Can I claim an expense on the Formation Costs of SMSF?
Capital expenses of setting up a superannuation fund do not qualify as a tax deduction under s 40-880 of the ITAA ’97 as the fund is not carrying on a business although it may be producing assessable income from investments and other assessable income. This is confirmed by ATOIDs 2003/524 and 2003/525.
ATO SMSF News edition 17 which was published in early 2011 states: “We consider formation costs (for example, cost of the trust deed to establish an SMSF) are of a capital nature regardless of who pays them. These are not deductible under tax law. Also, unless the SMSF is conducting a business, there is no write-off under Business Related Costs of the Income Tax Act, and we consider the necessary business nexus is unlikely to be met because the primary purpose of a fund is to conduct it for retirement purposes rather than as a business.
LRBA - BARE TRUST ESTABLISHMENT
The costs in establishing a trust for an LRBA are not considered to be borrowing expenses because they are incurred for establishing the arrangement through which the borrowing occurs, not for the borrowing itself. Therefore, the SMSF cannot claim a deduction for its legal expenses in setting up the trust under section 25-25 of the ITAA 1997.
Also, the SMSF cannot claim these costs as a deduction under the general deduction provision because they are capital in nature.
TRUST DEED AMENDMENTS
As a general rule, costs incurred by a trustee of a superannuation fund in amending the fund’s trust deed are not deductible as they are capital in nature. However, Trust deed amendments required to facilitate the ongoing operations of the super fund are generally deductible under the general deduction provision.
WHAT TO DO IN SF360
If the Fund has paid for an amount such as an SMSF Establishment, best practice for SMSF is to allocate using a Non Tax-Deductible Expenses account.
If you do wish to amortise the Formation Costs then allocate the payment to account 64000 Formation Expenses. Each year you would journal a Credit to this account and Debit the expense account. See Non Tax-Deductible Expenses for how to setup a non-deductible account .