Dodgy Tax Claims

Dodgy Tax Claims – Work Related Expenses and Rental Expenses

ATO Targets Work-related Expenses and Rental Expenses

The tax office have confirmed that they will continue to monitor work-related and rental expenses claimed in 2016 income tax returns. In particular, they will be focusing on work-related car, travel, mobile phone and internet expenses as well as repairs and maintenance for rental properties.

The tax office advise there are 3 key rules for claiming work-related expenses:
– You have spent the money yourself
– It must be related to your current job; and
– Your must a record to prove it.

The tax office is receiving more data from third parties than ever before, including banks, employers, health insurers, state and federal agencies and overseas treaty partners. In some cases, the deductions claimed by tax payers have been disallowed because their information did not match with information provided by these third parties. Some examples include:

– An employee claimed car expenses for their home to work travel on the basis that they transport bulky tools, however the tax office contacted the employer who confirmed that these items can be securely stored at the place of employment.
– An employee claiming travel expenses for an overseas holiday as work-related, however his employer confirmed that he was on annual leave and the trip did not relate to his work.
– A taxpayer claiming expenses for attending an overseas conference, however immigration records indicated that he was in Australia at the time of the conference.
– A taxpayer claiming car expenses based on the log book method, however toll road records did not correspond with the log book and further enquiries indicated that he was out of the country on the dates listed in the log book.

If claiming repairs and maintenance for a rental property, you must ensure that they were genuinely incurred while the property was available for rent and that they were to repair damage caused by the tenants.

If a claim is found to be incorrect, the expense will be disallowed and penalties may be imposed on the taxpayer.

We will also be providing an additional report to employee taxpayers this year. This report will advise if your work-related expense claims are outside the average for your occupation and income level. The tax office will be conducting reviews and may contact any clients whose deductions exceed the average. You should ensure that you are able to substantiate all expenses claimed in the event that this information is requested by the tax office. You are responsible for this proof even when you use a registered tax agent.

If you have any concerns regarding what you can claim in your tax return, please do not hesitate to contact our office.

The ATO have published an Article on Exposing dodgy deductions, to read the full article click here. Below is some case studies from the article:

Case Studies

Case study one

A railway guard claimed $3,700 in work-related car expenses for travel between his home and workplace. He indicated that this expense related to carrying bulky tools – including large instruction manuals and safety equipment. The employer advised the equipment could be securely stored on their premises. The taxpayer’s car expense claims were disallowed because the equipment could be stored at work and carrying them was his personal choice, not a requirement of his employer.

Case study two

A wine expert, working at a high end restaurant, took annual leave and went to Europe for a holiday. He claimed thousands of dollars in airfares, car expenses, accommodation, and various tour expenses, based on the fact that he’d visited some wineries. He also claimed over $9,000 for cases of wine. All his deductions were disallowed when the employer confirmed the claims were private in nature and not related to earning his income.

Case study three

A medical professional made a claim for attending a conference in America and provided an invoice for the expense. When we checked, we found that the taxpayer was still in Australia at the time of the conference. The claims were disallowed and the taxpayer received a substantial penalty.

Case study four

A taxpayer claimed deductions for car expenses using the logbook method. We found they had recorded kilometres in their log book on days where there was no record of the car travelling on the toll roads, and further enquiries identified that the taxpayer was out of the country. Their claims were disallowed.

Case study five

A taxpayer claimed self-education expenses for the cost of leasing a residential property, which was not his main residence. The taxpayer claimed he had to incur the expense of renting the property as he ‘required peace and quiet for uninterrupted study which he could not have in his own home’. This was not deductible.

In addition to the rental expenses, the cost of a storage facility was claimed where ‘the taxpayer needed to store his books and study materials’. They claimed they needed this because of the huge amount of books and study material associated with his course and had no space in his private or rented residence where these could be housed. This was not deductible.

The cost of renting the property was around $57,000, with additional expense of $7,500 for the storage facility. The actual cost of the study program he attended that year was only $1200.

Redraw and Offset Accounts – How they can save you money

Tax Minimisation and savings

Mortgage and Finance Broker Grant Robertson provides the following advice to Plant and Associates clients:

Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.

Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.

In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.

However, there may be restrictions on how much money can be withdrawn and when.

“For redraw, it depends on whether the facility applies to a fixed-rate or variable loan,” Moses says. “Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.”

It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.

Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.

Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.

“Let’s say that you are paying five per cent interest on your home loan and earning two per cent interest on your offset account,” explains Heritage Bank NSW State Manager Paul Moses.

“In a offset setup, the difference would be 3%, but would mean that the 2% interest that you earn is coming off the interest you are paying on your home loan.”

With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.

“Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000,” Moses says. “That’s probably the best type to have, if you are looking at offset accounts.”

Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.

“There are less restrictions attached to 100 per cent offset accounts, they’re very flexible. But really, it does just depends on each lender,” Moses says.

Finding a loan that matches your needs is a lot easier with an expert on your side. Speak to Grant Robertson 0466 977 170 or email: to find a loan that matches your current needs and future plans.

Grant Robertson Mortgage and Finance Broker Dip. Finance and Mortgage Broking Management

Phone : 0466 977 170 Fax : 07 5525 3887 Address : PO Box 1186, Mudgeeraba, QLD 4213 Email:

Q&As to consider if and when you have an investment property

Getting the right advice is imperative. You can read hundreds of articles about the benefits of owning a rental property, but it is important to conduct a property analysis and consider all factors including your current and future situations.

What are some of the factors that people need to consider if and when they have a rental property?

Consider instances where you go down to one income and how it will affect your ability to pay all the bills. If your rental property is untenanted for 10 weeks, how will you cope with the lack of income? Also, consider property being damaged either by natural disasters or current tenants and if interest rates continue to rise above and beyond your means.

How can investment property owners alleviate the risks involved in owning their properties?

They can mitigate all these risks by having landlord and building insurance for damages, ensure they have income and life insurance and making sure not to buy a property at your maximum borrowing capacity.

What does a negatively geared property mean?

Negative gearing can be achieved by having a property that costs you in interest, rates, insurance etc. more than what you receive in rental income. For tax purposes, depreciation and building write-off on the property also reduces your profit to a negative figure ensuring you do not pay any additional tax.

There are many other factors to take into account when considering an investment property. Always seek advice to determine if it’s the right investment for your financial circumstances by speaking to your accountant or financial adviser. Call Plant & Associates on 1300 783 394 to receive your FREE initial consultation.

