Issue 163, 23 November 2007

Welcome the latest issue of Thomson's Tax & Accounting Insight, your free news service for tax and accounting professionals.

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Articles in this edition include:

• Tax Office Outlines Key SMSF Compliance Risks

• Investment Property Deductions Disallowed

• CGT Small Business Concessions - Whether Caravan Park an Active Asset

• Thomson Tools

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Tax Office Outlines Key SMSF Compliance Risks

The Tax Office has indicated that it plans to conduct 11,000 audits and reviews of self-managed super funds (SMSFs) as part of its compliance program for 2007/08. Speaking at a recent conference, Assistant Deputy Commissioner of Taxation, Mr Ian Read, said the Tax Office will focus on the following SMSF compliance risk areas: loans to members, instalment warrants, contracts for difference, and changes to residency rules. The SMSF reviews will also cover new registrants, audit contravention reports, other regulatory cases, approved auditors, and income tax issues, Mr Read said.

Source: Assistant Deputy Commissioner of Taxation, Ian Read, speech to the Taxpayers Australia, Annual Conference, 9 November 2007

This article appeared in Thomson's daily Latest Tax News  (Monday 19 November).  With tax fast-moving and ever changing - every day, practitioners rely on Thomson's daily Latest Tax News for quick, accurate, comprehensive information - no compromises. When you need to know what's new in tax and related news every day, there's only one place to look - LTN.

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Investment Property Deductions Disallowed

In a recent decision, the Administrative Appeals Tribunal (AAT) partially disallowed rental deductions on the grounds that the property was purchased for use as a residence and not as a rental property.

The applicant owned a rental property in Sydney for which he claimed rental deductions totalling over $400,000 between 2001 and 2003. All of these deductions were offset against total gross rent of $14,700.

The deductions were claimed on the basis that the property was available for rent during the entire period; however, the property was only rented for 30 days each year in the 2001 and 2002 years, and for eight out of 91 days in 2003.

The Commissioner argued that as the property was only rented for 8.2% of the 2001 and 2002 years, and 8.8% of 2003, the taxpayer was only entitled to a deduction based on the proportion.

The AAT agreed with the Commissioner's assessment, and held that the expenses incurred by the applicant should be apportioned because:

• the applicant admitted that he purchased the property to make a capital gain;
• based on the evidence, the property was only partially used by the applicant for the purpose of gaining assessable income by way of rental; and
• there was no evidence that the apartment was used or available for use at any relevant time by anyone other than the applicant.

This article appeared in Thomson's Client Alert Newsletter Service. Client Alert is a monthly newsletter that promotes your business and develops your client's awareness of upcoming tax issues.  To find out more, phone Thomson Customer Service on 1300 304 197 or click here.

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CGT Small Business Concessions - Whether Caravan Park an Active Asset

Q. Our clients carry on a business of owning and operating a caravan park. They derive income from hiring parking spaces, caravans and cabins, under both long-term and short-term lets. The clients want to sell the caravan park. Is the caravan park an active asset for the purposes of the CGT small business concessions in Div 152 of the ITAA 1997?

A. An asset owned by the taxpayer is an active asset for the purposes of the CGT small business concessions, if it is used by the taxpayer in the course of carrying on a business: see section 152-40(1).

However, an asset whose main use (in the course of carrying on the business) is to derive rent (among other things), is not an active asset unless deriving rent was only temporary: see section 152-40(4).

Taxation Determination TD 2006/78 sets out the Commissioner's views on whether premises used in a business of providing accommodation for reward may satisfy the active asset test, despite the exclusion for assets whose main use is to derive rent. An analysis of the Determination leads to the conclusion that if the average length of stay in the accommodation is relatively short and there is no landlord-tenant relationship between the owner and the persons occupying the accommodation, the income derived by the owner from the accommodation will not be rent and therefore the accommodation will not be used for deriving rent. Whether a landlord-tenant relationship exists principally depends on whether the person hiring the accommodation has exclusive possession or simply has a right to occupy the accommodation on certain conditions.

Applying these principles to your clients' situation, if all the lets were short-term it is likely that the section 152-40(4) exclusion (where a CGT asset is used to derive rent) would not apply and the caravan park would be an active asset. However, the existence of long-term lets complicates the matter.

The first question to ask is whether the long-term occupants have exclusive possession of a caravan or a cabin (or of the land on which they situate their own caravan) so that a landlord-tenant relationship exists. If the answer is yes, and therefore the income derived is rent, the next question to ask is whether these long-term lets (from which your clients derive rent) constitute the 'main' use of the caravan park. TD 2006/78 states that it is appropriate to consider a range of factors to determine whether the main use of land or property is to derive rent. Two relevant factors seem to be the proportion by area of the land or property that is used to derive rent and the percentage of the total income that consists of rent. Of the two factors, the latter (percentage of total income that is rent) seems to be more important.

This issue appeared recently in Thomson Tax Q&A. Thomson TaxQ&A is issues based and uses actual scenarios confronted in practice to help you understand how developments affect your client's tax position. New Q&As are added regularly and the answers provided online are updated to take into account tax changes that impact on the issues raised. It therefore provides an up-to-date database of real solutions to actual tax issues facing tax advisers in practice.

To obtain more information, or to subscribe, simply contact your nearest Thomson representative or call 1300 304 197.

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Thomson Tools

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Tax Rates & Tables 2007

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Income Tax & GST Strategies Manual 2007/08

With worked examples and calculations, Income Tax and GST Strategies Manual is designed to act as a bridge between the theory of tax law and the practice of tax through the use of specific strategies. Each strategy highlights tax traps and illustrates how to take advantage of a favourable application of a particular provision of tax laws to optimise your client's tax position. Strategies are cross-referenced to relevant Australian Tax Handbook chapters for related background, saving on research time.

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Australian GST Handbook 2007/08

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Australian Financial Planning Handbook 2007/08

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