How to pay for Bare Trust / Company setup for SMSF - is Direct Debit okay?

[MsAli]

Hi All,

I was going to do a Direct Debit transfer from the SMSF bank account to the organisation taking care of this. They have given us their direct debit details and don't have BPay.

I wasn't sure if we should be forwarding them a cheque or can we just transfer online as long as we have proof of receipts?

Thanks,

MsAli

 

[SMSFguy]

Direct Debit is OK.

Your accountant should treat this as "Prepaid Borrowing Expense" and it will be amortised (claimed as a deduction) over 5 years.

Yes keep your receipts, unfortunately the auditor's need to sight everthing under the sun.

SMSFguy.

 

[GaryT]

Direct Debit is OK.

Your accountant should treat this as "Prepaid Borrowing Expense" and it will be amortised (claimed as a deduction) over 5 years.

SMSFguy.

Setting up a company to act as trustee for an SMSF is NOT "Prepaid Borrowing Expenses".

It also does not qualify as black hole expenditure (ITAA 97 s40-880 deduction usually written off over 5 years) because a SMSF would not normally meet the requirement of carrying on a business.

My understanding is that these are simply capital costs which are flushed out as a non-deductible expense in year one.

 

[SMSFguy]

Setting up a company to act as trustee for an SMSF is NOT "Prepaid Borrowing Expenses".

It also does not qualify as black hole expenditure (ITAA 97 s40-880 deduction usually written off over 5 years) because a SMSF would not normally meet the requirement of carrying on a business.

My understanding is that these are simply capital costs which are flushed out as a non-deductible expense in year one.

Ah yes will depend if the invoice is broken also. But spoken with a few SPAA auditors and they share the same view "depends".

 

[baby blue eyes]

Costs for the setup of bare trust and relevant trustee so the smsf has the correct structure to borrow are written off over five years as mentioned. Direct debit is ok and yes keep all invoices for accountant and the auditor

 

[GaryT]

Ah yes will depend if the invoice is broken also. But spoken with a few SPAA auditors and they share the same view "depends".

No idea what you are referring to with "the invoice is broken" and "depends".

It seems clear that the ATO sees setup costs as capital in nature - see IT 2672.

Costs for the setup of bare trust and relevant trustee so the smsf has the correct structure to borrow are written off over five years as mentioned. Direct debit is ok and yes keep all invoices for accountant and the auditor

Can you please provide a reference for your contention that costs relating to setting up a structure to allow an SMSF to borrow are deductible?

I had a look for any PBRs relating to this and the only one I found also confirmed that they are not deductible.

 

[coastymike]

The most tax-effective person who can instruct you to establish an smsf is the employer of the smsf member. The costs are tax deductible. Maybe your accountant hasn't discussed this strategy with you. Suitable for those who have their own companies and are employees of those companies.

If done properly no FBT issues for the employer sponsor company.

 

[GaryT]

Good solution coastymike but obviously can be only be used if there is a related or friendly employer.

The reality is that set-up costs are incurred BEFORE the fund is established. So this begs the question of how you would even get the expense into the the SMSF anyway?

Reimbursing the member would raise SIS Act concerns.

 

[coastymike]

From Peter Bobbin a well respected tax lawyer in the profession courtesy of linkedin

Peter Bobbin • I am not aware of any ATO statement that a super fund cannot reimburse a member for its set up costs. Additionally, from the time of setup to the time of payment there is no loan or borrowing, there is an unpaid expense of the fund, yet to have been reimbursed. Yes there is a debt but the debt does not become one until accepted by the smsf.

In other words, there was no obligation on the smsf to pay and reimburse the member until the smsf accepted this. I do not know when this occurred for your client but arguably it could have been as late as the point of payment. This clearly supports there being no loan or borrowing.

By the way, it is standard practice in the managed funds industry for the trust set up costs to be paid by the managed fund after set up and not uncommonly by way of reimbursement.

 

[monalisa]

The reality is that set-up costs are incurred BEFORE the fund is established. So this begs the question of how you would even get the expense into the the SMSF anyway?

Agreed, I am wondering what the accounting entry be?

 

[monalisa]

Costs for the setup of bare trust and relevant trustee so the smsf has the correct structure to borrow are written off over five years as mentioned. Direct debit is ok and yes keep all invoices for accountant and the auditor

On what basis though? i.e. ruling/section reference?

 

[baby blue eyes]

Two separate auditors have told me the bare trust set up is a borrowing cost. The whole structure is set up specifically so the fund can borrow funds. Both have audited funds on this basis. Check with your own accountant/auditor

 

[GaryT]

In my opinion establishment costs are not borrowing costs. The fact that the structure was formed so that the SMSF can borrow is totally irrelevant - they are still establishment costs.

I would suggest that you get your accountant (it is not an auditor issue) to provide some ruling/reference for his/her action. Also suggest that you get them to provide an indemnidy for when the ATO finds out. Good luck.

Also I have read the reference provided by CoastyMike above and as much as I respect the tax lawyer quoted, I still feel some hesitation in recommending a reimbursement from the SMSF to a member. The issue is not yet settled based on the opposing views in the same blog.

 

[MsAli]

Thanks guys. Missed the responses

 

[Rob G.]

In my opinion establishment costs are not borrowing costs. The fact that the structure was formed so that the SMSF can borrow is totally irrelevant - they are still establishment costs.

I think you are confusing two concepts.

Establishment costs are usually capital, therefore not deductible under s.8-1.

However, s.25-25 allows the deduction for capital costs of raising finances.

Whether a trust establishment has sufficient connection with the borrowing is a question of fact.

Take a look at wider industry use of debenture trusts for holding an asset as security for lenders.

Cheers,

Rob

 

[jorgon]

I still feel some hesitation in recommending a reimbursement from the SMSF to a member. The issue is not yet settled based on the opposing views in the same blog.

Actually I would say this issue is settled by ATO ruling SMSSR 2009/2, which examines the meaning of "borrowing" in section 67(1) of the Superannuation Industry (Supervision) Act 1993.

Here is the relevant excerpt:-

Example 7: reimbursement of payments made on behalf of SMSF

70. Gary and Sonia are trustees and members of an SMSF. The SMSF is due to make a payment to an entity for services rendered to the SMSF. Gary pays the amount on behalf of the SMSF. Gary immediately seeks and is given a reimbursement from the SMSF of the amount paid on behalf of the fund.

71. The arrangement does not give rise to a borrowing as there was no temporary transfer of money from Gary to the SMSF. The amount was paid on the SMSF's behalf and was then immediately reimbursed to Gary. Accordingly, the SMSF trustees have not contravened paragraph 67(1)(a).

In my opinion, the same principle can be applied to the costs of establishing the fund. Where (as will usually be the case) a member pays the establishment costs of setting up the SMSF (and pays the ASIC fees if there is a corporate trustee) then provided an immediate and clear decision is made and recorded in writing on the SMSF file, the payment can either be:-

1. reimbursed to the member by the SMSF as soon as it can; or
2. treated as a contribution to the SMSF by the member; or
3. regarded as neither of these ("nil-effect").

Once the SMSF is set up, then the third option is not available since payment of a liability of the fund should be regarded as a contribution (see ATO Tax Ruling 2010/1 which closely examines what is a "contribution"). It is possible that MsAli the starter of this thread was asking about the establishment of a bare trustee company in a limited recourse borrowing arrangement in which case this would be after the SMSF has already be set up so only options 1 or 2 would be available.