Edited version of your written advice

Authorisation Number: 1051394333839

Date of advice: 4 July 2018

Ruling

Subject: Deductibility of professional trustee fees

Question 1

Are the expenses incurred by the trust for the Professional Trustee’s fees deductible?

Answer

Yes

Question 2

Is an allocation of expenses, based on a breakdown of the Professional Trustee’s time and services suitable evidence for the apportionment of fees that are tax deductible?

Answer

Yes

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

The scheme commences on:

22 September 20xx

Relevant facts and circumstances

You are a trust established on 22 September 2015.

You qualify as a special disability trust within the meaning of the Social Security Act 1991.

Under the Social Security Act 1991, there is a requirement that there must be at least two trustees.

The two trustees for the trust are Person A and Person B who is the Professional Trustee.

The trust’s funds are invested in managed funds which generate an annual income.

One of the expenses incurred by you is professional trustee fees as a result of work performed by the Professional Trustee in relation to the administration of the trust.

At the time of the commencement of the trust, the two trustees agreed that the work performed by Professional Trustee would consist of the tasks outlined in the trust deed.

The administration tasks outlined in the trust deed will be the expenses by which the Professional Trustee will determine their fees.

It was agreed between the two trustees that no monthly invoices would be issued by the Professional Trustee for the trust.

Person A as trustee for the trust set up a direct debit from the trust’s bank account to pay the Professional Trustee fees monthly.

The Professional Trustee fees have been paid in accordance with the trust deed.

The trust deed stipulates the duties of the professional trustee with key responsibilities.

The Professional Trustee’s work predominately relates to producing assessable income and managing the tax affairs of the trust.

Relevant legislative provisions

Section 8-1 of the ITAA 1997

Section 8-10 of the ITAA 1997

Section 25-5 of the ITAA 1997

Reasons for decision

Question 1

Summary

The expenses incurred by the trust for the Professional Trustee’s fees are apportioned and deductible under either section 8-1 or 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 8-1 of the ITAA 1997 is the general provision which 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, or relate to the earning of exempt income.

Section 8-10 of the ITAA 1997 states that if more than one provision applies the most appropriate provision should be used i.e the specific provision should override the general provision. Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997. In particular, Division 12 lists that section 25-5 of the ITAA 1997 is the specific provision dealing with tax related expenses.

Subsection 25-5(1) of the ITAA 1997 allows a deduction for tax related expenses. Under this section, you can deduct expenditure you incur to the extent that it is for:

(a) managing your tax affairs, or

(b) complying with an obligation imposed on you by a Commonwealth law in so far as that obligation relates to the tax affairs of an entity

Tax affairs' is defined in section 995-1 of the ITAA 1997 as affairs relating to tax. 'Tax' is defined in this section as meaning income tax as assessed under the income tax assessment acts.

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; 56 ALR 785; 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.'

Special disability trusts face the same general criteria for claiming a deduction for income tax purposes that are faced by all other taxpayers. For a trustee to be able to claim a tax deduction a nexus is required to be established between the expense incurred and the activity producing the trust's assessable income.

In determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the outgoing follows the advantage which is sought to be gained by incurring the expenses.

Taxation Determination TD 94/91: Income tax: who is allowed a deduction under subsection 69(1) of the Income Tax Assessment Act 1936 for expenditure in respect of a tax related matter of a trust? contains the Commissioner's view in relation to who is allowed a deduction under subsection 69(1) of the Income Tax Assessment Act 1936 for expenditure in respect of a tax related matter of a trust (subsection 69(1) has been replaced by section 25-5 of the ITAA 1997).

Paragraph 2 of TD 94/91 states in part:

A 'taxpayer', as defined in subsection 6(1), means a person deriving income or deriving profits or gains of a capital nature. For a trust estate, it is the trustee who conducts the affairs of the trust and in whose name the income is derived and expenses are incurred: …. It is the trustee of the trust therefore who is a 'taxpayer' for the purposes of subsection 69(1) in relation to the trust.