Posted in Investments, Property

Super or Mortgage

The pros and cons of using spare income to pay more off your mortgage or increase your super needs to be weighed up, but with both strategies the winner could be your financial future.

Choosing to channel more of your cash into either your mortgage or your super can be a fork in your financial road and leave you asking which path you should commit to.

The direction you take depends on a few factors such as your age, how much you earn, your level of debt and your income tax rate.

If you are in your twenties, for instance, you may not want to save for a retirement that is 40 years or more away. A better strategy might be to invest in a home where you can build some equity by the time you are nearing your forties and considering a retirement strategy.  However, the older you get, the more you might want to invest in your superannuation and begin the transition to retirement financially.

 Issues to consider if you take the mortgage route:

•Paying no tax on growth in the value of your family home

•Access to redraw facilities if you need a quick flow of cash

•Equity which you can borrow against

•Reliance on the property market as a long–term strategy

•Changes to interest rates

Issues to consider if you send more money your super’s way:

•Boosting retirement income

•Tax–effective as tax on investment returns is capped at 15%

•Tax–effective when you salary sacrifice

•Potential benefits of Federal Government co–contributions if you earn less than $46,920

•Inability to access funds if you are under retirement age

Questions to ask yourself…

If you are at the time in life when you feel it’s better to place your cash into super, here are some steps to help you decide how to put a strategy in place:

How much do you owe on your mortgage?

Sit down and do your sums to figure out how much money is going into repayments, and how long it will take you to pay off your mortgage.

How is your mortgage set up?

Do you have an interest–only strategy at the moment and how long is the life of your loan? It might be worthwhile considering if this needs to be changed. Switching to an interest only loan may also give you more cash–flow that can be invested into your super.

Is there cash looking for a better home?

You may have more money floating around than you think and some can go into growing your super balance.

Do you have the capacity to salary sacrifice?

Your employer may allow you to salary sacrifice some of your income which will be taxed at a maximum rate of 15%, saving you a tidy sum in tax if your income is currently being taxed at a higher rate.

In conclusion…

It’s wise to speak to a professional who has the necessary tools at their finger tips to assess your personal situation and identify which options and blend of strategies will place you better in your retirement.

Have a good week.

Posted in Home Loans, Investments, Super

Centrelink benefits

Make sure you aren’t missing out! article by Tracey Roberts Financial Planner

Are you missing out on valuable Centrelink benefits because your assets aren’t correctly structured?  Sometimes, restructuring your assets can give you access to benefits like Newstart,  a pension card and/or part aged pension!

 Check with your financial planner to see if they can help or call Tracey Roberts at Foundation Planning Pty Ltd 07 5631 4343 or 0403 844 071 who wil be happy to have an obligation free chat (

 Here’s a couple of examples of what can sometimes be achieved.

Case Study

Reg (age 65) and his wife Carolyn (age 60) have the following assets:

  • Home – $300,000
  • Super – $380,000 (Reg}
  • Bank account – $10,000 (joint)
  • Car – $20,000
  • Home contents – $10,000

As Reg has recently reached Age Pension age and retired, he would like to apply for the Age Pension. Carolyn has been receiving Newstart Allowance for the past few years.  If Reg uses his entire superannuation balance to commence an allocated pension, he would be entitled to a part Age Pension of $448 per fortnight ($11,648 per annum). Carolyn’s Newstart Allowance would cease as their combined assessable assets now exceed the lower assets test threshold of $265,000*.

 Reg decides to cash in $170,000 of his superannuation benefits. This withdrawal will be completely tax-free^ as Reg is over age 60. Reg will then use this money to make a spouse superannuation contribution into Carolyn’s superannuation fund. Reg will commence an allocated pension with his remaining superannuation balance. As a result of this strategy, Reg & Carolyn’s assessable assets have been reduced by $170,000 to $250,000, which is below the lower assets test threshold of $265,000*.

 Reg will qualify for a full Age Pension of $564.50* per fortnight ($14,677 per annum).

Carolyn will continue to qualify for a full Newstart Allowance of $428.70* per fortnight ($11,146 per annum). This results in combined social security benefits of $25,438.40 per annum.  Further, while it is not likely to be applicable in this scenario, depending on their income position for the entire financial year, Reg may also be eligible for a spouse contribution tax offset of up to $540.

^ However, Flood levy of approximately $1,093 will apply.

* Rates and thresholds used are current to 31 December 2011. Rates include Pension Supplement for Reg.

Case Study

Sam (age 56) is single, owns his home, and has been unemployed for three months. His assets consist of the following:

  • $15,000 in the bank
  • $180,000 in managed investments (subject to deeming under the income test)
  • $75,000 in superannuation

As his assets (excluding superannuation) exceed the $186,750* asset test threshold, Sam is not eligible to receive any Newstart Allowance. Sam would like to receive some Newstart Allowance to help meet his living expenses and he is not averse to increasing his superannuation balance. He accepts his financial planner’s advice to make a $145,000 non-concessional contribution (using his managed investments) into his superannuation fund.  Following this contribution, the level of assets counted under the assets test is reduced to $50,000. The level of deemed income (from the managed investments) under the income test is also significantly reduced.

Sam is now able to receive the full amount of Newstart Allowance of $486.80 per fortnight*

or $12,657 per annum.

* Rates used are current to 31 December 2011.

Foundation Planning Pty Ltd

ABN 93 150 110 517

Authorised Representatives of AMP Financial Planning Pty Limited

Ph: 07 5631 4343 Fax: 07 5522 8836 Mob: 0403 844 071

PO Box 35, Mudgeeraba, QLD 4213

Posted in Centrelink, Investments, Retirement, Super

Cash flow vs growth strategy – Investment Properties Accountants Beenleigh

Plant and Associates Accountants Beenleigh and Nerang specialise in property investments. 

Cash flow properties:

These are properties with a low capital growth profile of 4–6% and high rental yield (return) profile of around 6–10%. Occasionally though the capital growth achieved for these types of properties can be very high. But typically this is only for a short while.


The main advantage with cash flow properties is the positive or neutral cash flow that they generate. You can’t lose having money in your pocket (unless you get in too late). Typically these properties are located in regional areas and so they tend to have lower entry prices (as well as lower stamp duty and land  tax) – so for investors who don’t have much equity or income it is easy to get started. Moreover, you can use the surplus cash flow to pay down  principal to get more equity for future investment. Because of the popularity of these types of properties it is not uncommon to occasionally achieve strong capital growth gains due to the demand for  high yield properties. Regional areas tend to have slower capital growth over periods of time unless there is an economic change in the area. For example, North Queensland is experiencing growth in property values at the moment due to mining. Traditionally properties in regional North Queensland have been strong cash flow properties. The increase in population has driven a demand for homes and rental accommodation, which in turn has pushed the price up for existing properties. These  properties would now be giving you good growth. Buying into the area now, however, would give you a higher entry cost and would reduce your ongoing cash flow. Should the mining boom cease or slow down, the demand for properties would drop, which in turn would have an impact on values.


