Charge upfront setup fee to SMSF?

Hi,

I recently paid an accountant an up front fee of $1,650 to set-up a SMSF.

Q1.Can the $1,650 set-up fee be claimed as a tax deduction? (TR 93/17 and TR IT 2672 seem to indicate it can't)
Q2.It seems I would be better off not charging the SMSF the set-up fee at all, in order to maximise my account balance (I'm trying to get the maximum NCC in without triggering the bring forward) can I do this? (SIS 1994 Reg 5.02 seems to say it is optional "may include;...costs of establishing..the fund", but does a legal "may" mean "must"?)

Thank you for any assistance with this

 

Hi netd

The position with establishment costs is as follows:-

1. The establishment costs include all the costs associated with setting up the fund and without which the fund could not exist. It would therefore include the costs of establishing the corporate trustee if there is one. But it would not include any contributions made to the fund.
   
2. Establishment costs are normally of a capital nature and therefore cannot be deducted by the fund from the fund’s income so as to reduce the income of the fund for tax purposes (this is clear from ATO ruling IT 2672).
   
3. Where a promoting member pays up-front costs of the fund to enable the fund to become established, this could be regarded as a loan to the fund for repayment by the fund and such a loan is permitted because it is not being used to purchase an asset – however for this to work it would be important for both the promoting member and the fund to expect immediate repayment of the money [see ATO ruling SMSSR 2009/2 and s67(1) of the SIS Act].
   
4. Alternatively the payment of up-front costs could be regarded as a contribution to the fund to benefit one or more of the members provided that it is clear that the contributor intended to benefit the member; if it were regarded this way, the promoting member would have to decide whether to claim a tax deduction in respect of the payments if able to do this; if a tax deduction was claimed it would be a concessionary contribution; if not it would be a non-concessionary contribution; either way, the contribution caps would need to be considered (SMSF newsletter 17 and ATO SMSFR 2009/2).
   
5. as a final alternative the payment could have a “nil-effect”: it would not be repaid, nor would it be regarded as a contribution.

Which option you choose should be documented and that record should be kept in the fund's papers. The choice made should also be reflected in the fund's accounts unless the nil-effect option is chosen.

The above position is reflected in the step-by-step guide in my establishment pack for setting up an SMSF. That pack also contains a suitable document in which to make the election and record that in the fund's papers. If you PM me I would be happy to send that to you.

No, a "may" in a statute or in regulations means "may". It does not mean "must".

 

Hi jorgon,

Thank you for your comprehensive reply.

The “nil-effect” option sounds like the best option for me in order to maximise my account balance.

Thanks again,
netd

 

Out of interest, did the $1650 include a corporate trustee?

I would assume yes.

SM