The ATO has issued the long-awaited Addendum to Taxation Ruling TR 93/17
to clarify and update the Commissioner's views on the deductions available for superannuation funds.
In common with other taxpayers, superannuation funds are generally restricted to claiming deductions under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that they are incurred in producing assessable income.
The Addendum sets out the acceptable methods for super funds to apportion tax deductions for expenses incurred in partly gaining non-assessable income (eg exempt current pension income from earnings on fund assets set aside to pay pensions). Six examples have been added to illustrate the apportionment methods, including:
- an acceptable/unacceptable method of apportionment;
- an acceptable method of apportionment involving a service provider;
- an expense of a capital nature (creating a new in house reporting system);
- an expense of a revenue nature (enhancing an existing in house reporting system); and
- an expense of a revenue nature (additional services received from external provider).
The Commissioner accepts that current practices involving the treatment of administrative expenses incurred as a result of a merger are different from those expressed in the Addendum. The Commissioner does not propose to allocate compliance resources to examining the treatment of administrative expenses incurred as a result of a merger that took place before or during the financial year ended 30 June 2016 (or equivalent substituted accounting period).
A deduction is available under s 25-5 of ITAA 1997 for an expense to the extent that it is for managing the fund's tax affairs or complying with an obligation imposed on the trustee by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity. The Addendum notes that s 25-5 is a specific deduction provision. If an expense is deductible under s 25-5, the ATO says that the wording of that provision will determine the rules for deducting the particular expense. Unlike s 8-1, s 25-5 does not require a connection between the expense and the gaining or producing of an entity's assessable income. Therefore, an expense that is deductible under s 25-5 does not need to be apportioned on account of producing any non-assessable income.
As a general rule, the Addendum states that the costs incurred by a trustee in establishing a superannuation fund are not deductible because they are expenses of a capital nature. This includes:
- establishing a trust; or
- executing a new deed for an existing fund; or
- amending the fund's trust deed to enlarge or significantly alter the structure or function of the fund.
However, the ATO accepts that deductions may be allowable to a super fund under s 40-880 of the ITAA 1997 in respect of certain "blackhole" business-related capital expenditure if the operations of the fund amount to carrying on a business.
Costs associated with amending trust deeds will be deductible if the amendments simply make the administration of the fund more efficient and do not amount to a restructuring of the fund. That is, amendments of a trust deed which:
- facilitate day-to-day operations of a fund; and/or
- improve its ability to compete in the super fund market; and/or
- are not of a capital nature, where no new tangible or intangible asset is acquired or no new branch of the fund's existing operations is created.
These indicators of whether trust deed expenditure is capital or revenue in nature also apply to trust deed amendments made in response to law changes relating to regulatory provisions. The fact that a trust deed is amended to reflect a change in regulatory law is a relevant factor that counts towards an assessment that the change is on revenue account. However, an amendment made in response to a regulatory law change which results in enduring changes to the super fund's structure or function or creates a new asset, whether tangible or intangible, is capital in nature and the costs associated with the amendment are not deductible under s 8-1.
While expenses connected with establishing, enlarging or replacing the income-yielding structure of a super fund are generally capital in nature and not deductible under s 8-1, the ATO acknowledges that such expenses could potentially be deductible under s 40-880 of ITAA 1997 for business-related capital expenditure, if the fund is carrying on a business. Of course, a fund carrying on a business would still need to satisfy the sole purpose test under the Superannuation Industry (Supervision) Act 1993 (SIS Act).