The draft provides the first comprehensive guidance on when private and public ancillary funds ‘provide a benefit’ under the Taxation Administration (Private Ancillary Fund) Guidelines 2019 and the Taxation Administration (Public Ancillary Fund) Guidelines 2022 (collectively, the Guidelines). 

SW provided feedback on the Treasury’s Giving fund reforms in August. Based on our discussions we found that trustees were concerned that the change is inconsistent with their Funds’ objective of providing long-term charitable support.

This draft determination represents a significant development in the regulation of ancillary funds, clarifying key interpretive questions that have implications for fund trustees, donors, and related entities. The determination addresses two critical provisions, those being:  

Background to ancillary funds  

Ancillary funds benefit from favourable tax treatment, with income generally exempt from tax and donations to them deductible. However, these concessions could be misused for private benefit. To safeguard the philanthropic purpose, ancillary funds are governed by strict Guidelines that set out general principles requiring ancillary funds to be both philanthropic in character and vehicles for philanthropy. 

The Guidelines impose two key obligations relevant to TD 2025/D3: 

Private Ancillary Funds have been in focus recently with the Treasury recently releasing a consultation paper on Giving Fund reforms.  

Overview of TD 2025/D3 

The determination addresses two critical questions: 

What is a ‘benefit’? 

The Guidelines do not define ‘benefit’. TD 2025/D3 clarifies that a benefit includes an advantage, a profit, or a gain, and is not limited to the payment of money or transfer of property. 

The draft determination outlines that a benefit can have the following key characteristics: 

Provision of benefits under section 15(4) of the Guidelines 

As outlined in the Guidelines, a distribution is the provision of money, property or benefits. The draft determination provides the following requirements for a benefit to qualify as a distribution under section 15(4): 

Non-binding promises of future payment 

The new determination clarifies that a promise of future payment by an ancillary fund to a DGR is not a ‘distribution’ under section 15(4) of the Guidelines. A non-binding promise of a future payment creates, at most, a mere expectancy or possibility which has no legal existence and therefore does not amount to a benefit. 

The new determination sets out that a promise of a future payment can only be binding if, when the promise is made, the trustee exercises a power that the trust deed permits to be used at that time in relation to the relevant income or capital of the fund. 

Provision of benefits under section 22(3) of the Guidelines 

Section 22(3) of the Guidelines provides an integrity provision which states that the trustee of an ancillary must ensure that the fund does not provide any benefit (except where permitted by section 23) directly or indirectly to a related entity. In this context, a related entity will be any of the following: 

In the context of section 22(3), benefit is not limited to financial gain, but encompasses things such as: 

It is further outlined that ancillary funds may provide benefits by omission. This may occur by failing or refusing to take actions, such as not requiring related entities to fulfill financial obligations for example. 

The phrase ‘directly or indirectly’ broadens the meaning of how benefits may be provided under subsection 22(3). It captures not only the ancillary fund’s direct actions but also any indirect arrangements or omissions that result in a benefit to a related entity, even if that entity is not directly involved in the transaction. The draft determination focuses on the overall effect of the fund’s conduct, ensuring that all contributing factors are considered. 

How SW can help 

SW can assist ancillary funds in ensuring that any benefits they wish to provide fall within the scope of the Guidelines as clarified in TD 2025/D3. We can review proposed distributions and related party arrangements to confirm they meet the ATO’s definition of a ‘benefit’ and do not trigger penalties under subsection 22(3). 

Taxpayers can still make comments on the draft guidelines until 30 January 2026.

For assistance in establishing or managing a Fund please contact our private client specialists, Heather Dyke or Matthew Oakey.  

Contributors

Blake Trad

Heather Dyke

The post ATO Draft Determination TD 2025/D3: New guidance on when ancillary funds ‘provide a benefit’  appeared first on SW Accountants & Advisors.

On 25 September, the ATO released Taxation Determination TD 2024/7 in relation to the deductibility of financial advice fees incurred by individuals who are not carrying on an investment business. TD 2024/7 does not reflect a change in the Commissioner’s view on the deductibility of financial advice fees as previously set out in Taxation Determination TD 95/60. Instead, it was published following regulatory reforms to the financial services industry. The Commissioner has maintained his view that fees prior to acquisition of assets are incurred ‘too soon’ and therefore capital in nature, and household budgeting advice are private or domestic expenses. Fees for financial advice relating to income products with sufficient connection to assessable income (i.e. income protection) are deductible.

General deductions

This determination addresses the application of section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to fees for financial advice, highlighting the importance that the fees are incurred in gaining or producing assessable income. Broadly, a deduction for any loss is not available under section 8-1 to the extent that:

• it is an outgoing of capital or of capital nature,
• it is an outgoing of a private or domestic nature,
• it is incurred in gaining or producing a taxpayer’s exempt or non-assessable, non-exempt income, or
• a provision of the Act prevents it from being deducted

Gaining or producing assessable income

To be incurred in gaining or producing assessable income, a sufficient connection must exist between the expense and the particular activities through which the assessable income is gained or produced.

