Archives: Investax FAQs

This is a common question, especially among individuals who own several rental properties and actively manage them. The key point to understand is that owning multiple properties does not automatically mean you’re carrying on a business of property letting.

In most cases, if you’re an individual who receives rental income—whether from one property or several, including a mix of short-term (like Airbnb) and long-term rentals—you are generally classified as a property investor, not a business owner. Your activities are considered a form of passive investment rather than an active business operation.

The Australian Taxation Office (ATO) is clear on this: you are not in the business of letting rental properties unless your operations are substantial, ongoing, and conducted in a business-like manner. This usually means:

• You have a large-scale operation, possibly involving many properties.
• You have a high level of involvement, systems, and processes similar to a business.
• You may engage employees or a property manager full-time.
• The primary intention is to generate income consistently through business activities.

Because most individual property owners, even those with multiple rental properties, do not meet these criteria, they cannot claim certain deductions such as travel expenses related to managing or inspecting their rental properties. These expenses are only deductible if you are genuinely in the business of property letting—which is rare for individuals.

In summary, having many properties doesn’t necessarily make you a business owner. You’re most likely a property investor, which means travel and similar expenses are not tax deductible under the current tax rules. Always seek professional advice if you’re unsure, as individual circumstances can vary.

ATO – In the business of Letting 

You can only claim a tax deduction for a property seminar or webinar if the content directly relates to managing or increasing the income of an existing rental property. For example, if the seminar provides guidance on improving rental returns, managing tenants, or understanding rental property tax rules, then the cost may be deductible.

However, if the seminar or webinar is focused on finding or purchasing an investment property or discusses general strategies around wealth creation or optimising your financial position through property investment, the cost is generally not deductible. These types of seminars are considered to occur too early in the investment journey—before the property is acquired and starts generating rental income. As a result, they are treated as private or capital in nature and are not deductible against rental income.

Travel for attending a property seminar may also not be tax deductible, especially if the seminar relates to acquiring residential property. You cannot claim travel expenses for inspecting a property before you purchase it, or for attending seminars aimed at helping you find or secure a rental property to invest in. This applies to properties located both within Australia and overseas. The ATO considers these costs to be personal in nature, and they do not qualify as tax deductions.

Some promoters may incorrectly suggest that these types of expenses are claimable—but the ATO is clear: unless the expenses are directly tied to an existing rental property, you cannot claim them as deductions.

ATO – Travel Expenses 

Yes, an SMSF can generally reimburse a member for establishment costs that were initially paid out of their personal funds—provided that the reimbursement is for legitimate trustee expenses and there are no restrictions in the fund’s trust deed preventing it.

These establishment costs typically include expenses such as the preparation of the trust deed, incorporation of a corporate trustee, and other legal or administrative documentation necessary to set up the SMSF. Once the SMSF has a bank account and has received rollover funds, it may reimburse the member, assuming all documentation is in place and the payment is properly accounted for.

Important note: While reimbursement is allowed in these circumstances, SMSF establishment costs are considered capital in nature and are not tax-deductible. This means that although the fund can pay back the member, it must not claim these expenses as deductions in its tax return—they should be added back for tax calculation purposes.

Example:
John sets up an SMSF and pays $2,000 from his personal account for the legal documentation and registration of a corporate trustee. A month later, the SMSF opens a bank account and receives a rollover of $200,000 from John’s industry super fund. The SMSF can reimburse John the $2,000 from its bank account, assuming the trust deed allows such reimbursements and proper records are maintained. However, when lodging the fund’s tax return, this $2,000 must not be claimed as a deduction.

As always, it’s important to consult a qualified SMSF specialist or your accountant to ensure compliance with the SIS Act and ATO guidelines.

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.