Neal Dallas, director of legal at Business Depot, said in a recent Accurium webinar that this simple scenario could cause issues in regard to Australian Taxation Office compliance, which may see the deposit as a capital expense rather than a general expense.
“You may have a client who has signed a contract and put a $1,000 deposit down with the real estate agent from their own back pocket,” Dallas said.
“Then we have an issue about whether we can reimburse the trustee, and the ATO’s view, which I think is largely correct, is that if you’ve got an expense which is a general expense, then it’s OK to do that reimbursement. The problem with this kind of deposit, though, is it is a capital expense.”
Mark Ellem, head of education at Accurium, said the ATO’s contribution ruling in regard to reimbursement states a reversal of the transaction has to happen immediately, but it also stipulates the reversal must only be made for a general expense, and a deposit on a property is a capital outlay.
“It’s going to form part of the overall purchase costs even if it is just an initial bid and is the buyer showing goodwill about being committed to the contract – it still forms part of the capital planning,” he said.
Dallas added that even if a member reimburses themselves out of the SMSF within 24 hours of making the deposit, it will be viewed by the ATO as an early release.
“If we treat the deposit as a loan to the fund, it breaches the borrowing rules,” he said.
He said one strategy that could be used is to treat the deposit as a contribution to the fund.
“You may not even seek reimbursement, and instead say the deposit has gone in as a payment on behalf of the fund and treat that as a contribution by the members of the fund that is then applied to pay the deposit,” he said.
“In a lot of cases, it won’t cause an issue, but if you have someone who’s maxed out their concessional contributions and non-concessional contributions, or doesn’t have capacity to make non-concessional contributions, then there will be a problem.”
Another strategy, he said, is to renegotiate the contract with the seller, which could present other problems, especially if the property has other bids.
“The vendor might say, ‘I’ve got six other people who bid who might be keener now and want to put in a higher offer’, so negotiating or trying to negotiate the rescission with that original contract can be quite difficult,” he said.
Dallas added that although, in his experience, the ATO has not been “too harsh” on these types of arrangements, it’s best practice to try and avoid them.