An expense can still be deducted even where the assessable income is:

• not gained or produced in the year during which the expense is incurred, or
• expected to be earned but is not actually earned.

Whether or not a sufficient connection exists between expenditure and what produces the assessable income is a question of fact so that the Commissioner must have regard to all the circumstances in each case. In particular, the Commissioner will consider:

• whether the expense was entirely preliminary to the gaining or producing of assessable income, and
• whether there is a lapse of time between incurring the expense and the commencement of the income-producing activity (a significant time delay may indicate that the expense was incurred for a different purpose).

Importantly, there is a difference between fees for financial advice incurred on a recurrent basis for an existing or ongoing income producing-investment, and fees for financial advice on a proposed investment prior to the acquisition of an asset. The former is deductible on the basis that there is a sufficient connection between the fee for the ongoing advice and the investments that produce assessable income.  

As there is sufficient connection between an individual’s assessable income and premiums for income protection insurance which are deductible under section 8-1, financial advice relating to income protection products will be deductible.

Capital or capital in nature

Amounts relating to fees for advice on a proposed investment are considered to be incidental to the cost of acquiring the income-producing investment and are therefore capital in nature and are not deductible under section 8-1. Similarly, fees incurred for advice on putting an income-earning investment in place or in relation to an income-earning structure are not deductible since they are capital in nature.

The determination explains that in determining whether an expense is capital in nature, consideration will be given to (the capital vs revenue distinction):

• the advantage sought from incurring the expense,
• the way the advantage is to be used, and
• the means of its acquisition (i.e., whether it is a once-and-for-all expense for the acquisition of something or a periodical outlay for the use and enjoyment of something).

Tax-related expenses

Provided an individual can identify that an amount was incurred for advice to assist them in managing their tax affairs, they will likely be able to claim a deduction under section 25-5 of the Act.

Importantly, to access a deduction under section 25-5, the advice must be provided by a ‘recognised tax adviser’ including:

• a registered tax agent, or
• a registered BAS agent (within the meaning of the Tax Agent Services Act 2009), or
• a qualified tax relevant provider (within the meaning of the Corporations Act 2001) registered with ASIC, or
• a legal practitioner.

Additionally, not all advice provided will be deductible as tax (financial) advice. Where information is provided without application or interpretation of the taxation laws to the individual’s personal circumstances, it will not be for managing that individual’s tax affairs.

How SW can help

Contact your SW contact if you have any questions about the deductibility of expenses you have incurred in respect of financial advice.

SW will continue to monitor and provide commentaries to inform clients of developments as they occur.

Contributors

Antony Cheung

The post Deductibility of fees for financial advice | New ATO tax determination appeared first on SW Accountants & Advisors.

On 23 February 2022, the Commissioner released Draft Determination TD 2022/D2, addressing the deductibility of expenses incurred when establishing and administering an Employee Share Scheme (ESS).

The Commissioner has stated expenses incurred from the establishment and/or amendment of an Employee Share Scheme (ESS) are not deductible under section 8-1 of the ITAA 1997 as they are viewed as capital in nature. This may be seen as a departure from a general view that employee costs are more typically revenue in nature.

Expenses not deductible

Establishment fees can include:

• Legal fees incurred from establishing an Employee Share Trust (EST) or ESS plan rules
• Start-up costs, such as commencement charges for a trustee company, or
• Registration fees with authorities such as stamp duty or ASIC fees.

Amendment fees can include:

• Legal fees paid to amend either the EST or ESS plan rules, or
• Regulatory fees and stamp duty paid to authorities.

To the extent that the business is carried on for a taxable purpose, both establishment and amendment fees would be deductible to the employer company in equal proportions over 5 years under section 40-880 of the ITAA 1997.  

Section 40-880; commonly referred to as ‘black-hole expenditure’ provides a deduction for certain capital expenditure of a business on a straight-line basis over a 5-year period.  Section 40-880 only applies to capital costs incurred in relation to a past, present, or proposed business that is not otherwise dealt with under other income tax provisions. 

The Commissioner did confirm however, that the ongoing expenses associated with the administration of an ESS should be deductible under section 8-1 of the ITAA 1997.  

Deductible expenses

Ongoing expenses include:

• brokerage fees
• audit fees
• bank charges
• making new offers to employees under an existing ESS, or
• other ongoing administrative expenses.

Fees relating to annual ESS reporting should continue to be deductible, however questions must now be raised as to whether the ATO’s view will impact on broader issues such as the tax treatment of contributions to employee share trusts and expenses they incur. 

How SW can assist

Once TD 2022/D2 is finalised by the ATO, it is important to note the determination will apply both prospectively and retrospectively.

If you want to discuss any of the aspects of this draft determination or concerns regarding your existing or future ESS, please contact your SW advisor or one of our experts.

Contributors

Justin Batticciotto

E: jbatticciotto@sw-au.com

The post Employee Share Schemes: Deductibility of expenses appeared first on SW Accountants & Advisors.