It has become common practice for SMSFs to maintain the currency of the deed due to ongoing changes in the law or outcomes from relevant case law decisions. It is however important to distinguish the different activities with a fund’s deed and how they will be deemed as capital in nature or deductible.
Trust deed amendment costs incurred in establishing a trust (i.e. SMSF), executing a new deed for an existing fund and amending a deed to enlarge or significantly alter the scope of the trust’s activities are generally not deductible as they are capital in nature.
This is in contrast to trust deed amendments that are required to facilitate the ongoing operations of the super fund – these are generally deductible under the general deduction provision. For example, if an SMSF amends its trust deed to keep it up to date with changes to the super law (such as at 1 July 2017), the expense in doing this will be deductible under the general deduction provision. This is unless the amendment results in enduring changes to the fund’s structure or function or creates a new asset.
To understand this further, let’s take a look at a few examples from the ATO’s website to understand these nuances further:
Example 1 – switching from individual to corporate trustee
An SMSF is a two member fund comprising a couple who are also the individual trustees of the fund. One of the members dies at a time before either member has retired. The surviving member decides to continue the SMSF with a corporate trustee of which they are the sole director.
The fund incurs legal expenses of $1,000 to amend the trust deed so the corporate trustee can be appointed. Making changes to the trust deed of the SMSF to permit appointment of a corporate trustee relates to the structure of the SMSF and the expenses are capital in nature. The legal expenses incurred in amending the trust deed are not deductible under section 8-1 of the ITAA 1997.
Example 2 – trust deed update
The trustees of an SMSF decide that the fund’s trust deed is out of date. It refers to super law provisions which have been repealed and to contact addresses for the trustees that are no longer current.
The trustees decide to engage a lawyer to update the deed. The firm charges $500. As the changes to the trust deed are an ordinary incident of the day to day running of the fund and are not capital in nature, the $500 charged by the legal firm is deductible to the fund.
Example 3 – deed amendment to permit an enduring change
The trustees of an SMSF decide that, as part of a properly formulated investment strategy, they will borrow money to purchase an apartment under an LRBA.
The trust deed of the SMSF, as it currently stands, does not permit the trustees to borrow money in accordance with section 67A of the SIS Act. The trustees engage a lawyer to amend the trust deed so that it permits the trustees to borrow money under an LRBA. The costs incurred in engaging the lawyer to change the trust deed are not deductible. This is because the addition of borrowing powers is an enduring change to the function of the SMSF (i.e. now allows the fund to borrow to acquire an asset).
Further information about the treatment of expenses incurred in determining whether it is deductible or capital in nature can be found in TR 2011/6, Income Tax: business related capital expenditure.