Can I claim a deduction for visiting my SMSF investment property to do maintenance or inspections?
Your SMSF is not allowed to claim a tax deduction for travel, meals and accommodation when travelling to the fund’s residential property to inspect or undertake maintenance. Travel expenses incurred in relation to a commercial property continues to be tax deductible.
Can travel expenses be paid from an SMSF?
Whilst travel expenses incurred to inspect a residential property is not tax deductible per the ATO, the costs may potentially be paid from the SMSF bank account. In practice however the auditor will have many questions surrounding the arrangement and it is not recommended.
The fund’s governing rules must permit the expense, and it should comply with the sole purpose test. The travel expense is required to be fair and reasonable, with all invoices issued in the name of the SMSF and paid directly by the SMSF.
Example – travel expenses to inspect residential property
Fred and Sara’s SMSF own an investment unit on the Gold Coast which is rented for short term holiday accommodation. They decided to fly from Sydney to the Gold Coast unit to inspect it and do annual maintenance. They stayed in the unit to save money and visited their daughter and went to the casino at night. Their SMSF paid for their flights, rental car and meals.
The fund will fail the sole purpose test. The travel and meals were not incidental to the members undertaking the annual maintenance but were incurred partly to fulfil their role as trustees to maintain the property but mainly for the purpose of a holiday and visiting their daughter.
Other issues arising from this scenario include non-arms length expenses, failing the in-house asset test and providing financial assistance to a member of the fund.
Non-Arms Length Expenses (NALE)
The Tax Act requires all transactions undertaken must be made on an arms-length basis. Where there is a nexus between the income being earned and NALE due to a scheme the non-arms length income (NALI) provisions will be triggered. The definition of a scheme is very broad and includes any arrangement or plan, proposal, action or course of action. Income which is considered to be NALI is taxed at 45%.
Is the provision of services by Fred and Sara to their SMSF NALE?
The Gold Coast unit’s repairs and maintenance were done for free, with no payment exchanged. The expense directly relates to earning rental income. The broad definition of a scheme could include the trustee carrying out these repairs. The main issue is whether Fred and Sara acted in their capacity as trustees or individuals; trustees cannot charge for services performed in their role as SMSF trustees. Routine maintenance (excluding capital repairs or renovations) typically falls under trustee duties. However, if Fred or Sara were licensed professionals using business equipment and insurance, the outcome might differ.
In-House Assets (INHA)
Leasing residential property to a related party is prohibited when the 5% INHA threshold is exceeded. Utilising the Gold Coast unit for accommodation during property repairs may be considered incidental and might not contravene regulations; however, such use could invite scrutiny from the ATO and may be difficult to substantiate. Given that Fred and Sara also stayed at the property for personal reasons, including visiting their daughter and taking a holiday, it is unlikely that this would be regarded as incidental use.
Providing Financial Assistance to a member of the fund
There was no payment made for use of the unit. Providing financial assistance to a member is prohibited.
What expenses can be claimed in relation to an SMSF investment property?
Rental expenses must be invoiced in the name of the SMSF and paid directly from the fund’s bank account. Expenses which are incurred in earning rental income may be deductible under the general tax provisions or there are special tax provisions allowing a tax deduction for specific expenses.
The following are typical deductible rental expenses:
- real estate agent’s fees
- repairs and maintenance
- council rates
- water rates
- legal cost of preparing a lease
- depreciation of assets
- capital works
Distinguishing repairs from improvements is essential. Improvements are capital expenses, depreciable over the asset’s life and not immediately tax deductible, while repairs restore original condition. Improvements can be added to a property’s cost base for CGT purposes. When a fund pays pensions, income from pension accounts (ECPI) is tax-exempt, and rental expenses incurred for ECPI are not deductible.