The extent to which an expense of a super fund may be considered an outgoing of capital or capital in nature is determined by looking at all the circumstances of the case. The factors you need to consider in determining whether a particular expense is capital or capital in nature depend on whether the expense is:
- incurred in establishing, altering, replacing or enlarging the business structure of the entity
- lasting and recurring in nature
- providing or bringing into existence a lasting or recurring asset or advantage (from the super fund's perspective).
An expense incurred in establishing, replacing or enlarging an income producing entity is capital in nature. It is not deductible under the general deduction provisionFootnote7. For example, the costs of establishing a super fund are capital in nature.
An expense incurred in altering the organisation or structure of the entity producing the income is capital in nature. This is not deductible under the general deduction provision. If an expense provides an enduring advantage by establishing or expanding the income yielding structure, or it creates or preserves a capital asset (particularly a one-off expense), this indicates the expense is capital in nature. See Example 1.
On the other hand, an expense incurred in making changes to the internal organisation or day-to-day running of the entity is not considered to be capital in nature. This is provided the changes do not result in an advantage of a lasting character. See Example 2 and Example 3.
Certain business-related capital expenditure (or blackhole expenditure) may be deductible over a period of five yearsFootnote8.
A deduction may be available for the cost of depreciating capital assetsFootnote9 held by the trustee of a super fund. This is for when their use is in gaining or producing the fund's assessable income.
See also:
- Capital allowances
- TR 2011/6 Income tax: business related capital expenditure – section 40–880 of the Income Tax Assessment Act 1997 core issues
Trust deed amendments
Example 1: Legal expense incurred in amending a trust deed which is capital in nature
A public offer super fund is not, under its existing trust deed, able to offer a product that meets the requirements of a MySuper product as listed under super lawFootnote10. The super fund incurs legal expenses in amending its trust deed so that it is able to offer a MySuper product to its members.
The ability to offer a new type of product is capital in nature, as it is an advantage of a lasting character and the change to the trust deed is structural in nature. The legal expenses incurred by the fund in amending the trust deed are therefore capital in nature, and not deductible under the general deduction provision.
However, if the super fund is carrying on a business, a deduction over a five-year period may be availableFootnote11.
End of example
Example 2: Legal expense incurred in amending a trust deed which is deductible under the general deduction provision
A public offer super fund has a product that meets the requirements listed in super lawFootnote12 of a MySuper product. The super fund applies to APRA for authority to offer the product as a MySuper product, and APRA authorises the product.
The super fund incurs legal expenses in making minor amendments to the trust deed to refer to the product as a MySuper product that meets the requirements in super law. The change to the trust deed is not structural in nature, nor capital or capital in nature. If the fund is gaining or producing only assessable income, the legal expenses in making the amendments to the trust deed are deductible. If the fund is gaining or producing assessable and non-assessable income, then the legal expenses will need to be apportioned.
End of example
Example 3: Legal expense incurred in amending a trust deed which is deductible under the general deduction provision
An APRA-regulated super fund gains or produces assessable income. The fund incurs legal expenses in amending its trust deed so that the deed applies with reference to the rulesFootnote13 provided under super law regarding the charging and allocating of certain fees to members of the fund.
The changes to the trust deed do not alter the structure or organisation of the fund, and do not result in an advantage of an enduring character. The legal expenses are deductible to the fund. If the fund is gaining or producing assessable and non-assessable income, then the legal expenses will need to be apportioned.
End of exampleSuperStream expenses
The SuperStream standard is part of the government's Super Reform package. It provides a consistent, reliable electronic method of transacting linked data and payments for super. The goal is to improve the efficiency of the super system, have faster processing of rollovers and contributions, and reduce the number of lost accounts and unclaimed super money.
Example 4: SuperStream expense incurred by a super fund with internal administration – capital in nature
An APRA-regulated super fund that gains or produces assessable income has an internal administrationFootnote14 system. To ensure it complies with the data elements required for the SuperStream Data and Payment Standards under super lawFootnote15, the fund conducts a significant upgrade to its systems. The fund then replaces its backend registry system with a more modern platform. The expense incurred by the fund in this systems upgrade results in an advantage of an enduring nature and is capital in nature.
If the fund had simply conducted a data mapping exercise and updated codes in its existing computer systems, these changes would be maintenance in nature. They would not involve the creation or acquisition of a capital asset. In this case, the expenses incurred by the super fund in conducting the update are deductible under the general deduction provision. Where the fund also derives non-assessable income, the expense will need to be apportioned.
