To determine whether legal expenses incurred pertaining to trust deed amendments are tax deductible to an SMSF, advisers and trustees must determine whether the cost in question is of a revenue or capital nature, an SMSF technical expert has confirmed.
“The classic question that gets raised quite regularly in this space is what happens if we’re amending the deed. Is that deed amendment tax deductible to the fund?” Smarter SMSF technical and education manager Tim Miller revealed during a SuperGuardian webinar today.
“So if we’re establishing a deed, then that’s generally not deductible because it’s going to be capital in nature.
“However, where we’ve got trust deed amendments that are required to facilitate the ongoing operation of the fund, then they’re [often] going to be deductible under the general deductible provisions.”
To illustrate his point, Miller used two examples of how the expenses for certain trust deed amendments would be treated from a tax deductibility perspective.
The first example involved an individual who wanted to change the trust deed to allow the fund to put a corporate trustee in place instead of the original individual trustee arrangement. The costs involved were the legal expenses to amend the deed and the Australian Securities and Investments Commission (ASIC) fee for the newly established company to facilitate the action.
“So the legal expenses are capital in nature because they are incurred in making enduring changes to the structure of the fund, in going from an individual trustee to a corporate trustee, and then the ASIC fees incurred in setting up the corporate trustee are also capital in nature and not considered to be expenses incurred by the fund,” he said.
The second example involved an SMSF that was required to update its trust deed to accommodate certain legislative changes.
“As [the legal fees incurred to make] the changes are ordinary [expenses regarding] the running of the fund and they’re not capital in nature, then they will be deductible,” Miller noted.
As a rule of thumb he recommended trust deed amendments be assessed as being either a necessity or an “aesthetic” change to determine if any related legal expenses can be treated as a tax deduction for the SMSF.