Issue
Is an amount of capital expenditure incurred in establishing a business structure for a regulated superannuation fund deductible under subsection 40-880(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that the business is, was or will be carried on for a taxable purpose?
Decision
No. An amount of capital expenditure incurred in establishing a business structure for a regulated superannuation fund is not deductible under subsection 40-880(1) of the ITAA 1997 because a superannuation fund does not generally carry on a business.
Facts
An entity is a regulated superannuation fund. It incurs an amount of capital expenditure in establishing a structure to carry out its operations.
Reasons for Decision
Subsection 40-880(1) of the ITAA 1997 provides that an entity can deduct an amount of capital expenditure incurred in establishing a business structure to the extent that the business is, was or will be carried on for a taxable purpose.
A superannuation fund such as a regulated superannuation fund has to pass the 'sole purpose test' under section 62 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) that is, to have as its core purposes the provision of benefits for each member of the fund on or after the member's retirement, death or on attainment of a prescribed age.
A trustee of a superannuation fund is limited by for example, paragraph 52(2)(e) of the SIS Act which prevents the trustee from entering into any contract, or doing anything else, that prevents the trustee from, or hinders the trustee in, properly performing or exercising trustee's functions and powers.
Subparagraph 52(2)(f)(iii) of the SIS Act also requires the trustee to ensure the liquidity of the entity's investments having regard to expected cash flow requirements. This is to ensure that the fund has enough cash to pay members' benefits.
Paragraph 52(2)(f) of the SIS Act and Regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations) require an investment strategy be in place to manage the fund assets soundly and to secure maximum returns to members by taking into account all circumstances such as risk, diversification, liquidity and solvency.
Hence, a higher risk in carrying on a business will need to be accounted for by the trustee in the investment strategy.
Section 67 of the SIS Act also prohibits a regulated superannuation fund from borrowing except in limited circumstances.
Paragraph 13 of Taxation Ruling TR 93/17 states that 'superannuation funds are generally prohibited from undertaking speculative activities or carrying on an active business such as operating a retail shop, motel or primary production business.'
In view of the restrictions under the SIS Act and SIS Regulations, it would be difficult for a regulated superannuation fund to carry on a business and therefore, generally it would not satisfy the requirement in subsection 40-880(1) of the ITAA 1997 that it carry on a business for a taxable purpose.