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API JANUARY 2014
JANUARY 2014 API
¿ SMSF TRAP
Before you consider setting up a SMSF to purchase a
negatively geared property, make sure your employer will
contribute directly into your personal SMSF. It won’t work if
the contribution goes into another fund first.
It isn’t good enough to roll the contribution across from your
employer’s fund into your SMSF.
The contribution is taxed in the hands of the first fund that
If that’s your employer’s fund, then the rental property losses
sitting in your SMSF can’t be offset against the contributions
and they’ll be taxed at 15 per cent going into the employer’s
fund. This can’t be claimed back or offset by your SMSF. API
Vendor finance GST trap
In the tax case KFBC vs Commissioner of Taxation 2013 AATA
577, the seller was found to be liable to pay GST on the
original agreed price for a property, even though they didn’t
receive that full amount.
KFBC sold land to a developer, so the contract was subject
to GST on 1/11th of the sale price. When the developer
couldn’t afford the full amount upfront, KFBC agreed to
effectively lend the developer the balance of the purchase
price, taking a second mortgage on the property. After the
developer defaulted on the payment arrangement, KFBC
instead agreed to receive $500,000 and three blocks of
land. The $500,000 was paid but the bank sold the land as
mortgagee in possession before KFBC received its blocks.
The bank took all the sale proceeds.
The Administrative Appeals Tribunal found that the
loan arrangement was completely independent of the sale
contract. The property still sold for the price stated in the
original contract and GST was payable on 1/11th of that.
Registered tax agent, CPA, chartered accountant and founder
of BAN TACS Accountants Pty Ltd, www.bantacs.com.au
This information is of a general nature only and does not constitute professional advice.
You must seek professional advice in relation to your particular circumstances before
acting. This information is also to be read subject to the disclaimer on page 6.
CGT exemption not an automatic right
Readers will do well to avoid being caught in the situation
the taxpayer in the tax case Keep v Federal Commissioner of
Taxation, Administrative Appeals Tribunal 2013 709, found
This case is all about section 118-150 of the Income Tax
Assessment Act 1997 (ITAA), which relates to the four-year
rule that allows you to back date your main residence capital
gains tax (CGT) exemption over vacant land and your home
during construction, providing you move into it as soon
as practical after completion and cover it with your main
residence exemption for at least three months
The period of time that the taxpayer lived in his newly
constructed home wasn’t clear but the shortest period was
just one week short of the three months required.
The CGT was more than $20,000, so I bet he wished he’d
stayed that extra week.
He didn’t sell the house until a couple of months after he
The taxpayer represented himself so he may not have
known about Interpretative Decision 2006/185, which states
that if you live there for less than three months you can
use s.118-145 of the ITAA – the absence rule, sometimes
referred to as the six-year rule – to continue to cover the
property after you move out, with your main residence
exemption, as long as you still own it.
In this separate decision, the taxpayers only lived in the
house for 21⁄2 months, less time than Mr Keep.
The following factors were stated in Mr Keep’s judgement:
> There was no evidence of any gas or electricity accounts
kept in his name. Apparently they were connected in his
former spouse’s name so he couldn’t produce evidence.
> He hadn’t changed his address for some items from
his sister’s place where he’d lived before the house was
finished and after he moved out of the house.
> He had a driver’s licence in a different state.
> As a fly-in, fly-out miner he didn’t always return home
to the newly constructed house, instead staying at his
sister’s place on some breaks.
> His income tax return for the relevant year showed his
> No one personally vouched for him in court that the place
was used as his home, they only sent letters.
The point here is your main residence exemption isn’t an
automatic right and it’s your responsibility to prove that
From the courtroom
æBefore you consider setting up a SMSF to purchase a negatively
geared property, make sure your employer will contribute
directly into your personal SMSF.Æ
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