Are the costs of establishing a self-managed super fund (SMSF) deductible?

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Answer: 

The costs of establishing a superannuation fund would typically be classified as non-deductible capital expenditure. Clearly the SMSF trust – or any interest in the trust – does not qualify as a “depreciating asset” for the purposes of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997).

A “blackhole” deduction under section 40-880 of the ITAA 1997 may be available (5-year write-off), but the key issue would be whether the SMSF proposes to carry on a business: see section 40-880(1). This is a complex issue, as typically superannuation funds are involved in passive investments rather than conducting a business.

However, a superannuation fund can carry on a business of investing or trading in shares – this is acknowledged in Taxation Ruling TR 93/17. (Whether an entity is carrying on a business is considered in Taxation Ruling TR 97/11.)

The factors that need to be considered include the following:

  • the purpose and intention of the taxpayer in engaging in the activities (to be assessed objectively);
  • an intention to make a profit from the activities (to be assessed objectively), even if only a small profit is made or a loss is incurred (although if a loss is incurred every year for a number of years, that suggests the activity may be more in the nature of a hobby);
  • the size and scale of the activities – they must be in excess of domestic needs, but need not be the only activities of the taxpayer and can be carried on in a small way;
  • repetition and regularity of the activities – however, the expression “carry on” does not necessarily require repetition (see FCT v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 81) and an isolated activity may constitute the commencement of a business;
  • the activities being carried on in a systematic and business-like manner typical of that type of business (eg detailed and up-to-date records and accounts should be kept); and
  • the existence of a business plan.

All relevant factors must be considered in combination and as a whole, and no one factor is likely to be decisive.

Sole purpose test

A significant issue would be whether a “business” element would trigger a breach of the sole purpose test that applies to SMSFs (s 62 of the Superannuation Industry (Supervision) Act 1993).

Establishing a business element to activate a blackhole deduction would not necessarily mean that the superannuation fund has breached the sole purpose test. Rather, a superannuation fund carrying on a business is just a possible indicator that the sole purpose test has been contravened. So if the trustee of an SMSF can demonstrate a business element, it may be possible to substantiate that there is no breach of the sole purpose test.

Other issues

While the costs of establishing a superannuation fund are not typically deductible, taxation advice may be deductible under section 25-5 of the ITAA 1997, to the extent that the advice is about the operation of tax laws or costs incurred are for managing the taxpayer’s “tax affairs”. However, in Drummond v FCT [2005] FCA 1129, a taxpayer was denied a deduction under section 25-5 for “taxation advice” when establishing a superannuation fund because the advice included matters outside the scope of managing the taxpayer’s tax affairs.

Also note that Taxation Ruling TR 93/17 discusses deductions that a superannuation fund may be able to claim.

Further advice

The above is a discussion only, and further advice should be obtained before implementing a new strategy. Please contact our office to discuss your circumstances and to obtain tailored advice.

Article as seen at http://checkpointmarketing.thomsonreuters.com/