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Edited version of private advice
Authorisation Number: 1051753300670
Date of advice: 15 September 2020
Subject: Superannuation funds - deductions
Can the Super Fund claim a deduction for the reimbursement of the costs for the Course under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Can the Super Fund claim a deduction for the reimbursement of the costs for the Subscriptions under section 8-1 of the ITAA 1997?
This ruling applies for the following period
Income year ending 30 June 2021
The scheme commences on
1 July 2020.
Relevant facts and circumstances
You are the corporate trustee of a superannuation fund (the Super Fund).
You were incorporated on the same date that the Super Fund was established.
Your directors are Persons A and B, who are also your shareholders, each holding equal shares.
The Super Fund used the services of Company A to undertake share trading activities, with several lots being acquired, and several lots being sold on instructions from Person A.
The Super Fund made capital losses in relation to its trading activities and the services of Company A were ended to reduce the cost of their fees and the making of losses.
Person A, as your director, took control of the Super Fund's share investing and sold several lots of shares purchased by Company A, realising a loss. Person A purchased several lots of shares, some of which were sold for a profit, and the remaining lots having an unrealised loss.
The Super Fund commenced trading in warrants, allocating up to a specified percentage of the Super Fund's balance to undertake those activities.
To improve the Super Fund's performance, Person A undertook a course (the Course) in relation to trading on financial markets more than 12 months after the Super Fund had commenced trading in warrants, personally paying the course fees. The Course:
· was conducted over several months, on a part-time basis, involving several course days undertaken at specified periods during the Course, and several tutorial sessions; and
· covered issues in relation to trading cycles.
It was anticipated that the Course would enable Person A in their role as your director to identify and act on short-term trading opportunities of varying cycle time frames.
The learnings from the Course have only been used in relation to the warrant trading, and will always be used for that purpose, with the decisions in relation to other investments of the Super Fund being addressed by other another entity.
Person A subscribed to and personally paid for several publications (collectively referred to as the Subscriptions), commencing a significant period ago, and continuing to the present time.
The Subscriptions were anticipated to provide Person A with insight and knowledge in relation to short-term trading opportunities.
The Super Fund will reimburse Person A for the costs of the Course and Subscriptions.
Persons A and B do not personally own any shares and don't undertake any share trading activities.
During the past XX months, the Super Fund has undertaken XXX warrant trades, being on average less than X trades per week with an average holding time of less than XX days.
The Super Fund's current focus being to hold share warrants for short periods and reinvesting in the same companies at specified times.
The Super Fund is administered by Company X, who engaged the services of Company Y to prepare the Super Fund's 20XX-XX income tax return in which they included the losses from the Super Fund's activities as being capital in nature.
For the purposes of this ruling, the following will occur during the period covered by this ruling:
· The Super Fund will reimburse Person A for the costs of the Course and Subscriptions; and
· Neither Person A nor Person B will undertake any kind of trading in the nature considered by this ruling in their own names.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Section 295-85
Income Tax Assessment Act 1936 Section 51AAA
Reasons for decision
Deductions for superannuation fund expenses
The expenditure of most expenditure incurred by a superannuation fund is governed by the general deduction provision in section 8-1 of the ITAA 1997.
· it has the essential character of an outgoing incurred in gaining or producing assessable income, or
· it has the character of an operating or working expense of a business or is an essential part of the cost of the fund's business operations.
However, even if the first or second limb is satisfied a deduction is not permitted under section 8-1 of the ITAA 1997 to the extent the loss or outgoing is:
· capital, or of a capital nature
· private or domestic in nature
· incurred in gaining or producing the taxpayer's exempt income or non-assessable non-exempt income, or
· otherwise prevented from being deducted by a specific provision of the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936).
The deductibility of expenditure incurred by a superannuation fund is governed by the general deduction provision in section 8-1 of the ITAA 1997, or the specific deduction provision in section 8-1 of the ITAA 1997.
Expenses incurred by a self-managed superannuation fund (SMSF) and the deductibility of those expenses are outlined in Taxation Ruling 93/17 Income tax: income tax deductions available to superannuation funds which explains the general principles governing deductibility of expenditure of superannuation funds under section 8-1 of the ITAA 1997.
Paragraph 4 of TR 93/17 provides that subject to any apportionment of expenditure the following types of expenses incurred by a superannuation fund are ordinarily deductible under section 8-1 of the ITAA 1997:
a) actuarial costs - except those incurred in complying with, or managing, the fund's income tax affairs and obligations (such as Subdivision 295-F) which are ordinarily deductible under section 25-5 of the ITAA 1997;
b) accountancy fees - except those incurred in complying with, or managing, the fund's income tax affairs and obligations which are ordinarily deductible under section 25-5 of the ITAA 1997;
c) audit fees;
d) costs of complying with a 'regulatory provision' as defined in section 38A of the Superannuation Industry (Supervision) Act 1993 (unless the cost is a capital expense);
e) trustee fees and premiums under an indemnity insurance policy;
f) costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself) e.g., interest on money borrowed to secure temporary finance for payment of benefits and medical costs in assessing invalidity benefit claims;
g) investment adviser fees and costs in providing pre-retirement services to members;
h) subscriptions for membership paid by a fund to The Association of Superannuation Funds of Australia Limited and other such industry bodies; and
i) other administrative costs incurred in managing the fund.
Deductions for losses and outgoings are also generally denied by section 51AAA of the ITAA 1936 if the assessable income is in the nature of a net capital gain, with these losses and outgoings normally being included in the cost base of the relevant CGT asset.
