Tax Tip 5: Reimbursing yourself - Impossible

Discussion in 'Accounting & Tax' started by Terry_w, 22nd Jul, 2015.

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  1. melbournian

    melbournian Well-Known Member

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    @Terry_w what's your take on reimbursing yourself from superannuation? as a self managing ip short lease etc.
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A superfund is a separate entity so no problems there. Just be careful of all the Super Law aspects.
     
  3. Coconutwheels

    Coconutwheels Well-Known Member

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    Thanks Terry, it's something that I hadn't ever contemplated. You could make a book out of your threads!
     
  4. melbournian

    melbournian Well-Known Member

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    Thanks @Terry_w I actually put forward my tax deductions and why I should be able to reimburse myself on particular fees from the super to the ATO and asked for an interpretation in which I was asked to give a presentation to an officer in box hill. It went ok and they said they will get back to me on it. I'll elaborate further once I get the ok.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I've copied them all into a word document and have fixed up spelling and grammatical errors and have about 100 pages of tax tips and 100 pages of legal tips and a smaller amount of loan tips. I might make them available on my website as a PDF in the future.
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    From a legal point of view one person can reimburse another. A wife could reimburse a husband for example. It is not possible to reimburse yourself because you cannot contract with yourself and once you have spent the money the deed is done. Whereas if a wife incurred an expense on your behalf you could borrow to pay her back (but there are some tax issues with the ATO potentially applying Part VIA).

    With super you are looking at additioanl laws - trust laws and SIS Act laws. Under trust law a trustee can be reimbursed from the trust. But with the ATO administering SMSF regulations extra care is needed as some people try to get money out of their SMSF when they are not supposed to.
     
  7. melbournian

    melbournian Well-Known Member

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    Very true @Terry_w ATO lady was asking me to justify or explain every deduction when I was there.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Its almost impossible for a taxpayer to refinance using super. SIS Act and Regs generally prohibit arrangements between a fund and a member where funds are borrowed, loaned, advanced etc with or without security and arms length terms. (It doesn't matter what you call it). Interposing a trust etc in the middle can be just as problematic. This is a two way prohibition in most cases.

    However provided the member satisfies a condition of release it may be possible to take a lump sum from a fund and discharge personally borrowed funds etc. Then later re-contribute to the fund if permitted. Its not a refinance and cant be. But it may address cashflows and a timing issues.

    The other option is a for member to borrow funds and make a large contribution. This strategy can suit a person approaching age limits on using the bring forward rule or CGT proceeds etc. The short term loan is taken by the member and interest is non-deductible but it is typically a short term settlement issue to use the bring forward and obtain tax benefits that outweigh that interest.

    Using super to cover a member cashflow issue needs financial advice. It comes with a substantial range of issues and concerns. Using a SMSF to cover a shortfall in personal or business liquidity could see the fund found non-complying. IMO its better to assume the answer is no until financial advice confirms its OK.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Fees etc paid by the fund are NOT member expenses but are trustee fund expenses. You cant reimburse the fund as such. The ATO will soon write and advise you that if you give money to the fund to cover a reimbursement of a specific fund expense that the amount is a contribution that meets the definition described in Tax Ruling 2010/1. The word reimburse does not exist in tax law or super law but contribution does. Further you are not entitled to a personal deduction for fund expenses. For a taxpayer / member these costs fail to satisfy the general deduction requirements of s8-1. Non-deductible. No question about it.

    The issue you posed to ATO has been argued by many taxpayers with legal qualifications as a way to reduce excess contributions. It hasn't worked before and I suspect you wont get them to change their view. Ditto returned contributions aren't automatically a reduction to assessable fund income either !!.


    An example of this arises with some taxpayers who look at their super statement and see that the fund charged them say $2k a year for income protection. You cant claim the deduction. Only the trustee. And you cant reimburse the fund - Any deposit to the fund satisfies TR 2010/1 and would be a member non-concessional contribution. Same as fees etc. The fund and the taxpayer are distinct entities for tax purposes.
     
  10. melbournian

    melbournian Well-Known Member

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    Thanks Paul and i value ur opinion as you have more insight into SMSF. i am not looking to reimburse the fund. i am looking to cover the management expenses through the super which is incurred to produce assessable income for the fund whether to a trustee or through a provider.

    There is a specific ruling which was the basis of how i presented my discussions.. TR93/17 s26 which states

    Expenditure is deductible under section 8-1 to the extent that it
    is incurred in gaining or producing assessable income or necessarily
    incurred in carrying on a business for that purpose (and is not of a capital, private or domestic character). Therefore, some apportionment is necessary if expenditure is incurred partly in deriving assessable income and partly in deriving exempt income:

    Well, from my discussions, with the ATO they did not seemed opposed to it but trying to understand what the nature of the expense or fees were and how it was calculated. Say i generated $3000 for short term leasing. i wanted to pay a trustee (20% of that due to the running around, meeting tenants, cleaning etc).
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    M - are you wanting the trustee to reimburse you 20% for the hassle of meeting tenants, cleaning etc? If so I would say that is not possible unless you are a licenced professional doing work - such as a registered tax agent doing the return of the fund they are a member of.

    There is a SMSF ruling on this.
     