Because you are  generating an income from the positive cash flow, you pay tax along the way. You get taxed on this extra income and the money going in the tax man’s pocket is going to make it hard for you to create serious wealth. Because these properties are usually in regional or outer  areas they can be quite sensitive to economic cycles. Therefore compared to properties located closer to the centre of our major cities these properties will generate lower capital growth over the longer term. There are also potential higher costs associated with maintenance and more tenancy problems due to socioeconomic factors. From a finance perspective it is harder to get low-doc loans for some regional properties due to postcode restrictions imposed by lenders, mostly due to their smaller populations. The result is lower leverage which will reduce your return.

Growth properties:

These are properties with a higher capital growth profile of 7–10% (and occasionally over 12% for a short while) and a lower rental yield (return) profile of 3–5% rent (occasionally below 2.5%).


The main advantage of these types of properties is the fact that these areas are usually inner areas and high population areas which are not affected as much by economic cycles and interest rates. Therefore they usually have higher and consistent capital growth over the longer term. This means investors can generate more equity in a quicker period of time which can allow them to invest further. The government also makes it attractive for investors to purchase these types of properties by offering tax benefits via negative gearing and delayed capital gains tax (CGT).

Most lenders view these  types of properties as less ‘risky’ than regional properties, mainly because of the larger populations in these areas. Therefore there is less risk of tenancy problems due to better socio-economic conditions and the fact that there are more buyers in these areas, in case the property ever needs to be sold quickly.


The big disadvantage with these properties is the negative cash flow if you take on a normal mortgage at a high leverage level. Added to this is the fact that these properties are usually more expensive than cash flow properties, in terms of purchase price, stamp duty and land tax. It is harder for beginners to enter the market, simply because there is greater demand for these types of properties than the supply. Furthermore, in the short term there is no guarantee for capital growth every year – you may bet on the wrong horse. The main disadvantage from a finance perspective is that it gets harder to get full-doc loans to access cheaper interest rate mortgages as your portfolio gets bigger.



Houses have typically shown more consistent growth long term in established areas. Therefore purchasing property with high land content is a way to increase your chances of securing good future growth if in an established area. You usually own the land and so therefore you also  have greater control over what you want to do with it. This means there are more options open to you (depending on council regulations in the area you are purchasing) to modify the property and add value. Because of the above, houses are typically more sought after and therefore it is usually easier to get finance. However, townhouses are now getting popular as family sizes decrease and the number of retirees increases.


Houses offer lower rental returns as a percentage of their value. There can also be higher maintenance costs.



One of the main advantages with apartments (or units) is they tend to have higher rental as a percentage of their value. Moreover, apartments often achieve just as good returns as houses in areas that are fully built up with height limit restrictions on further development. Over the last decade we have seen these types of assets start to become popular with the younger generation and empty nesters. They meet the needs of these demographics as lifestyle trends change. Partly because they typically are less labour intensive in terms of maintenance so there is generally less time involvement, and they also have potential advantages over houses because of the shared benefits of many apartment complexes from community/group services, eg pool, tennis court, gym, activities, etc.


The main disadvantage is that apartments typically show less consistent growth in areas that are not fully built up. Owners of apartments also typically have less control over their asset as any changes they want to make to their property usually requires approval from a body corporate. So the opportunity to add value is restricted. Owners have to contribute to the running of the body corporate, so compulsory fees are generally higher. It’s also hard to get good finance for some types of apartments, mainly company title properties and very small apartments (under 40m2). So watch out for these!

 New vs old properties strategy

New properties:


New properties are attractive to passive investors who are time-poor and would like to have a property that requires little effort on their behalf. There is usually lower maintenance, and if there happens to be any defects after completion, the builder or builder’s insurance should cover any cost involved. New properties have an appeal to tenants as they usually have lots of light and space, and may also come with other amenities such as a swimming pool and gym (new apartment complexes). Tenantswith good incomes are often prepared to pay higher rent for new properties, particularly if they are situated close to their work. From a tax point of view, new properties usually offer higher or longer depreciation benefits, not only from the fixtures and fittings but also from capital works. It is possible for investors to use these tax benefits to assist with monthly cash flow.


The main disadvantage of purchasing new properties is that the cost to purchase may be higher than an old property in the same area, as developers have to cover their costs and profit margins. Many people who purchase new properties may make emotional rather than business decisions, as they may have fallen in love with the look of the place and how it makes them feel. If they have paid an inflated price for the property, it may take longer to realise capital growth. Another reason that growth may be affected is because there may be a few properties that are very similar being sold at the same time, such as in a brand new development. A few hasty re-sales can affect the values of all the properties in the immediate area. This can have an impact both if you are trying to sell a property or are trying to release equity from your own property. If   properties have been sold for lower prices, it will reduce the market value of your own property. As a general rule, brand new properties don’t allow much room to add value by renovating as all the work has already been done by the developer, so unless an investor has purchased at well under market value they will need to wait for natural capital growth to occur.

 Old properties:


One of the biggest advantages of old properties is the fact that you get less price fluctuation than new properties in the same area, plus you gain the ability to add instant value through renovations, subdivision and development. Some investors have even managed to get their property for ‘free’ by subdividing a large block and selling off a portion of the land. It has been proven that land, and the scarcity of it, is what drives property value upwards, and older properties generally have a bigger land component. Investors can be more certain that the property they are purchasing has a ‘true’ market value, with no profit margin set by the seller. They are usually found in well established suburbs which can demonstrate consistent growth.


High maintenance costs are probably the biggest disadvantage of old properties. There may be a loss of rental income if renovations need to be done. It may also be harder to attract good quality tenants to an old property, unless it has had some renovations done to it to modernise it. Also, tax benefits are not as good with old properties due to lower depreciation values. Rental may not be as high if the property is very run down, which could impact on your monthly cash flow as the rental yield you can command will be lower than could be achieved with a new property.

 Off-the-plan strategy


Off-the-plan purchases have a lot of the advantages I have already touched on with new properties. An off-the-plan purchase is a brand new property which has higher depreciation benefits. The stamp duty payable on the purchase is reduced because the property is not yet completed.