Paragraph 3 of TD 94/91 states:

If a trustee of a trust incurs expenditure in respect of the management or administration of the income affairs of the trust or in compliance with an obligation under a Commonwealth law imposed on the trustee in respect of another taxpayer, a deduction is allowed for this expenditure in the tax return of the trust.

In your case, you engaged the services of a Professional Trustee to assist with work related to the administration of the trust. The trustees agreed that the administration tasks in the trust deed would be the relevant tasks of the Professional Trustee and that specific fees would be charged for these tasks. The Professional Trustee’s work predominately relates to producing assessable income and managing the tax affairs of the trust.

It was also determined that a monthly direct debit will be paid to the Professional Trustee’s bank account. No invoices have issued by the Professional Trustee in relation to the monthly payments as the expenses are outlined in the trust deed.

Part of the work performed by the Professional Trustee includes tax related matters such as the preparation of the trust’s income tax returns. The Professional Trustee fees charged in relation to tax related matters would not be deductible under section 8-1 of the ITAA 1997 as this expense is a specific deduction listed under section 12-5 of the ITAA 1997.

If there were no tax related expenses during the income year, the Professional Trustee fees would be fully deductible under section 8-1 of the ITAA 1997.

Accordingly part of the professional trustee fees you incurred in administering the affairs of the trust are deductible under section 8-1 of the ITAA 1997 as there is a nexus between the expense incurred and the activity producing the trust's assessable income.

Therefore the Professional Trustee fees you incurred are deductible under the relevant provision of either section 8-1 and 25-5 of the ITAA 1997.

Question 2

Summary

An allocation based on a breakdown of the professional trustee’s time and services would be suitable evidence for the apportionment of fees that are deductible under section 8-1 and 25-5 of the ITAA 1997.

Detailed reasoning

The Commissioner's view in relation to apportionment of expenses can be found in a number of taxation rulings.

Taxation Ruling TR 95/33 Income Tax: subsection 51(1) – relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings provides the Commissioner’s view in relation to situations in which as taxpayer’s subjective purpose, intention or motive is relevant in determining the availability of an income tax deduction (subsection 51(1) of the ITAA 1936 has been replaced by section 8-1 of the ITAA 1997).

Paragraph 14 of TR 95/33 states in part:

When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin (1949) 78 CLR 47 at 59; 8 ATD 431 at 437). …

That is, where an outgoing is not incurred entirely for the purposes specified in subsection 8-1(1) of the ITAA 1997, the portion of the outgoing for which a deduction is allowable under section 8-1 is calculated on a basis that is fair and reasonable in the particular circumstances.

Taxation Ruling TR 95/25: Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith outlines the implications flowing from the decision of the Full Federal Court in FC of T v. Roberts.

Paragraph 40 of TR 95/25 states:

Under the reasoning in Roberts and Smith, interest on borrowed funds will be fully deductible provided the amount of 'capital' attributable to the borrower at the time of the borrowing is equal to or greater than the amount borrowed. If the amount of capital attributable to the borrower is less than the amount borrowed it will be necessary to apportion the interest expense. Generally the proportion of interest deductible will be equal to the proportion of capital that had been used to derive assessable income.

In your case, you engaged the services of a Professional Trustee to assist with work in relation to the administration of the trust. The Professional Trustee’s work predominately relates to producing assessable income and managing the tax affairs of the trust. The Professional Trustee keeps a record of the time spent administrating the trust when determining the Professional Trustee fees for the trust.

An allocation based on a breakdown of the professional trustee’s time and services would be suitable evidence for the apportionment of the Professional Trustee fees that are deductible pursuant to section 8-1 and 25-5 of the ITAA 1997.

Accordingly, you can claim a part deduction in respect to the Professional Trustee fees based on the apportionment on the trustee’s time and service in relation to expenses deductible under 8-1 and 25-5 of the ITAA 1997.