  12. melbournian

    melbournian Well-Known Member

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    @Terry_w not me, the fund to reimburse the trustee (partner) who be essentially running the short term lease. if i were to go with a professional it would cost just about the same 16-20% for that. i understand they are fees for licensed professional and i did mention it to them but the requirement to effectively manage communications with renters (not tenants), meeting them say 6am in the morning, ensuring all services (internet, hot water), cleaning etc). these are required to essentially generate the revenue (we talking 2 day rents not 1 month)
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes?
     
  14. melbournian

    melbournian Well-Known Member

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    sorry clicked the enter button too quickly
     
  15. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    TR 2010/1 and ITAA treats your funds into the fund as a contribution. TR 93/17 deals with types of expenditure and deductions for a fund. eg Non-assessable and exempt etc. Para 26 explains the exempt income issue (s8-1 ITAA being the cornerstone of that nexus). eg a fund which received exempt pension income cant claim a deduction for the rent expenses as such if the fund income is all exempt. ie no losses to carry fwd. The deductions incurred are exemption in same proportions....eg two members one on pension and one not. If you think ATO will allow you to pay $ to the fund to offset your efforts as a trustee and not call it a contribution you are mistaken. Either that or ATO are about to approve a massive scheme which will be exploited. (IMO they wont)

    I would be concerned that the proposed contribution if it were not a contribution could actually be non-arms length income and create a tax / compliance problem. The issue Terry referred to with a tax agent providing free or low cost services to the fund is covered by TR 2010/1 but you wont meet that test. It just ignores the value of the discount. Without that exclusion it leads to a non-arms length concern if you pay $ to the fund for ANY reason. Non-arms length income means the fund is non-complying AND tax is at highest marginal rate. Loads of taxpayers has tried this and lost appeals. Its a nasty penalty for such little to gain.

    In general terms never deposit member $ to a fund unless its a contribution within caps without advice.

    You aren't trying to claim a personal deduction for the $ paid to the fund also are you ?
     
    Last edited: 19th Nov, 2015
  16. melbournian

    melbournian Well-Known Member

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    thanks @Paul@PFI -Ok to keep it simple - i have a job that pays into the SMSF monthly. i do not intend to pay any extra contibutions being 35+ years away from accessing super. i just wanted to have an expediture(management fee) for running the operations of the lease (which i predict will generate 2K positive after loans etc). whether it is my partner or it is hired company, it still needs to be paid. the only difference and test and forms part of my query to the ATO is whether the expense can be paid to the trustee.

    let's assume this is not a rental IP. this is coffee shop and i needed a barista to make the coffee. (if my partner was a gun barista and trustee and works there 20 hours week- can she be paid for this?)
     
  17. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A1 = No. Its is non-arms length income when you pay the fund for management. The fund would earn passive investment income (rent) and that's no issue. The fund cannot pay you and there is no basis for the fund to charge you. Trustees of SMSFs are required to freely give their time. Your SMSF Trustee constitution may prohibit such a practice anyway. You have read and signed the trustee declaration ?

    A2 = If the SMSF owns a coffee shop and leases it then that is in itself not a concern as the income is passive rental income. However the operation of a business by the SMSF results in business income. A major concern.

    The fund can lease a shop to you to allow YOU operate a small business. However it can only charge you rent. It is essential that this lease by on lease like terms and that the rent be supported by a basis that is commercially sound. Excessive or lower rent are both a concern as is late payment etc. No management fees. Nothing. Departure from the correct practice could see loss of almost 50% of the fund in a tax penalty.
     
  18. melbournian

    melbournian Well-Known Member

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    Thanks @Paul@PFI for your feedback - i do appreciate it. At the moment all these are preliminary discussions with ATO, accountant and esuper fund as the paperwork to esuper fund is still being finalized and an asset has not even been purchased. i did read the declaration and ask the esuper fund and there was no restriction on this.

    A1 = Wouldn't council rates, owners corp, electrical, and management lease fees be considered expenses deducted against the passive income from the lease If not who will be covering these costs?

    A2 = not leasing the shop. Say purchasing a franchise operations. Would the situation be the same?

    As mentioned, i presented it to the ATO and i understand where you are coming from but it is not only professional fees that can be considered deductible expense. I remember clearly asking it twice it i was able to claim those expenses and they had no issue about it (so whether i go with my partner or getting with leasing management company) these expenses will still be there. Yes - they may reject the trustee charging these expenses but i'll wait for the outcome.The one thing they asked clearly was the percentage of the calculation as per below. But i will update on the details when i get a firm answer as well as what the numbers are.


    TR 93/17 s6

    The correct method for apportioning expenditure between assessable income and exempt income depends on the particular circumstances of the case. If there is a single outlay in respect of a thing or service, only part of which is used for gaining or producing assessable income, then the following principles apply:

    (a) If a distinct and severable part of the thing or service is devoted to gaining or producing assessable income and part is not, the expenditure can be apportioned according to the
    ratio of those parts. Where possible a superannuation fund should apportion its expenditure in this way.

    (b) If an outlay serves both objects indifferently, another method must be used to apportion the expenditure which gives a fair and reasonable assessment of the extent to

    which it relates to assessable income.
     
    Last edited: 19th Nov, 2015
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think it is pretty straight forward @melbournian - those costs are not reimbursements but fees. Can the trustee charge the fund a fee? Read the trust deed for starters and you will find it is probably prohibited.

    See s17A(1)(f) SIS Act and (g)
    And then s17B which gives the exceptions.
     
  20. melbournian

    melbournian Well-Known Member

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    @Terry_w thanks will read those up. I think You're among the best forum member who gives quality tips with no hidden agendas
     
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