The Foreign Investment Review Board will allow an overseas investor to purchase an off-the-plan property, whereas they can’t purchase an established property. Perhaps one of the biggest advantages is that there is the potential to secure the property without putting any of your money down. Some developers accept Deposit Bonds to cover the deposit instead of you having to use your own cash. If the property is not completed for a couple of years, this is a much cheaper option and allows you the flexibility of using your cash for something else. So there is a potential   equity gain for the investor to be had, even before settlement. But only if you get it right.


There have been occasions where properties purchased off-the plan may have dropped in value by the time the property is completed and ready to settle; therefore investors may find themselves out of pocket. These developments tend to be heavily marketed by skilled project marketers and you have to be careful to see through the spin and focus on the underlying fundamentals of the project itself. With some new developments the area and type of product that is being developed may not have been tested before. This is a warning sign. Past performance is the best indication of future performance; without past performance the future performance is unknown. Therefore there is more scope for the purchase price to be set artificially as there is no precedent. You need to factor this risk into your decision making process. Paying the upfront deposit prior to any valuations being completed commits you to the property before you have a true ‘value’ on the property. Remember you haven’t actually ‘seen’ the property you are  purchasing. If there are a number of large developments going on in the same area, it can reduce the value of the property you have purchased even before it’s completed because there is an over supply. With large developments, if a certain percentage of the properties are not sold before construction, there is no guarantee the project will commence, which means you may have lost valuable time and missed out on other property opportunities.

 Guaranteed rental

Rental guarantees are attractive to property investors because they offer the promise of secure, ongoing rental income from an investment property. There are several scenarios where an investor might be offered a guaranteed rental return: ?Department of Housing (Housing commission) rentals ?Defence Housing Australia (DHA) rentals ?Off-the-plan units with a developer’s rental guarantee ?Display homes sold to an investor then rented back to the builder until the rest of the houses in the development are sold DHA has put together the most  comprehensive rental guarantee system in Australia, with over 18,000 properties under management; over 11,000 of these are managed on behalf of investors. They are able to do this by building and selling properties close to Department of Defence installations to house Defence Force personnel and their families.


You get guaranteed rent so you won’t have to worry about your property becoming vacant. It ensures steady cash flow and peace of mind that your property is well-tenanted during the duration of the lease. The upside of a rental guarantee with an

organisation like DHA is thatit’s unlikely to run into financial difficulty because of its size and government backing. The other positive is that a rental guarantee in a market where vacancy is high and rents are stagnant is not a bad thing.


The offer of a rental guarantee is only as good as the company giving the guarantee, its commitment to the offer, continued operation and having sufficient financial resources, including a positive cash flow, to fund rental shortfalls for property investors. In the case of most developer’s guarantees, the developer will guarantee the rent for a period of time on properties they have built and are trying to sell. Very often these rental guarantees are higher than the current market rate to make the investment more attractive. In the case of Defence Housing Australia, the rental guarantee is based on independent valuations and is reviewed annually. DHA’s standard lease terms are nine or 12 years, and sometimes include an option for DHA to extend the lease by a further three years.

 Renovation strategy


There are many advantages to renovating, the main being the ability to instantly create additional equity that you can access for further investment or to create an equity ‘buffer’ to manage your risk better. Spending money on a renovation, if done right, is a very efficient use of your money.

 Renovations don’t have to be major to add instant value. Cosmetic renovations have lower town planning requirements and don’t carry the risk inherent in building. They can be as simple as a new kitchen or bathroom, fresh paint and floor coverings. This increased value can assist by also enabling a higher rental return, not just creating more equity. It can also lead to higher tax advantages due to higher deprecation. Sometimes you can buy properties under market value that need renovation. However, these properties are highly sought after so competing parties frequently bid this benefit away. Another positive is that if you are purchasing these types of properties, most of the money you pay is going to the ‘land component’. It’s the land which appreciates, while the building on the land depreciates. So with a higher land component you are ensuring solid future growth.


Inexperience, however, could cost you more money if you don’t anticipate structural, engineering or council permits. You may not see trouble spots until half way through a renovation (electrical, plumbing or structural issues). It’s very easy to underestimate the time, cost and work involved in a renovation; you would have to ensure that the money spent is going to give you the increased value in the property and that you haven’t over-capitalised. You have to ask yourself, will you be able to create enough equity on the sale or revaluation to make it worth your investment in time and money? Can you increase the rent sufficiently in the area to make the exercise worthwhile? Doing a renovation requires a lot of work if you do it yourself. Even if you don’t do it yourself, it requires a lot of management if done by others. It also takes a lot of time to find the property   that can make the numbers work.

 Development strategy


The main benefit of developing is the potential for you to make a good profit above your costs by creating the equity instead of waiting for it over time with capital growth. It also allows you to express your creativity. There is no question about it, developments are exciting projects to work   on and there is a certain amount of pride that goes with completing a project. You also get to call yourself a developer! From a finance perspective the main benefit with development is that you have the potential to get finance and capital based on the strength of the deal, instead of your own personal equity or income capacity. While there are multiple exit strategies to make money, depending on how quickly and how much profit you want, ie subdivide and sell, sell with plans and permits, secure plans and permits construct, subdivide and keep, secure plans and permits construct, subdivide  and sell etc…


Like anything, where the potential return is higher, so is the risk. Developing is a complex business. It’s easy to make a loss if you don’t know your craft. It requires high commercial skills and people skills if it is to be done successfully. It also requires good timing. You have to be able to read the property market extremely well. And from a money perspective it might not be the most efficient use of your money due to long lead times. There are potential delays in every step of the development process; planning, permits, finance and construction. Therefore it frequently requires a larger capital commitment (than originally estimated) from the developer, as these delays cost money. So you have to factor in that you will have a lower income while holding the site. Which one is the best? Each of the above strategies has its own unique characteristics and none any better than the other. You can make good money out of all of these strategies or just focus on one and become very efficient at doing just that.


Bill Zheng is the CEO of Investors Direct.


Posted in Investments, Property

Rentals – What expenses can you legally claim – article by Sharon Plant, Property Accountants

 Advertising for tenants

This is a claimable expense if it is strictly advertising for tenants and your property is available for rent. These costs include: advertising with local real estate agencies, and posting advertisements in newspapers, local publications or online. Advertising for the sale of a property is a capital expense and can only be taken into consideration as part of the cost base of the property on disposal.

Bank charges

The bank charges on your loan account (usually in the form of monthly fees) are tax deductible as well as any bank charges on a separate bank account that you have specifically set up for your investment property.

