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Ruling
Subject: Deductibility of the legal expenses in forming a Bare Trust and trustee company
Question 1
Are the costs associated with the setup of the bare trust deductible to the superannuation fund?
Answer
No.
Question 2
Is there a capital loss as a result of the bare trust being unusable?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
A bare trust and trustee company were setup for the purpose of acquiring a property using the non-recourse loan provisions. The superannuation fund then made an offer to purchase the property using the bare trust structure set up. The offer was rejected by the vendor and the property was sold to another non-related party.
The superannuation fund incurred legal costs for the setup of the bare trust in anticipation of the acceptance of an offer for the purchase of the property. As the offer was not accepted, the bare trust is now unusable.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Section 40-880
Reasons for decision
A general deduction under section 8-1 of the Income Tax Assessment Act 1997 is a loss or outgoing that has the relevant connection with income or business activities, and that is not of a capital, private or domestic nature. A specific deduction, on the other hand, is an amount that a provision other than the general deduction provision allows as a deduction.
The cost of setting up the trustee company and bare trust are considered to be capital expenses and not deductible under the general provisions. The expenses are not incurred in deriving income or carrying on a business, as they are incurred at a point too soon. They are capital expenses incurred in creating an entity that may be involved in purchasing an investment property on behalf of the superannuation fund. The expenditure creates the structure that has an enduring benefit to the taxpayer, in the form of an entity.
The expenditure is also not be deductible under the five year write-off for 'blackhole' business capital costs as it does not relate to a business that was or is proposed to be carried on for a taxable purpose. There would have been no business carried on if the property had been purchased and held by the bare trust. It is a passive investment on behalf of the superannuation fund.
A taxpayer can only make a capital gain or loss if a capital gains tax (CGT) event happens. The specific time when a CGT event happens is important for various reasons. In particular, the timing is relevant for working out whether a capital gain or loss from the event affects the taxpayer's income tax for the current year. Most CGT events involve a CGT asset.
In your situation a trustee company has been created for the possible bare trust arrangement that would have arisen had the property been purchased. This company (shares) would appear to be the only CGT asset that is in existence in relation to your question. No CGT event has occurred to date that could create a CGT loss in regards to this asset. If the company (shares) was disposed of or the company was liquidated and deregistered a CGT event would occur that could give rise to a capital gain or loss. Taxation Determination TD 2000/7 sets out the requirements for when a CGT event happens in relation to a deregistered company.
Because no such CGT event had occurred at this point in time in regards to the company no capital loss can be claimed with regards to the trustee company and the bare trust.