purchase a property with an existing four-bedroom house and later build a granny flat in the backyard with two bedrooms, a family room, a kitchen, and a bathroom, this does not breach LRBA rules. Since the granny flat is an extension of the residential premises rather than a transformation of the asset, the property remains fundamentally the same.

On the other hand, building a granny flat on vacant land under an LRBA is not allowed, as it would breach the Single Acquirable Asset rule. Under this rule, the asset acquired under an LRBA must be a single, identifiable asset at the time of purchase. Developing a vacant block into a residential property with a granny flat would change its nature, making it a different asset from what was originally acquired, which is not permitted.

Building a granny flat can be a smart income and capital growth strategy for your SMSF, provided you have the additional funds for construction. Since granny flat construction is allowed under LRBA rules, owning an SMSF investment property with a large block of land could provide a dual income stream, enhancing your fund’s cash flow and long-term growth potential.

However, before proceeding, it’s crucial to consult with a financial planner or tax expert to fully understand the tax and compliance implications of this strategy. If you need further information or clarification, feel free to contact Investax—our SMSF specialists are here to help!

 

Reference – SMSFR 2012/1

If you are a foreign property owner in Australia, you are required to lodge a vacancy fee return for your residential property. It must be lodged annually within 30 days after the end of each vacancy year. This obligation applies to foreign investors who applied for property ownership after 9 May 2017 or purchased under a new or near-new dwelling exemption certificate. A foreign owner must lodge the return regardless of whether the property was occupied or rented.

A vacancy year is a 12-month period starting from the occupation day of the property, which is typically the settlement day for an established property or the day a certificate of occupancy is issued for a new one. 

The vacancy fee applies if the property is not residentially occupied for at least 183 days or six months in a 12-month period. To be considered occupied, the dwelling must be either lived in by the owner or a relative, leased for a minimum of 30 days at a time, or genuinely available on the rental market at market rent. Short-term rentals (less than 30 days) do not count towards the 183-day requirement. If the return is not lodged on time, a vacancy fee may still apply, even if the property was occupied.

From 9 April 2024, the vacancy fee will be double the original foreign investment application fee. Some exemptions exist, such as if the property was undergoing substantial repairs, deemed unsafe, or if the owner was receiving long-term medical care. Owners must keep records for at least five years and update details if their foreign ownership status changes. Failure to comply can result in civil penalties or infringement notices from the Australian Taxation Office (ATO).

Australian citizens living abroad (expats) are not considered foreign owners, so they are not required to lodge a vacancy fee return.

Permanent residents (PRs) and New Zealand citizens with a Special Category Visa (Subclass 444) are also not classified as foreign owners, meaning they do not need to pay the vacancy fee.

Investment property owners can generally claim tax deductions for repairs and maintenance, but not for improvements, which can only be depreciated over time. This distinction often confuses property owners, especially at tax time. Simply put, a repair is about fixing wear and tear, accidental damage, or natural deterioration to restore the property’s function without changing its character. 

To claim a tax deduction for repairs, one key rule is that the expense must be incurred in the same year you’re claiming it. You can also claim repair costs if they happen after the property is ready to earn income but before any income is actually received, as long as they’re not considered initial repairs. For example, if your rental property is vacant, advertised for rent, and gets damaged before a tenant moves in, you can still claim the repair costs because the property is held for income purposes, even though you haven’t earned any rent yet.

Here are some common examples of allowable repairs and maintenance:

• Painting
• conditioning gutters
• maintaining plumbing
• repairing electrical appliances
• mending leaks
• replacing broken parts of fences 
• replacing broken glass in windows
• repairing machinery

No, you cannot increase your tax-deductible loan by using equity from your investment property to reduce your home loan. This is because you are essentially swapping security rather than creating a new deductible loan. The ATO determines tax deductibility based on the purpose of the borrowed funds, and repaying a home loan is considered a private expense.

Example:

Let’s say you own Property A, which is an investment property, and Property B, which is your home. You decide to refinance Property A to access equity and use those funds to pay down the mortgage on Property B. While the new loan on Property A is secured against an investment property, the funds are being used for a private purpose (paying off your home loan). Because of this, the interest on the refinanced loan would not be tax-deductible.