Borrowing expenses

These are costs associated with the borrowing of money required to purchase the property and although not deductible upfront, they are deductible over the shorter of either the period of the loan or five years. These include mortgage insurance, title search fees, registration of mortgage, costs for preparing and filing mortgage documents, mortgage broker fees, valuation fees, stamp duty on mortgage and loan establishment fees.  There are claimed over a number of years – not all in the year incurred. Borrowing expenses are those costs that are directly related to taking out a loan for the property and include items such as establishment fees, title search fees, any costs incurred in relation to preparing and filing mortgage documents such as broker fees. Borrowing fees can sometimes also include valuation fees and lenders mortgage fees.

 It should be noted that any insurance premiums providing for loan payment on your death, as well as interest charges, are not considered borrowing expenses. Additionally, if the total borrowing expenses are less than $100 then the costs are fully deductible in the year in which they are incurred. Similarly, if the loan is repaid in less than five years, the remaining balance of these expenses are fully deductible in the income year in which the loan is finalised.

Council rates

Council rates are imposed on land owners to help fund the cost of community infrastructure and services to the local municipality. Councils generally offer a one-off annual payment or a payment plan of quarterly instalments, and all payments are tax deductible.

Gardening and lawn mowing

This is deductible and includes dump fees, mower expenses, tree lopping, replacement garden tools, fertilisers, sprays and replacement plants.


Insurance can be purchased to protect your investment properties. Insurance cover is tax deductible and can protect you against circumstances including loss of rent, rent default, theft by a tenant, building damage and public liability claims. Mortgage insurance is not immediately claimable but is amortised/ depreciated over time as part of borrowing expenses.

Interest expenses

Interest charges on a loan are tax deductible. Principal or capital repayments are not tax deductible. Only the interest component directly related to your property is tax deductible. If you are paying principal and interest on your loan then you will need to calculate the interest component for the year. Locate the bank loan statements for each investment property to ascertain the interest paid for the income year.

Land tax

Land tax is tax deductible. Land tax is a tax levied on the owners of land and it is based on the value of land. Once you’ve completed a land tax registration form, you will be sent an assessment notice showing the land tax payable on the land you own. You will be liable for land tax if you own, or part-own: vacant land, a holiday home, an investment property, a company title unit, or a retail, commercial or industrial unit.

Legal expenses

Legal expenses are generally incurred during the sale or purchase of an investment property. The legal costs for buying and selling a property are not tax deductible and are included in the capital gains tax calculation.

Tax deductible legal expenses include the costs of evicting a non-paying tenant and the costs of terminating a lease.

Pest control

If you pay for your investment property to be sprayed or fumigated by a professional pest controller, then you will generally be entitled to a tax deduction.

Property agent fees or commissions

A property agent charges fees for maintaining your investment property on your behalf. The property agent lists their monthly charges in the property agent’s summary.

The charges for the year-end financial statement, tenant reference-check fees, leasing fees and monthly rental statement fees are all tax deductible. You will receive the net rental income after the property agent deducts their monthly fee.

Repairs and maintenance

A repair is generally tax deductible. Renovations, improvements, replacements and extensions are treated differently to repairs and maintenance. Renovations, improvements, replacements and extensions are generally deductible over more than one year.

‘Repairing’ is restoring the item to the condition it was in before it deteriorated, without changing its essential character. If you ‘replace’ an item with similar parts/ materials then it is also a repair even though you repaired the entire item. If the item is ‘repaired’ with improved parts/materials, which will improve the function of the item or extend its life then it would be considered as an improvement and need to be included as a new asset.


Initial repair rule:

Repairs undertaken within 12 months of the purchase will not be allowed as a deduction.

These non-allowable deduction details should be kept as they will increase the cost base of the property on disposal and will be needed for capital gains calculations. (Law Shipping Co v IRC (1923) and W Thomas & Co Pty Ltd v FCT)

 Repairs at the end of the tenancy

Any painting or cleaning or other repairs to return the property to the condition it was in before it was rented will be allowable.

 This is allowable even if the property is reverted to private use as long as the expense is incurred in the year of income.



Keep a record of all your stationery and postage expenses for the year. Don’t dispose of your records. This is an often-overlooked tax deduction by investment property owners.

Tax-related expenses

The cost of obtaining tax advice from a registered tax agent is tax deductible. Tax preparation fees and accounting charges are also tax deductible.

Telephone expenses

Telephone calls directly related to the running of your investment property are tax deductible.

Travel undertaken to inspect the property or to collect the rent

Investment-related travel and car expenses include airfares, car hire, taxis and accommodation. These expenses are tax deductible if you incur these costs while collecting the rent, inspecting the property, or travelling for some other reason related to your investment property.


In order to claim car expenses, you will need to record your vehicle’s engine size as well as the number of kilometres you travelled while maintaining your investment property each year.

Water charges

Water rates are tax deductible if you, not your tenant, pay the water bill.

While the previous expenses are the most common deductibles on investment properties, there may be other deductions that you are entitled to specifically relating to your investment property.


What cannot be claimed

Not all fees and costs that are associated with an investment property are able to be claimed as a tax deduction. You are not able to claim a tax deduction for any expenses that are:

  • related to the acquisition and disposal costs of the property
  • not incurred by you, the property owner, for example, any water or electricity charges that are incurred by your tenants
  • not related to the rental and income generation of the property, such as if you personally use your holiday home


Costs such as the purchase cost, conveyancing costs, stamp duty on the property transfer and advertising for sale, which are related to the acquisition or disposal of the property, are not able to be claimed as a deduction. However, in relation to capital gains tax you may be able to add these costs to the property’s cost base, or reduced cost base.


 Around tax time, there are even more ways to help you pay off your investment – and one of those is by getting a property depreciation schedule that you can claim on tax.

 What is property depreciation?

It’s a dollar amount that the ATO legitimately allows a Tax Payer to claim on items that decline in value as they age.

 There are two types of allowances available under the Income Tax Assessment Act 1997: depreciation on plant and equipment (such as blinds, carpets and air conditioners) and depreciation on building allowance, which refers to construction costs of the building itself, such as concrete and brickwork.

 How does a depreciation schedule help me?

A depreciation schedule will help you pay less tax now.  But remember if you claim the depreciation on a year by year basis when/if you sell the property, the cost base and thus the Capital gain/loss is adjusted by the depreciation claimed.  (For instance if you buy a property for $450,000 and depreciate $50,000 of assets before selling for $500,000 your gain is $100,000 not $50,000.  Speak to your accountant about capital gain/loss as there are many other factors besides the purchase cost and sale price that make up the cost base.

