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Edited version of your private ruling
Authorisation Number: 1012475350740
Ruling
Subject: Deductibility of trustee company expenses
Question
1. Is the Fund able to claim a deduction for the annual review fee charged by the Australian Securities and Investments Commission to the Trustee?
2. Is the Fund able to claim a deduction for annual accounting fees for performing registered office functions charged to the Trustee?
3. Is the Fund able to claim a deduction for establishment costs of the Fund and the Trustee?
Advice/Answers
1. No.
2. No.
3. No.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
The Trustee is a corporate trustee of the Fund.
The Trustee does not trade and is not a trustee for any other trust or entity.
The Trustee has no assets or income and thus has no capacity to pay expenses on its own behalf.
The Fund relies on the Trustee to make decisions.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Subsection 8-1(2).
Further issues for you to consider
Does Part IVA apply to this ruling?
Reasons for decision
Summary
The Fund is not entitled to claim a deduction for the annual review fee charged by the Australian Securities and Investments Commission to the Trustee, annual accounting fees for performing registered office functions charged to the Trustee or establishment costs of the Fund and the Trustee.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
In this case the annual review fee charged by Australian Securities and Investments Commission (ASIC) to the Trustee (the Trustee) and the annual accounting fees for performing registered office functions charged to the Trustee are outgoings that are incurred by the Trustee and not by the Fund (the Fund). Therefore, the Fund cannot claim those expenses as a tax deduction.
In Steele v. Deputy Commissioner of Taxation (1999) 161 ALR 201;[1999] HCA 7;(1999) 161 ALR 201;(1999) 197 CLR 459;(1999) 41 ATR 139;(1999) 73 ALJR 437;99 ATC 4242, the majority of the judges, in considering whether expenditure made prior to the derivation of expected assessable income is incidental stated:
There are cases where the necessary connection between the incurring of an outgoing and the gaining or producing of assessable income has been denied upon the ground that the outgoing was entirely preliminary to the gaining or producing of assessable income or incurred too soon before the commencement of the business or income producing activity. The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may be one of a number of facts relevant to a judgment as to whether the necessary connection might, in a given case, exist, but contemporaneity is not legally essential, and whether it is factually important may depend upon the circumstances of the particular case.
In other words, the expenditure should not be preliminary to the income-earning activities and is not incurred too soon.
Subsection 8-1(2) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent it is a loss or outgoing of capital or of a capital nature.
The guidelines to distinguish between capital and revenue outgoing were laid down in the Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] ALR 498;[1938] HCA 73;[1939] ALR 10;(1938) 12 ALJ 411;(1938) 5 ATD 23;5 ATD 87;61 CLR 337;(1938) 61 CLR 337 at 351 (Sun Newspaper Case). It was pointed out that expenditure in establishing, replacing and enlarging the profit-yielding structure itself is capital and is to be contrasted with working or operating expenses. Dixon J in Sun Newspapers Case stated:
The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.
In addition, an expenditure incurred with a view to brining into existence an asset or an advantage for the enduring benefit of the business will be capital in nature (British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205).
Further, in Tax Determination 92/143 (TD 92/143) consideration was give to whether establishment expenditure incurred by a company preparatory to listing its shares on an Australian or foreign stock exchange were deductible under section 8-1 of the ITAA 1997. It was found that there was insufficient connection between establishment expenses incurred by a company and the derivation of assessable income from its income producing activities for the expenses to be deductible. Establishment expenses are not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income under the second limb of section 8-1 of the ITAA 1997. The expenses do not have the character of a working expense or form part of the cost of a company's trading operations
The expenditure for establishment costs of the Fund and the Trustee are not working or operating expenses which relate to the day-to-day running of the Fund. Therefore, the expenses are not revenue in nature.
The benefits from the establishment expenses are enduring, extending beyond the year in which they are incurred. They are also non recurrent.
The establishment costs are capital in nature and are not deductible under section 8-1 of the ITAA 1997.
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