The fund would be expected to incur both revenue and capital expenditure as a result of implementing the SuperStream reforms. A typical expense that is revenue in nature would be training staff to use the new system, as the expense is incurred in the day-to-day running of a super fund.
End of exampleEstablishment costs
The costs of establishing a super fund, including the costs of preparing the trust deed, are typically capital in nature. They are not deductible under the general deduction provisionFootnote16. However, if the costs meet the parameters of business-related capital expenditureFootnote17 (or blackhole expenditure) they may be deductible over a five-year period.
Merger-related expenses
The expenses incurred by merging super funds are typically capital in nature. They are not deductible under the general deduction provisionFootnote18. This is because these costs are incurred in altering, or proposing to alter, the structures of both merged entities. Examples of these expenses include financial due diligence, legal and financial advice about the merger.
If the merger-related expenses meet the parameters of business-related capital expenditure (or blackhole expenditure), they may be deductible over a five year periodFootnote19.
Business-related capital expenditure (blackhole expenditure)
The following rules apply to business-related capital expenditure incurred after 30 June 2005.
A specific deduction may be available to trustees of APRA-regulated super funds (the taxpayer) for a range of business-related capital expenses (referred to as 'blackhole expenditure'). These expenses are deductible over a period of five yearsFootnote20 starting in the year the expense is incurred.
The deduction is available for a range of business-related capital expenditure. This is provided that no other provision either takes the expenditure into account or denies a deduction.
Subject to specified limitations and exceptions, a taxpayer may be able to deduct capital expenditure they incur if it is 'in relation to' a business to the extent the business is for a 'taxable purpose'Footnote21 and:
- is currently carried on by them, or
- was formerly carried on by them or by another entity, or
- is proposed to be carried on by them or by another entity.
For capital expenditure to be 'in relation to' a business, there must be a sufficient and relevant connection between the expenditure and the business.
If a super fund derives both assessable and non-assessable income, the deduction for the business-related capital expense, spread over five years, must be apportionedFootnote22.
When is a fund carrying on a business?
The activities of some APRA-regulated super funds in dealing in shares and other investments may amount to the carrying on of a business. We assess the super fund's investment activities against relevant factors to see whether they amount to the carrying on of a business.
These indicators include:
- whether the activity has a significant commercial purpose or character
- if there is a purpose of profit
- repetition and regularity of the activity
- if the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit
- size, scale and permanency of the activity.
Whether APRA-regulated super funds satisfy the above indicators to be considered to be carrying on a business for tax law purposes will depend on their particular circumstances.
See also:
- TR 93/17 Income tax: income tax deductions available to superannuation funds
- TR 97/11 Income tax: am I carrying on a business of primary production?
- TR 2011/6 Income tax: business related capital expenditure – section 40–880 of the Income Tax Assessment Act 1997 core issues
- Footnote 7
- Section 8–1 of the Income Tax Assessment Act 1997
- Footnote 8
- Section 40–880 of the Income Tax Assessment Act 1997
- Footnote 9
- Subdivision 40–B of the Income Tax Assessment Act 1997
- Footnote 10
- Section 29TC of the Superannuation Industry (Supervision) Act 1993
- Footnote 11
- Section 40–880 of the Income Tax Assessment Act 1997
- Footnote 12
- Section 29TC of the Superannuation Industry (Supervision) Act 1993
- Footnote 13
- The rules contained in Part 11A of the Superannuation Industry (Supervision) Act 1993. The rules apply from 1 July 2013.
- Footnote 14
- Internal administration is defined as where the fund administration tasks are carried out directly by the trustee or people employed by them.
- Footnote 15
- Section 34K of the Superannuation Industry (Supervision) Act 1993 and the Superannuation Data and Payment Standards 2012 (legislative instrument).
- Footnote 16
- Section 8–1 of the Income Tax Assessment Act 1997.
- Footnote 17
- Section 40–880 of the Income Tax Assessment Act 1997.
- Footnote 18
- Section 8–1 of the Income Tax Assessment Act 1997.
- Footnote 19
- Section 40–880 of the Income Tax Assessment Act 1997.
- Footnote 20
- Section 40–880 of the Income Tax Assessment Act 1997.
- Footnote 21
- The definition of 'taxable purpose' is provided by subsection 40–25(7) of the Income Tax Assessment Act 1997 and covers various purposes, including the purpose of producing assessable income. The test is applied at the time the expenditure is incurred.
- Footnote 22
- Subsection 40–880(3) of the Income Tax Assessment Act 1997.