 Is my property too old to claim property depreciation?

The most common misconception is that only new property can be depreciated and this is simply not true. If your residential property was built after July 1985 you’ll be able to claim both building allowance and plant and equipment. If construction on your property commenced prior to this date, you can only claim depreciation on plant and equipment but it may still be worthwhile. A Quantity Surveyor can advise you.

 I bought my property three years ago. Can I still make a claim?

Yes you can. Your accountant can amend your previous tax returns up to two years back. However it is important to note that your accountant may determine the tax savings after taking into account their fee for the amendment of the tax return may not be worthwhile.  Don’t worry as you do not lose the deduction, as discussed above it will count at the time of sale.

 My property is renovated. Can I still claim?

Yes. The Australian Tax Office (ATO) will need to know how much you spent on renovations. If the previous owner completed the renovations you’re still entitled to claim depreciation. Where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation.  NOTE: that if you did the renovation yourself, you can not claim for your time.

 Shouldn’t my accountant prepare this report?

If your residential property was built after 1985 your accountant isn’t allowed to estimate the construction costs. The ATO has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown. Real estate agents, property managers and valuers aren’t allowed to make this estimate.  Your report should be prepared only by a Qualified Quantity  Surveyor.  Be careful as recent legislation was passed stating that individuals or companies preparing tax depreciation schedules also have to be registered Tax Agents.  It is important to get a Qualified Quantity Surveyor to complete the report as a compromise on your tax depreciation schedule will not withstand an ATO audit.

 A site inspection of your property is necessary to satisfy ATO requirements and also ensures that all depreciable items are noted and photographed. This guarantees you won’t miss out on any deductions and the documentation can then be used as evidence in the event of an audit.

 The best time to get a quantity surveyor to inspect your property is immediately after settlement and hopefully just before the tenant has moved in. But if that’s just not possible, quantity surveyors can liaise directly with the tenant or property manager in order to cause minimal disruption.

 Property Investment Strategies – excerpts from article by Bill Zheng in the “Your Investment Property” Magazine

Posted in Investments, Property, Tax Minimisation Tagged with: ,

DIY Landlord : Your Guide to Managing Your Rental – article from Your Investment Property Mag

Rob Farmer outlines the upsides and downsides of managing your own property as well as insider tips on how to make it work…

Let’s face it, sometimes being a property manager is a tough job, catering to the needs of both tenant and landlord. In Australia there are a number of landlords who choose to manage their own property, which has it pros and cons. If you are thinking of managing your own rental, here are some things you should consider.

1.  Personality and professional distance 

The first question you need to ask yourself is do you have the personality type that can keep your relationship with your tenant a business one? If the tenant is late paying the rent, or damage is found during an inspection, or if a tenant wants to break their lease without the required notice, can you assert your legal rights unemotionally?

Being a DIY landlord means dealing with difficult issues – such as making rent demands, evicting tenants and claiming bond monies. Unfortunately, they are a fact of life when dealing with rental properties. As a DIY landlord, you need to ensure that you are going to be able to do these things without getting emotionally involved in the situation.

 2.  Legal and legislation 

In Australia, there are numerous legal and legislative structures in place to protect both tenant and landlord. These vary in each state.

If you are a DIY landlord you need to get up to speed with the relevant Acts and legislation. It is recommended that you complete a short course in property management run or recommended by the Real Estate Institute in the state where your property is located.

As a DIY landlord, you will also need to obtain access to standard agreements and documents such as lease agreements and bond lodgment forms. It is not uncommon that disputes involving rental payment, lease conditions, and bond claims to end up in a tribunal and the judge will take into consideration whether the landlord has taken the appropriate steps and can provide the appropriate records as evidence that this has occurred.

For example, if you wish to evict the tenant you need to be able to demonstrate that you have provided the required reminders, notices and applications at the correct intervals in order to get the demand you require issued. If you cannot do so, the judge may not provide you with the order you wish, and the tenant will be allowed to stay in the property.

 3.  Rent collection

One of the most important property management tasks is rent collection. It is extremely important that a clear process is followed in this regard and that the full rent amount is paid on the specified date. If you are not clear on this you may find your tenant is constantly late or the money is trickled to you in multiple payments over the course of rent period.

 These days, professional property managers use direct debit to manage rent payments. This is the best form of payment as the control is with the property manager. At the commencement of the tenancy, the tenant signs an authority so the rent can be debited from the tenant(s) account on the day it is due. One of the great things about this form of payment is that if there is no money in the tenant’s account, you know about it straight away. With other forms of payment, it may be 3-7 days before you know there is a problem.

If you are a DIY landlord, be clear that rent must be paid in full and on time. Don’t drop in to collect rent, avoid part payments and ensure there is one party that is responsible for communicating any issues with rent payments.

 If your tenant does not pay their rent in full at the designated time, I would recommend you need to commence written reminders that rent is due.
Dependent on the state, you can start more formal proceedings from around day 10-14. Be careful that you complete all steps in the right order, keep records and don’t harass the tenant. In some states, for example, there is a limit to how many reminders you can issue.

 4.  Leasing your property

From time to time your property will become vacant and you will need to find a new tenant – preferably someone who will care for the property and pay their rent on time!

Depending on which state you are in, your tenant will be obliged to provide between approximately two and four weeks’ notice before vacating. There is a lot involved in leasing your property. If you are going to lease your own property there are some important steps involved in the leasing process you need to follow:


Advertising is all about creating competition for your property. You want as many people as possible to want to live there. This will maximise the number of applications you get for your property. The more applications you have, the better to choose your perfect tenant from!

 You should develop a marketing plan, including how you are going to advertise and what type of tenant are you wanting to target.

 In Australia, and are important to be in. Also have a look at Google’s new real estate search engine, – although relatively new, this is a must have.

 The way you write your advertisement is very important. Go online and see what others are doing as this will provide you with some great ideas on how to structure and word your ad. Make sure you include the location, any important facilities nearby such as schools and transport, include all the features and benefits of your property and don’t be afraid to be detailed about it. Be sure to include as many pictures as possible that show off your property.

 Receiving enquiries

This is an important part of the leasing process. You need to make sure you are accessible and that you manage this process professionally. Tenants may not feel comfortable renting from a DIY landlord if you don’t understand what to do and don’t act professionally.

