SMSFs warned on sole purpose breaches with education costs

When considering whether it’s appropriate for the SMSF to pay for these types of expenses, Ms Formica said 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.

The trustee first needs to consider what the purpose is behind them undertaking a particular investment course, she said.

“Is the purpose solely to provide benefits to members of the SMSF on their retirement? Or is the trustee deriving a personal current-day benefit?” she questioned.

She gave an example of an SMSF client who 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,” she cautioned.

“The same logic would apply to any investment class for which the trustee wished to improve their knowledge.”

The trustee also needs to ensure that the costs incurred by the fund are fair and reasonable, she noted.

“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 and the ATO,” she warned.

It is also very important, she said, that appropriate evidence of the costs are 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,” she added.

SMSF trustees also need to understand the tax treatment of these expenses, she said.

“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,” she explained.

“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, she said, 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, or the investments made with the knowledge gained by undertaking the course are expected to generate only capital gains.

“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],” she stated.

“Examples of investments in this category include cryptocurrency, warrants, exchange traded options, futures contracts, gold or silver bullion etc.”