Investments in tax shelter arrangements
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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What is a tax shelter arrangement?
You have a tax shelter arrangement in the income year in which you incur prepaid expenditure (the expenditure year) if all the following apply:
- your allowable deductions (attributed to the expenditure year) exceed your assessable income from the arrangement for that year
- you do not have day-to-day control over the operation of the arrangement
- at least one of the following is met
- more than one taxpayer participates as an investor in the arrangement
- the manager, arranger or promoter of the arrangement, or an associate, carries out similar activities for other taxpayers.
What expenditure is excluded from the tax shelter rules?
The following prepaid expenditure is excluded from the application of the tax shelter rules. This is provided the arrangement is conducted at arm’s length and that you have or can reasonably expect to obtain rent, dividends or trust income:
- premiums for building insurance, contents insurance or rent protection insurance
- interest on money borrowed to acquire
- real property or an interest in real property
- shares listed on an approved stock exchange
- units in a widely held unit trust which has at least 300 beneficiaries.
Additionally, you must not have obtained and will not obtain any other kind of assessable income (except a capital gain or insurance receipt) from the arrangement.
Also specifically excluded from the application of the tax shelter rules are:
- certain expenditure that is an allowable deduction under the infrastructure borrowing rules
- expenditure incurred under a contract (requiring prepayment for something to be done under the agreement) entered into before 1.00pm (by legal time in the ACT) on 11 November 1999 that you cannot avoid by your own actions
- expenditure under an agreement covered by a favourable ATO product ruling, where the ruling was made (or an application received and acknowledged by the Commissioner) before 1.00pm (by legal time in the ACT) on 11 November 1999
- any prepaid expenditure which is excluded expenditure
- an amount below $1,000
- an amount required to be incurred by a law or a court order
- an amount of salary or wages
- an amount that is capital, private or domestic in nature (except certain research and development amounts)
- certain amounts incurred by a general insurance company in connection with the issue of policies or the payment of reinsurance premiums.
If you incur prepaid expenditure that is not subject to any of the above exceptions, you must determine your deduction according to the other rules explained in this guide.
Summary of rules
- If you invest in a tax shelter arrangement, you need to be aware that the rules for prepayments may apply to limit your immediate deductions.
- If you prepay expenditure under a tax shelter agreement for a thing that will not be wholly done within the expenditure year and it is not covered by one of the exclusions listed above, you cannot deduct all of the expenditure in the income year in which it was incurred. The deduction must be apportioned over the eligible service period or 10 years, whichever is less.
- An agreement for a tax shelter arrangement is one that covers any activities that relate to the arrangement, including those that give rise to deductions or assessable income. For example, if you invest in a tax shelter arrangement and prepay interest on a loan from a third party to pay management fees for the tax shelter, the prepaid interest on the loan would also be subject to the tax shelter rules.
Calculating your deduction for a prepayment made under a tax shelter arrangement
Use the following formula to work out your deduction for prepaid expenditure that is affected by the tax shelter rules:
A × (B ÷ C)
A is expenditure
B is the number of days of eligible service period in the income year
X is the total number of days of eligible service period
Last modified: 30 May 2019QC 58636
Example: Investment in a tax shelter arrangement
On 30 April 2019, Marion invests in an olive grove venture. The investment has all the characteristics of a tax shelter arrangement and is not subject to any of the exceptions. Under the terms of the agreement, Marion is required to pay an initial management fee of $10,000 on 1 May 2019. The payment will cover the provision of services over the period 1 May 2019 – 30 April 2020 (a period of 366 days). Marion made this payment on 1 May 2019. Marion is required to apportion her deduction over the 2019–20 income years.
Marion calculates her deductions as follows:
2018–19 (1 May 2019 to 30 June 2019)
$10,000 × (61 ÷ 366) = $1,667
2019–20 (1 July 2019 to 30 April 2020)
$10,000 × (305 ÷ 366) = $8,333
For the 2018–19 and 2019–20 income years, Marion is entitled to a total deduction of $10,000.
End of example