 Tenant screening

It is really important to have a thorough tenant screening process. Remember it is easy to put a tenant in your property but can be potentially very difficult to remove a bad tenant from your property. Make sure you have a list of questions to ask and don’t be afraid to ask them more than once; the same question asked in different ways can often help to identify a discrepancy with what the tenant has previously said.

 After the tenant has completed a tenancy application you should screen them by phone and then interview them in person; this is really important as your gut instincts will play an important part in your decision making. Make sure you clearly understand who they are, why they left their last rental, do they have pets, when do they want to move in, will they live alone, what do they do for work, how much do they earn and what references can they provide.

 Make sure you verify all these details independently and call previous landlords or agents they have rented from. You can also check the tenant register in your state to ensure that they have not been identified as beingpoor tenants.

Google the prospective tenant and you may be surprised at what you can find out about them. Be careful, of course, not to breach any Privacy laws that are applicable by ensuring you have the appropriate permission.

 Application acceptance

Once you are comfortable with your choice of tenant, approve them quickly before another landlord does. Book a time to sign them up on a lease and accept the appropriate bond and deposit monies. It is critical that bond monies are held with the appropriate bond authorities in each state.

 Move in day

This is where the ingoing property inspection is agreed upon and the keys are handed to the ingoing tenant.

 5.  Inspections

As a property investor, apart from getting a good yield, making sure your property asset is looked after is really important. In each state, there are rules on how many times you can inspect a property per year and how the inspection process should be conducted. As a general rule, an inspection occurs three months after initial occupancy and every six to 12 months thereafter.

If you are a DIY landlord, you will need to ensure that you adhere to the legislation in your state regarding inspections, particularly in relation to the frequency, notification and entry process.

 Keeping thorough records and photographs is strongly recommended.

 6.  Rental appraisal and rent increases

 If you are going to become a DIY landlord, you need to commit yourself to ensuring you are going to keep up to date on what is happening in your area. You also need to make sure you only increase rents in line with the terms of the lease and the legislation in your state.

 One of the most important tasks that a property manager provides is independently determining the market rent for your property. Due to the amount of property they manage in a particular area, they should have an excellent knowledge of what rent your property can achieve. At different times, the market can be stronger than others and this can also vary between different property types.

 A good agent can often obtain thousands of dollars a year more for your property in rent because they understand the market.

 7.  Repairs and maintenance

One of the most common traps for DIY landlords is not understanding tenant rights in regards to repairs and maintenance, and in particular repairs deemed as urgent as defined by the relevant legislation. For instance, if there is no hot water or operating toilets, the tenants have the right to have these items attended to urgently, in most cases they have the right to pay for these to be repaired and claim the money back from the landlord.

 If you are a DIY landlord, you need to make sure you have a range of tradespeople who can respond to your calls quickly and cost effectively. One of the advantages of a property manager is that because they deal with so many trades, they have better access and control of quality and cost competitive tradespeople. These relationships can save you hundreds if not thousands of dollars.

 8.  Availability and time

If you are considering being a DIY landlord, you need to ensure that you are always readily accessible and have the time to deal with situations when they arise. It can be costly and frustrating if you are working or are on holidays when a property needs to be leased, when the tenant doesn’t pay their rent or if urgent maintenance work is required. Be aware that some of these things are time consuming, particularly if you aren’t sure what you are doing.

DIY landlords would be wise to consider a family member or close friend who can assist should you not be available.

 Managing a property can be time consuming. On average, it takes about one full-time person to manage 90-100 properties. When interviewing property managers, ask them what their ratio of staff to properties is, to ensure they are not overloaded.

 9.  Technology, tax and record keeping

If you are going to become a DIY landlord, it is important that you have the appropriate technology and systems to support you. You will need access to the internet, e-mail, mobile phone, a financial reporting system and electronic files for all your record keeping.

 One of the advantages of using a property manager is that they will receive, check and pay all of your bills. At the end of each month you will receive a statement of all the transactions, and at the end of each year you will receive an End of Financial Year statement detailing all revenue and expenses.

 There are now some advanced agencies that provide landlords the ability to log-in over the internet to view details of the property. For example, at RUN Property, landlords can view everything to do with their   property such as tenant details, copies of important documents, photos from inspections and copies of all financial statements and payments.

 10.  Costs

One of the key reasons that a landlord may consider a DIY option is to save money. Keep in mind that these costs are tax deductible so you should be claiming these to reduce your taxable income.

 When you look at the cost of employing a professional property manager, it is certainly good value. If you compare these costs to other professionals, such as accountants, the cost is very reasonable. These costs are often more than offset by the additional rent an experienced manager can get you, better deals on repairs and, of course, the cost of your expenses and time.

 REMEMBER – we have a rental property checklist on our website to assist you determine what you can and cant claim. Plant and Associates


Posted in Investments, Property

Debunking the Myths about Insurance – article provided by Paul Pavlic / Ian Bostock

Myth 1.

I have enough insurance inside my super

 Unlikely. Remember that the minimum level of cover provided through your super fund is set with all members in mind. It is therefore unlikely to be exactly the level of cover you and your family needs and may not be enough to cover all or even just some of your debts, loans and mortgages. (Four our clients in Qsuper – once you leave your industry employment your insurance ceases, in addition your insurance is set to automatically decline with age.

 Myth 2.

I don’t need insurance, the Government will look after me if I get sick or injured

 This would be nice but it’s not really the case. Centrelink will pay a maximum disability pension of $695.30 per fortnight for singles and $524.10 (each) for couples (1). Would this cover your current lifestyle, loan payments and mortgage?

 Myth 3.

Workers’ compensation will cover me

 Not usually. Workers’ compensation only covers accidents or injuries that occur during working hours or for an illness that are the direct result of your employment. The majority of accidents and illnesses occur outside of the workplace. So if you want to protect your lifestyle and your family it’s unwise to rely on workers’ compensation alone.

 Myth 4.

 Life insurance is not affordable

 For most Australians insurance is very affordable. For example, a 35 year old male, non-smoker applying for $500,000 Life Insurance cover, the monthly premium would be approximately $30. A 25 year old female, non-smoker applying for $500,000 of Life Insurance cover the monthly premium would be approximately $25.

 Myth 5.

 Life Insurance Companies do not pay claims

 Insurers do pay claims. In fact life insurance companies pay out almost $10 million every working day in claims to clients (2). This figure would be even higher if Australians had adequate levels of cover.

 Myth 6.

Many people have to pay higher premiums or cannot get life insurance at all.

