Private ruling: Superannuation funds - deductions
Date of advice: 6 April 2023
Published: 29 May 2023
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are investment advice fees incurred by The Trustee for the Superannuation Fund (the fund) deductible under the general deduction provisions of section 8-1(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The fund is a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). The trustee of the Fund is X Pty Ltd. In or around the financial year ended 30 June 20YY the fund entered into an agreement with Investment Advisor for the provision of specific advice in respect of the acquisition, retention, and subsequent sale of Target Co. Under the agreement, an 'Advisory Fee' of $XX was paid by the Fund to the Investment Advisor. The fund is in partial pension phase, with current draft actuarial percentage of exempt income as calculated under section 295-390 of the ITAA 1997 as ZZ%.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 110-35

Reasons for decision: Summary: The tax deductibility of expenditure incurred by a superannuation fund is determined under the general deduction provision in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 8-1 of the ITAA 1997 provides: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. | Detailed Reasoning - Capital loss or outgoing: Section 8-1(2)(a) of the ITAA 1997 denies a deduction for a loss or outgoing that has been incurred where the loss or outgoing is capital or of a capital nature. 'Loss or outgoing of capital, or of a capital nature' is not statutorily defined nor is there legislative guidance in distinguishing between capital and revenue. However, courts have outlined various 'tests' and criteria it would consider in distinguishing between capital and revenue. | Detailed Reasoning - Sun Newspapers Ltd v Federal Commissioner of Taxation: The leading authority on the distinction between revenue and capital outgoings is the judgment of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403 ( Sun Newspapers ). Dixon J set out three matters to be considered (at CLR 363): (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it, that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. The tests in Sun Newspapers requires an enquiry as to whether the expenditure relates to the structure within which the profits are earned or whether it relates to the process of earning it. | Detailed Reasoning - Foley Brothers v FC of T: In Foley Brothers Pty Ltd v. FC of T (1965) 13 ATD 562; (1965) 9 AITR 635, outgoings incurred for the purpose of altering the organisation or structure of the profit-yielding subject (including its demise) were considered to be of a capital nature. | Detailed Reasoning - Deductions available to superannuation funds: Expenses incurred by superannuation funds and the deductibility of those expenses are outlined in Taxation Ruling TR 93/17 Income tax: income tax deductions available to superannuation funds (TR 93/17) which explains the general principles governing deductibility of expenditure of superannuation funds under section 8-1 of the ITAA 1997. TR 93/17 at paragraph 5 subsection (c) states that 'up-front costs incurred in investing money are of a capital nature and are not deductible under section 8-1'. Paragraph 4 of TR 93/17 outlines the typical expenses incurred by a superannuation fund that are ordinarily deductible under section 8-1 of the ITAA 1997. These include: (a) actuarial costs (b) accountancy fees (c) audit fees (d) cost of complying with the Occupational Superannuation Standards Act 1987 and Regulations (e) trustee fees and premiums under an indemnity insurance policy (f) costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself) (g) investment adviser fees and costs in providing pre-retirement services to members (h) subscriptions for membership paid by a fund to The Association of Superannuation Funds of Australia Limited; and (i) other administrative costs incurred in managing the fund. Investment adviser fees incurred by a superannuation fund are generally deductible to the extent they are incurred in gaining or producing assessable income, however up-front fees incurred in investing money are of a capital nature and are not deductible. Expenditure which is incurred partly in producing assessable income and partly in gaining exempt income must be apportioned as per paragraph 6 of TR 93/17. | Detailed Reasoning - Investment advice - investment plans: Taxation Determination TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business? (TD 95/60)discusses whether initial fees and ongoing fees paid for investment advice are an allowable deduction. TD 95/60 explains that a fee for drawing up a financial plan is not deductible because it is not expenditure incurred in the course of gaining or producing the assessable income from the investments. It is too early in time to be an expense that is part of the income producing process as it is an expense that is associated with putting the income earning investments in place. Therefore, the expense has an insufficient connection with earning income from the investments and is considered capital in nature. TD 95/60 also states that where a taxpayer has existing investments and goes to an investment adviser to draw up an investment plan, the fee paid would be a capital outlay even if some or all of the pre-existing investments were maintained as part of the plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of a capital nature. | Detailed Reasoning - Application to this case: As per clause X and Y in the agreement, in consideration for making available the information in relation to Target Co, the superannuation fund must pay the Advisory Fee where it has invested in Target Co. Where no investment was made, the Advisory Fee would not be charged. The investment fee is invoiced in full at the end of the Exit Date. The fee relates to advice and recommendations to invest in Target Co. Even though the payment is not made upfront, to the extent the fee relates to the recommendation to invest, the amount would be considered capital in nature. The investment advice given by the Investment Advisor related to the business of Target Co only, and specifically in relation to the valuation of Target Co and whether, in their opinion, the shares in Target Co should continue to be held or sold. The advice is consistently focused on maximising the capital value of the initial investment which was the focus of the investment plan from the outset. In applying the factors outlined in Sun Newspapers , we consider the investment fee to be wholly capital in nature as: (a) the investment expense was an outgoing related to the acquisition of shares in TargetCo, a capital asset; (b) The fee was a once-off expense; (c) The fee was incurred on the taxpayer's investment in TargetCo. The investment expense relates to the structure within which profits are earned, being the investment in Target Co, rather than to any process in relation to the earning of profits. The investment plan has a strong emphasis on the capital value of the Target Co and the advice provided relates strongly to an exit point being determined in relation to the recommended capital value of the investment. The nature of the fee itself is determined in relation to the increased value of capital related elements and rights pertaining to the capital investment. As per the view established in Foley Brothers , the investment expense where it relates to the advice to exit holdings in Target Co would be of a capital nature. In this regard, to the extent the fee relates to the ongoing advice and the advice to exit, we would consider it an extension of an investment plan as per TD 95/60. Accordingly, the whole of the fee is capital in nature.