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Ruling

Subject: Deduction-trustee liability insurance

Question 1

Are the legal expenses to amend an entity constitution an allowable deduction for your Self Managed Superannuation Fund (SMSF)?

Answer: No.

Question 2

Are the costs of renewal fees, insurance premiums and the trustee liability insurance allowable deductions for your SMSF?

Answer: Yes

This ruling applies for the following periods

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2006

Relevant facts

An entity acts as a corporate trustee for a SMSF.

The assets of the SMSF are in the trustee company's name.

The SMSF paid annual renewal fees.

The SMSF paid legal expenses to amend the entity constitution.

The SMSF paid compulsory insurance premiums.

A member of the SMSF paid an expense to take out a trustee liability insurance policy (the policy) on behalf of the SMSF.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

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

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

Capital expenses

Expenses of capital, or of a capital nature, cannot be claimed as a deduction under section 8-1 of the ITAA 1997.

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Broadly speaking, expenses connected with establishing, enlarging or replacing a business or the profit-yielding structure of an organisation are not deductible under section 8-1 of the ITAA 1997(Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; 5 ATD 87 ). These expenses do not come within the positive limbs of section 8-1 of the ITAA 1997 because they lack the necessary connection with, and relevance to, producing income to bear the character of operating, working or business expenses or to have the character of income-producing expenses. The expenses are, in any event, excluded from the section 8-1 of the ITAA 1997 because they are capital expenses or expenses of a capital nature.

The costs of initially registering a business or trade name, for example, are not deductible under section 8-1 of the ITAA 1997. Nor are the costs incurred in preparing or amending the constituent documents of a company or trust ordinarily deductible under subsection 51(1) ( Case F17, 74 ATC 80; 19 CTBR(NS), Case 35, Fanmac Ltd v. FC of T 91 ATC 4703 at 4709; (1991) 22 ATR 413 at 421).

Legal expenses

In your case, the SMSF has incurred legal expenses to amend the corporate trustee's constitution. The expenses incurred do not relate to the day to day income earning activities of the SMSF. The legal expenses to change the corporate trustee's constitution were incurred in establishing the corporate trustee's right to act as the trustee for the SMSF and thus provides an enduring benefit to the SMSF of a capital nature and are not deductible under section 8-1 of the ITAA 1997.

Superannuation fund deductions

Taxation Ruling TR 93/17 explains the general principles governing the tax deductibility of expenditure incurred by a superannuation fund under section 8-1 of the ITAA 1997.

Expenditure of a superannuation fund, which is not of a capital, private or domestic nature, is deductible under subsection 8-1 to the extent that:

(a) it has the essential character of an outgoing incurred in gaining or producing assessable income; or

(b) it has the character of an operating or working expenses of a business or is an essential part of the cost of the fund's business operations.

TR 93/17 provides the types of expenses typically incurred by a superannuation fund that are ordinarily deductible under subsection 8-1; actuarial costs; accountancy fees; audit fees; costs of complying with the Superannuation Acts and Regulations; trustee fees and premiums under an indemnity insurance policy; investment adviser fees; other administrative costs incurred in managing the fund. It can be seen that some of these expenses may not directly relate to the derivation of assessable income but are incurred in conducting the activity of a superannuation fund and meeting the required legislation and regulations.

A trustee of a SMSF such as a corporate trustee is responsible for the running of a SMSF. The duties, responsibilities and obligations of being a trustee cover:

· the fund's trust deed

· the provisions of the superannuation laws, including

· Superannuation Industry (Supervision) Act 1993 (SISA)

· Superannuation Industry (Supervision) Regulations 1994 (SISR)

· the Income Tax Assessment Act 1997 (ITAA 1997)

· the Tax Administration Act 1953 (TAA 1953)

· the Corporations Act 2001

· other general rules, such as those imposed under other tax and trust laws.

Renewal fees

Generally an initial registration fee is considered a once off expense of an enduring nature and is directly, actively and immediately necessary with respect to a businesses structure. These expenses are capital in nature. However, annual renewal fees for the registration of a business are expenses of a revenue nature and therefore the expenses will be deductible under section 8-1 of the ITAA 1997.

Similarly premiums paid by a business for insurance are deductible as ordinary business expenses under section 8-1 of the ITAA 1997 and are deductible in the year in which they are incurred.

In your case, the entity is responsible for managing the activities of the SMSF such as the investments and the payment of expenses. The annual renewal fee and insurance premiums would be seen as a deductible expense under subsection 8-1 of the ITAA 1997 to the superannuation fund as there is sufficient connection to the activity of the fund in meeting administrative requirements of managing the fund.

The annual fee and insurance premiums are therefore deductible to the SMSF under section 8-1 of the ITAA 1997.

Trustee liability insurance

If the superannuation fund were to incur professional fees, as defined in the audit insurance policy for an audit or investigation, the fees themselves would be seen as a deductible expense under subsection 8-1 to the superannuation fund as there is sufficient connection to the activity of the fund in meeting administrative requirements.

Therefore, the SMSF is entitled to a deduction for the cost of the policy premiums under
section 8-1 of the ITAA 1997.