 Insurers are in the business of giving people access to insurance at an affordable price. If they failed to do this, they wouldn’t have a business. Data from the Investment and Financial Services Association (IFSA) indicates that around 93% of applicants pay standard premiums for their life insurance (3).

People who have a higher risk of developing chronic illness or who work in high risk occupations are usually required to pay an extra premium to cover this risk, but this only applies to a few people (the remaining 7% of applicants). And only a very small number are not able to be covered at all.

 Myth 7.

Most people have enough insurance

 Unfortunately, this is not the case. In fact, research shows that 60% of families with dependent children do not have enough insurance to cover the household expenses for a year if the family bread winner were to die (4). We also know that, on average, those that have death cover through their super policy have less than half the level of cover they need (5).

Ironically, most  Australians insure their homes and cars but less than a third insure their most valuable asset, their income. This causes unnecessary hardship for numerous Australians and their families.

A common myth – Insurance is too expensive

 A number of people think insurance is too expensive – until they need it. The premiums that these people paid were obviously worth every cent for both them and their family. The following are real claims from Zurich’s portfolio





Total Benefit Paid

Gross Premiums Paid**




Eye injury – left eye






Amputation of left hand





Occupational Therapist Consultant

Post viral fatigue











Sales Representative

Major Depressive Illness



Source: Zurich Life Risk Brochure – A small cost for a large benefit

Do you know if you are currently paying for stepped or level premiums on your insurance policy in super?

 Most clients will not be able to answer this question without seeking the assistance of a qualified adviser. Stepped premiums are deceptively cheaper now, however, rapidly increase in price over the long term. If your client’s objective is to hold cover until age 65 and they are in their 20’s, 30’s or 40s it may be more cost effective to implement level premiums.

 Do you know if your insurance cover inside of super is unitised and decreasing with age?

 Most clients will not be able to answer this question without seeking the assistance of a qualified adviser. Many industry super funds sing the praises of the ‘cheap’ insurance premiums to their members but fail to let members know that their insurance covers are decreasing with age.

 Does all of your insurance gradually expire on your way to age 65 and is that suitable to your personal circumstances?

 Most people prefer to know the levels of insurance cover they have rather than playing a guessing game if they ever need to make a claim.

 Will you have enough insurance cover if you need it?

 The majority of super funds issue default cover that is age based, unitised and decreasing with age. Your client may think they have enough Life, TPD & Income Protection Insurance cover inside of super, however, years down the track when an event happens they are often disappointed that the cover has been declining without their awareness.

 By making an appointment with a financial adviser, the client can obtain information how to obtain fixed levels of insurance cover that will not decrease with age, rather the client can choose to have the cover increase with inflation.

 Are you aware that our financial adviser can assist you to arrange for your insurance premiums for Life, TPD and Income Protection to be paid from your superannuation account if cash flow is an issue for you at this point in time?

 Most clients do not know that this is an option to overcome cash flow issues.

 Do you know what Trauma insurance cover is?

 Basically 80% of the population will die from a trauma event – the most common trauma events are – Heart attack, Stroke and Cancer. Yet only 3% of the population are covered for Trauma events.

Did you know that you can insure your children between the ages of 2-16 for Trauma events?

Most people say that their family is important to them, however, many clients are not aware they can insure their children for trauma events.

 What would you do if you lost your income due to sickness or serious injury and could not meet your mortgage repayments?

 Most clients do not have sufficient cash reserves or a plan B if they lose their income.

 It is always a good idea to run these scenarios by your licensed adviser as they may be able to apply for special terms on the following conditions.

  • Family health history (eg cancer, heart conditions)
  • Currently taking Prescription Medication
  • Are you Pregnant. Unfortunately, due the nature of this medical condition you are unable to apply for insurance until your baby is born.
  • Trail bike riding/hazardous sports
  • Mental health medication
  • Body Mass Index over 35
  • Time off work for depression
  • Currently on an insurance claim or law suit
  • Self Employed with ABN need 12months financials and Income Tax Return
  • Smokers generally pay double for insurance premiums
  • I am Bankrupt
  • I am a full-time international student
Posted in Income, Insurance, Investments

Interest Deductibility After Income-Producing Activity Ceases


The issue is whether a deduction for interest expenses incurred in respect of funds borrowed for use in a business or investment activity remain deductible even though those incoming-earning activities may have ceased.

Taxation Ruling

TR 2004/4 refers to the Full Federal Court decisions in the cases of Brown and Jones. The ruling refers to investments in businesses, rental properties and shares.

Brown’s Case

The taxpayer partners borrowed to acquire a Delicatessen business. After a number of years, the business was sold at a loss. The proceeds on the sale were insufficient to cover the loan. The court held that the interest expense incurred on the outstanding loan balance remained deductible.

Jones’s Case

The taxpayer and her husband borrowed money to fund a trucking and equipment hire business. After the husband’s death, the taxpayer sold the assets of the business but the proceeds were insufficient to repay the loan. Subsequently, the taxpayer refinanced the loan because she was able to obtain a lower interest rate through an alternative lender. It was held that the interest costs incurred were deductible as the new loan was considered to have taken on the same character as the original borrowing.

Establishing a nexus

The commissioner states that a sufficient nexus between the former income earning activities and the interest expenses incurred following cessation of those activities, must continue to be maintained.

In particular, the commissioner notes that the interest is still considered to be incurred in gaining or producing ‘assessable income’ if the ‘occasion’ of the outgoing is to be found in whatever was productive of that income in an earlier period.

Interest expenses may still be deductible irrespective of:

  • The loan not being for a fixed term
  • The taxpayer having legal entitlement to repay the principal before maturity, with or without penalty, or
  • The original loan being refinanced.

Breaking the nexus

The commissioner does state that the nexus would be broken if it could be concluded that the taxpayer:

  • Has kept the loan on foot for reasons unassociated with the former business activity, or
  • Has made a conscious decision to extend the loan to obtain a commercial advantage which is unrelated to the previous attempts to earn assessable income.

Factors to determine whether the nexus is broken include:

  • Is the taxpayer entitled to fully repay the loan or is there a fixed term in which interest is required to be paid?
  • What is the financial capacity of the taxpayer following the cessation of income earning activity?
  • Does the taxpayer hold liquid assets? If so, are these asset holdings substantial?
  • Have assets held by the taxpayer been realised/disposed? If so, have the proceeds from the realisation of those assets been used to repay the loan principal?
  • Has a significant amount of time elapsed since the cessation of the income earning activites?
  • Has the taxpayer refinanced the loan following the cessation of income producing activities?
Posted in Investments