As an example of this, Paragraph 11 of Taxation Determination TD 2004/1 Income tax: are the costs of subscriptions to share market information services and investment journals deductible under section 8-1 of the Income Tax Assessment Act 1997 states that if an investment portfolio is managed with the aim solely of generating capital gains that are included in the investor's assessable income under section 102-5 of the ITAA 1997, the cost of subscriptions is not an allowable deduction by virtue of section 51AAA of the ITAA 1936.
Section 295-85 of the ITAA 1997 operates to modify the operation of ordinary income and general deduction provisions so that the capital gains tax (CGT) rules are the primary code for calculating gains or losses realised by complying superannuation entities, including SMSFs, on the disposal of CGT assets.
Specifically, subsection 295-85(2) of the ITAA 1997 states that if a CGT event happens to a CGT asset owned by a complying superannuation fund, the following provisions do not apply:
· section 6-5 of the ITAA 1997
· section 8-1 of the ITAA 1997
· sections 15-15 and 25-40 of the ITAA 1997, and
· sections 25A and 52 of the ITAA 1936.
An exception to this treatment is contained in paragraph 295-85(3)(b) of the ITAA 1997 for CGT assets of the Fund that are:
· debenture stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;
· a deposit with a bank, building society or other financial institution;
· a loan (secured or not); or
· some other contract under which an entity is liable to pay an amount (whether the liability is secured or not).
There is also an exception in Table 1 in subsection 295-85(4) of the ITAA 1997 for trading stock. However, shares and derivatives of shares are not trading stock of complying superannuation entities. They are specifically excluded by subsection 70-10(2) of the ITAA 1997 because they are covered assets under section 275-105 of the ITAA 1997.
Activities that will be subject to the capital gains provisions for self-managed superannuation funds include:
· trading in exchange traded options (ATO ID 2009/110 Income Tax Self Managed Superannuation Funds: exchange traded options - tax treatment of premiums receivable and ATO ID 2009/111 Income Tax Self Managed Superannuation Funds: exchange traded options - tax treatment of premiums payable)
· trading in ASX Mini Index Futures Contracts (ATO ID 2010/7 Income Tax Self Managed Superannuation Funds: tax treatment of futures contracts); and
· trading in shares (ATO ID 2009/92 Superannuation Income Tax: tax treatment of losses realised by a complying SMSF on disposal of shares).
Application to your situation
In your situation, the Super Fund had undertaken share trading activities while it was utilising the services of a share broker, whose services were terminated. Person A, as your director, took control of the Super Fund's investment activities and commenced share warrant trading.
Person A, as your director, incurred expenses in relation to undertaking the Course and the Subscriptions and has used the knowledge obtained from these sources in relation to the Super Fund's share warrant investment activities. The Super Fund will reimburse Person A for the costs of the Course and Subscriptions.
We have considered the following when determining whether the Super Fund is eligible to claim a deduction in relation to either the costs of the Course and/or the Subscriptions as follows:
In your situation the warrant trading activities of the Super Fund do not fall within the exceptions contained in subsection 295-85(3) of the ITAA 1997, as provided above. Therefore, any gains or losses made by the Super Fund in relation to its activities will be subject to the CGT provisions.
The Subscriptions are not of the type as listed at paragraph 4 of TR 93/17 as they are not subscriptions for membership to The Association of Superannuation Funds of Australia Limited and other such industry bodies.
Based on the information provided it cannot be viewed that the cost of the Course and/or Subscriptions was incidental, relevant or sufficiently linked to any of the Super Fund's trading activities prior to Person A completing the Course or obtaining the Subscriptions.
Additionally, seminar type expenses may not be deductible if the expenditure does not have a sufficient connection with assessable income and is an investment of capital made to prepare for the future commencement of an investment business as found in Petrovic and FCT (2005) 59 ATR 1052; AATA 416 where a taxpayer was denied a deduction in respect of property seminars after it was found that the expenditure was not incidental to his pre-existing rental income.
As any gains made by the Super Fund will be assessable under the CGT provisions in relation to its warrant trading activities, it is viewed that any expenditure on the Course and Subscriptions is to enable knowledge from them to be used in relation to generating capital gains. Therefore, in accordance with section 51AAA of the ITAA 1936 any expenditure by the Super Fund in relation to the Course and Subscriptions is capital in nature and is therefore not deductible by the Super Fund.
Reference to the following has been made in the ruling application to support that the Super Fund is eligible to claim a deduction in relation to the costs for the Course and Subscriptions:
· Webpage titled Self-managed superannuation funds - deductibility of expenses (QC 53481)
This webpage outlines that funds can claim deductions where there is no specific deduction provision, or any exclusions, to prevent the deduction being claimed.
Exclusions included under the general deduction provision includes that a fund cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.
As outlined above, it is viewed that the costs incurred in relation to the Course and Subscription are subject to a specific exclusion as they will be used to generate capital gains. Therefore, these amounts are excluded from being claimed as a deduction by the Super Fund.
· TR 93/17
As provided above, paragraph 4 of TR 93/17 outlines the types of expenses for which superannuation funds can claim deductions under section 8-1 of the ITAA 1997. The expenses listed in this paragraph are administration, operation and management type expenses incurred in relation to the funds.
TR 93/17 provides that deductions cannot be claimed for capital expenses, or expenses that are capital in nature.
As outlined above, it is viewed that the costs incurred in relation to the Course and the Subscriptions relate to specific activities that will only generate capital gains and not ordinary income and are therefore not deductible. They have not been incurred in relation to the administration, operation or management of the Super Fund and are not of the type as referenced in paragraph 4 of TR 93/17.
The Super Fund is not eligible to claim a deduction for the costs of the Course and Subscriptions under section 8-1 of the ITAA 1997 as those expenses are viewed as being specifically related to assets that will generate capital gains or losses for the Super Fund. The deductions are denied by section 51AAA of the ITAA 1936.