Edited version of private ruling

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Ruling

Subject: superfund's expenses

1. Is the superfund entitled to a deduction for the eligible expenses paid from the superfund's bank account?

Yes.

2. Is the superfund entitled to a deduction for the expenses paid from a member's bank account?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are the trustee and sole member of a Superfund.

You use your home office to carry out the relevant activities of the superfund.

Some expenses incurred by the Superfund were paid out of the Superfund's bank account.

Other expenses such as electricity and internet expenses were incurred by the member and paid from the member's bank account. The member was not reimbursed by the superfund for the expenses they had incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166) 

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).

Taxation Ruling TR 93/17 discusses the tax deductions available to superannuation funds. The tax deductibility of expenditure incurred by a superfund is usually determined under section 8-1 of the ITAA 1997.

As a general rule, a loss or outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153).

A superfund is a separate entity from its members and is taxable in its own right. Therefore, it is necessary to determine who incurred the various expenses in order to determine if a deduction is allowed for the superfund.

Taxation Ruling TR 97/7 sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape.

The guidelines developed by the courts that help to determine if an expense has been incurred include:  

· there must be a presently existing liability to pay a pecuniary sum

· presently existing liability is determined on the circumstances of the case

· an expense is incurred when actually paid if there was no presently existing liability.

Taxation Ruling TR 94/26 also provides guidelines on the meaning of incurred and states at paragraph 6 that:

Whether there is a presently existing pecuniary liability is a question which must be determined in light of the particular facts of each case, and especially by reference to the terms of the contract or arrangement under which the liability is said to arise.

Therefore, where a document, such as an invoice is made out in the superfund's name and the amount is paid from the superfund's account, it is considered that the superfund has incurred the expense. That is, they had a presently existing liability to pay the specified amount. Where such expenses are incurred for the production of assessable income, then it follows that a deduction is generally allowable under section 8-1 of the ITAA 1997.

However, where an invoice is made out in a member's name and is paid for by that member, the superfund has not incurred the expense. That is, any amount that is paid out of a member's bank account is not an expense incurred by the superfund. For example, an internet invoice in the member's name and paid for by the member out of their own funds, is not incurred by the superfund. Therefore, no deduction is allowable.

In summary, where income earning expenses are incurred and paid directly out of the superfund's account, a deduction is allowable. However, where a member pays expenses from their own money and the superfund has not incurred the expense, no deduction is allowable.

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