The ATO recently decided to scrap the Draft Taxation Ruling (TR) 2013/D7. This draft ruling relates to superannuation entities and how expenses are to be apportioned. The original ruling, TR 93/17, will apply with an issue of a comprehensive addendum to this ruling. It is expected to be issued this month.
The draft ruling was initially released due to uncertainties about some issues contained in the original ruling and was open to industry feedback.
One of these issues was the complexity around calculating deductions when the fund is both in pension and accumulation phase.
The draft ruling was an attempt to provide guidance on whether the expense was ‘distinct and severable’ or whether it was an ‘indifferent expense’ and hence it should be apportioned based on a fair and reasonable assessment. This was causing industry confusion as it was not possible to prescribe or sanction any single or standard method for apportioning. Each case depends on its own facts and without any prescribed method it is difficult to provide certainty on the demonstration around the fair and reasonable assessment. The draft ruling provided some specific examples based on the income ratio method, while even highlighting in one of the examples the bias and subjectivity that can occur especially when merging funds.
One such example in relation to the apportionment of ‘indifferent expenses’ is as follows:
An SMSF has two members, one of whom has not retired and is still contributing to the fund and the other is retired and is receiving a pension and has no other interest in the fund. In the income year, the fund derived $190,000 income from its investments. $100,000 of this income is exempt current pension income under section 295-385 of the Income Tax Assessment Act 1997. The remainder of the income ($90,000) is assessable income of the fund.
In addition, in the income year, the fund received $10,000 in assessable contributions made for the first member.
The fund pays for advice concerning the making of some resolutions by the trustees of the fund about the ongoing maintenance of the fund. In the particular income year, the fund incurs an expense of $200 in respect of the advice. That expense is an indifferent expense.
The trustees of the fund employ the ‘income ratio method’ to make an assessment of the extent to which the $200 expense relates to gaining or producing the fund’s assessable income, as follows:
$200 * [$100,000/$200,000]
The resulting apportionment of the $200, as $100 (50 per cent) incurred in gaining or producing the fund’s assessable income, is, in the circumstances, a fair and reasonable assessment of the extent to which the advice expense relates to gaining or producing the fund’s assessable income.
In this instance, based on the facts, this method was found to be fair and reasonable, however, another set of circumstances based on the same method could result in the opposite result.
Another point of confusion was around the merger of funds. When a merger occurs, the receiving fund is able to receive the rollovers as part of their assessable income when it comes to the apportionment of expenses. Depending on what method is used it can result in significant deductibility of expenses and hence raises the question around the fair and reasonable assessment.
Based on industry feedback and consultation with the Association of Superannuation Funds of Australia, SMSF Association and Financial Services Council it was found this approach was too subjective and confusing, and instead one set of rules are required. Hence, the ATO’s decision not to finalise this draft ruling and instead communicate the views and intent of the draft ruling via an addendum.
