Tax Tip 164: Deductibility for Costs of Setting Up a Trust

Deductibility for Costs of Setting Up a Trust


The costs of setting up a trust are generally not deductible.


However the costs may be deductible if the trust is being set up in relation to a business that is carried out, or proposed to be carried out.


The costs could be claimed over 5 years, or upfront in the first year if the trust will be a small business entity.


The same rules apply for company set ups.


See section 40-880 ITAA97
INCOME TAX ASSESSMENT ACT 1997 - SECT 40.880 Business related costs
(the so called black hole expenditure)

 

I believe only the professional expenses associated with the establishment, advice etc from a lawyer or accountant are immediately deductible for small business establishment or restructure. Trust / Co costs such as deed, duty and company formation costs may well be deductible over 5.

Other capital asset and expense deductions

 

TR 2011/6 paragraph 82 to 83 says setup costs (including a deed) are fully deductible and not claimed over 5 years.

82. In many cases, the description of what the expenditure is for will be enough to demonstrate the relationship with the former, proposed or existing business. The connection will be readily evident. For example, capital expenditure incurred to establish the structure (that is, the entity) that is to carry on a proposed business has a clear connection with that proposed business. Likewise, expenditure on converting an existing business structure to a different structure which is to carry on that business in future, for example, from a sole trader or partnership to a company, demonstrates a relevant connection with the existing business being carried on (as well as with the carrying on of that business in the future).

83. There is an immediate connection between expenditure of this type and the relevant business because establishing the structure by which the business will be owned and operated is an essential prerequisite to the conduct of the business itself. The occasion of the outgoing can only be explained by reference to the business. Of course, expenditure to establish a structure, such as a company, will only be deductible under section 40-880 if there is in fact a business that is proposed to be carried on in that structure. If there is no proposal to carry on a particular business within a reasonable time then it follows that the requisite relationship between the expenditure and a business cannot be satisfied.

I'm also of the view that a trust deed is a service and 40-880 2(A) says you can claim an immediate deducton "in obtaining advice or services relating to the proposed structure". a trust deed isn't advice but I believe it is a service. this was confirmed to me by an ATO officer as well

 

I also like that. In some cases capital costs arent as clear. Thats where I was coming from. This tends to arise with a new business vs an existing business but esp where its NOT a business. Esp where its future is not certain. Overall ...yes. A entity to hold passive interest eg a unit trust ??? Not a business ? Thats where I was going. SMSFcosts - Not a business.... Many Disc Trusts arent a business....An investment trust perhaps ??

 

Hello,
Just to confirm that setting up a family trust cost isn't tax deductible at all?

 

Hi @Nodrog, I have seen that you mentioned about getting the structure right at the beginning for buying shares.
Is it worth to set up a family trust if the plan is just to buy dividend paying shares each year? At the beginning, it might just be 10k or 20k a year but will gradually increase the amount over time. Also, the plan will be to keep the shares long term like 20 to 30 years. Thanks.

 

Read the thread!!!

The answer is 'it depends'.

 

Shares, unlike property, can be sold and repurchased relatively cheaply. So getting the structure right from the beginning isn't as vital as it is with property.

But selling will trigger CGT so less capital compounding if you were to sell and have a trust repurchase the same shares.

 

Family trust setup costs used to purchase a dora the explorer.pencil case wouldnt be deductible. Yes.

 

@Terry_w , yes, I did read the threat and I wanted to clarify for Discretionary Trust set up cost. I believe there are different types of trust.
My understanding was I won't be able to claim it if I set up the family trust for my own but if it is set up via small business, the cost can be claimed over 5 years.
Since I don't have a plan to set up via a small business, just confirming that I won't be able to claim it.

The reason to set it up for shares is that I don't want to sell it and I want to be able to distribute the trust income to kids in the future. It would be like another 20 years so not quite sure it is worth the cost to open the trust now. Cheers!

 

The cost of the trust upfront and over time need to both be considered. Typically allow $2,000 (UF) + $1350+ annually v's prepare and lodge own tax. The UF costs claimed over 5 years (?? But not outwardly deductible as not a small business) provided there is income to offset. Losses would carry fwd and arent lost.

Other matters to consider is no offset eg neg gearing v's personal tax position and what occurs if the trust produces income. It must be distributed or highest marginal rate applies. So end game may be the CGT is deferred (??? Depend if you are holding or trading ?) but if the trust produces income regularly there may be fewer / less/no tax benefits v's personal ownership and gifting in XX years.

Or a short term view to use own name and confirm strategy works. Then consider trust. Depends on size, scale etc

 

You must have missed this bit:
The costs of setting up a trust are generally not deductible.

However the costs may be deductible if the trust is being set up in relation to a business that is carried out, or proposed to be carried out.

 

@Paul@PFI and @Terry_w, thank you. What does UF stand for?

 

up front?

 

Oh yeah. That makes sense.

 

Someone asked me the other day whether a fee on a trust setting up another trust to act as shareholder of a bucket company could be deductible to the first trust. I don't think it can as there is no connection of the expense to its income.

 

And is not a fixed trust entitlement either if the trust is a disc trust. A fixed trust beneficial co may be able to claim BUT if the income is not business income it may only claim over 5 years. Business income can take a broader meaning than the entity conducts a business itself.

 

Stamp duty on trust deeds signed in NSW, with no dutiable property, will now incur stamp duty of $750.
The Duties Act on Austlii hasn't even been updated yet but it is law.

 

WTF ....A 50% increase. What was the date ? 1 Jan ?
We need a revolution like France had.

 

1 Feb the law changed

View - NSW legislation
That is the official legislation

Austlii is easier to use, but the Austlii link to the legislation is still showing $500 DUTIES ACT 1997 - SECT 58 Establishment of a trust relating to unidentified property and non-dutiable property