When considering if it is appropriate for an SMSF to pay a particular expense, it is important to ensure the payment:
- would be allowed under the fund’s governing rules,
- is consistent with the sole purpose test,
- is “reasonable” given the fund’s circumstances, and
- is appropriately documented.
Sole purpose test
What is the purpose of the SMSF trustee undertaking this particular investment course? Is the purpose solely to provide benefits to members of the SMSF on their retirement (or to the member’s beneficiaries on their death)? Or is the trustee deriving a personal current day benefit?
Consider the following example. The trustee of an SMSF decides to alter the fund’s investment strategy to include exposure to cryptocurrencies and plans to undertake a course to improve their knowledge of this investment class. If the SMSF trustee also intends to purchase (or has purchased) cryptocurrency in their own name, then it would suggest a non-SMSF related purpose behind the course. If the SMSF were to incur these course fees, in our view, the fund risks breaching the sole purpose test.
Note there is nothing special about cryptocurrency – the same logic would apply to any investment class for which the trustee wished to improve their knowledge (eg Australian shares, international shares, residential investment property etc).
Often the fees for courses such as this can be quite high. Like any trustee responsible for the property of another, an SMSF trustee must ensure the costs incurred by the fund are “fair and reasonable”. A trustee responsible for a fund with assets of say $200,000 who spends say $20,000 on an investment course may attract scrutiny from the fund’s auditor/the ATO.
Where a trustee determines that it is appropriate to pay such costs from the fund, appropriate evidence of the costs should be retained. Many auditors will also require a declaration from the trustee that the costs were incurred solely to benefit the members/beneficiaries of the fund.
The tax deductibility of most outgoings of an SMSF is determined under the “general deduction provisions” [ITAA 1997 s.8-1]. Under these provisions, an SMSF is able to claim a tax deduction for any losses or outgoings that are:
- incurred in gaining or producing the fund’s assessable income, and
- not of a private or capital nature.
Of particular relevance here is whether the course fees are of a “capital nature”. Course fees will be considered capital in nature and not deductible if:
- the trustee has not previously invested in assets of this nature and the course is designed to develop the trustee’s knowledge in preparation for future investment activities (as distinct from improving the performance of the fund’s existing investments), or
- the investments made with the knowledge gained by undertaking the course are expected to generate only capital gains (ie not dividends, interest or other ordinary income). This is because all gains or losses realised on the disposal of superannuation fund assets must generally be calculated using the CGT provisions (rather than being treated on income account) regardless of the trustee’s profit making intention [ITAA 1997 s.295-85]. Examples of investments in this category include cryptocurrency, warrants, exchange traded options, futures contracts, gold or silver bullion etc.
With many SMSF trustees looking for ways to improve the fund’s investment performance in the current low interest rate environment, it is important for them to ensure any fees paid by the fund are allowable under the superannuation law and they understand the tax treatment.