If you are considering refinancing or restructuring your loans, we recommend seeking professional advice from Investax Property Tax Specilists to ensure you maximise tax benefits while staying compliant with ATO regulations. Feel free to reach out to us for guidance.

 

A 13.22C Unit Trust is a unique trust structure that allows SMSFs to invest alongside other investors, including related parties.

For example, if you want to buy a property but don’t have enough cash, you and your SMSF can co-invest by purchasing the property through a 13.22C Unit Trust. This allows multiple parties, including individuals and SMSFs, to pool their funds while ensuring compliance with superannuation laws.

However, this structure comes with strict rules. If any of these rules are broken, the SMSF could face serious consequences, including tax penalties and compliance breaches, which may put the fund’s tax concessions at risk. 

This structure is not meant for:

❌ Borrowing money (it must remain a non-geared unit trust)
❌ Holding a mortgage or any asset with a charge over it
❌ Investing in other companies or trusts (for example, it cannot buy shares in BHP)
❌ Leasing property to a related party, unless it’s a business real property (i.e., commercial property used in a business)
❌ Lending money (except for deposits in an Australian bank account)
❌ Buying assets from a related party (unless it’s a commercial property purchased at market value)

 

Additionally, the unit trust cannot own any asset that was previously owned by a related party since:

• August 11, 1999, or
• Three years before the SMSF first invested in the unit trust—whichever is later.

 

Reference: 

SMSFRB 2020/1

CCR REG 13.22C

 

Strata or Bodies Corporate are required to lodge tax returns if they have $1 or more in assessable income that is not considered “mutual income.” For income tax purposes, a strata plan is treated as an Australian public company, even if it is self-managed. A tax return must be lodged for any year in which non-mutual income is earned, such as income from sources outside the group, like investment income. However, if the strata only derive income that falls under the principle of mutuality, which is not assessable, then a tax return does not need to be lodged.

Mutual Income (from owners) – NON-TAXABLE:

• Strata Levies
• Interest on Arrears
• Recoveries

Non-Mutual Income (from non-owners) – TAXABLE IN THE HANDS OF THE BODY CORPORATE:

• Interest from cash at bank or term deposits
• Monies collected from coin-operated laundry facilities (derived from tenants or the public)

Non-Mutual Income (from non-owners) – TAXABLE IN THE HANDS OF INDIVIDUAL LOT OWNERS:

• Income from communications tower leases
• Rent from common property apartments
• Income from advertising billboards

Example as per TR 2015/3 – A strata title body leases the rooftop of a residential rental property to a telecommunications company for $50,000 per year. The Commissioner allows proprietors to report this income in proportion to their unit entitlement and claim deductions under Division 40 and/or Division 43 of the ITAA 1997 for the common property.

Reference 

Strata Tax Return – ATO 

Tax Ruling – TR 2015/3

Many taxpayers end up paying tax on the sale of their primary residence simply because they are not fully aware of the six-year exemption rule. Understanding how this exemption works, and the eligibility criteria involved is crucial for minimising your tax liability.

For foreign residents and Australian citizens who are classified as foreign residents for tax purposes, the main residence exemption from Capital Gains Tax (CGT) does not apply. This means you will be liable to pay tax on the capital gain or profit from the sale of the property if you sell it while classified as a foreign resident. The only exception is if you meet the criteria outlined in the life events test, which is specific and has limited applicability.

However, this restriction does not apply to Australian residents for tax purposes. If you are classified as an Australian resident at the time of the sale, you are entitled to the main residence exemption, like all other Australian resident taxpayers. This includes the six-year exemption rule. It allows you to treat the property as your main residence for CGT purposes for up to six years, even if it has been rented out during that period. However, this applies only if you do not nominate another property as your main residence during that time.

Proper understanding of these rules can significantly reduce your tax obligations, making it essential to seek professional advice tailored to your situation. If you’re unsure about your eligibility or how these rules apply to your situation, contact Investax Property Tax Specialists for expert advice.