Bare Trust Set-Up Costs: Are They Deductible According to the ATO?

When setting up a bare trust, many individuals and businesses are keen to understand the implications of costs related to this financial structure, particularly in terms of deductibility according to the Australian Taxation Office (ATO). This article delves into the nuances of bare trust setup costs, exploring whether they can be deducted and the impact this has on financial planning.

The Big Reveal: Deductibility of Bare Trust Set-Up Costs

Before diving into the technicalities, let’s cut to the chase: are bare trust set-up costs deductible according to the ATO? The answer is nuanced. Generally, costs directly related to establishing a bare trust are not immediately deductible. This conclusion is drawn from the ATO’s guidelines on capital versus revenue expenses.

Understanding Bare Trusts

To comprehend why set-up costs are treated a certain way, we first need to understand what a bare trust is. A bare trust is a type of trust where the trustee holds property or assets for the beneficiary. The beneficiary has an absolute right to the trust's assets, meaning the trustee has no discretion over how the assets are managed or distributed.

Why do people use bare trusts? Typically, they are used for straightforward asset holding or for tax efficiency in certain situations. Unlike discretionary trusts, bare trusts are less complex and provide transparency regarding the ownership of the assets.

The Nature of Trust Set-Up Costs

When establishing a bare trust, several costs are incurred, including:

• Legal fees: For drafting trust deeds and legal consultations.
• Administrative costs: For registering the trust and related paperwork.
• Accounting fees: For advice on compliance and reporting requirements.

The ATO’s Stance: According to ATO regulations, these costs are classified as capital in nature. This means that they are not deductible as a revenue expense in the year they are incurred. Instead, they may form part of the capital costs associated with the acquisition of an asset.

Capital vs. Revenue Expenses: A Breakdown

Capital expenses are generally costs that enhance or maintain the value of an asset, or are necessary for acquiring or improving an asset. In contrast, revenue expenses are costs incurred in the day-to-day operations of a business or in earning income.

• Capital expenses: These costs usually form part of the cost base of the asset and are amortized or depreciated over time.
• Revenue expenses: These are typically deductible in the year they are incurred.

Bare trust set-up costs fall into the capital expense category. This means they are not deductible immediately but can be accounted for in a different way, often impacting capital gains tax calculations if the assets are sold.

What Does This Mean for Financial Planning?

Understanding that bare trust set-up costs are capital in nature rather than revenue affects how individuals and businesses approach financial planning. While these costs are not deductible in the traditional sense, they can be important for capital gains tax calculations.

Consider this in your financial strategy:

• Record Keeping: Maintain detailed records of all set-up costs. These will be essential when calculating capital gains tax.
• Tax Planning: Discuss with a tax advisor how these costs might impact your overall tax strategy, particularly if the trust assets are expected to appreciate in value.

Exploring Alternative Deductions

While bare trust set-up costs themselves may not be deductible, there could be other deductions or tax strategies worth exploring:

• Ongoing Trust Administration Costs: Regular administrative and compliance costs associated with running the trust might be deductible.
• Professional Fees: Ongoing professional fees for accounting and legal services might be deductible depending on their nature and purpose.

Conclusion: A Strategic Approach

In summary, while the direct costs associated with setting up a bare trust are generally considered capital expenses and thus not deductible in the current year, understanding this classification helps in effective tax planning. By keeping detailed records and exploring alternative deductions, you can manage the financial implications of setting up a bare trust more strategically.

In the end, navigating the complexities of bare trust set-up costs and their deductibility requires a clear understanding of ATO guidelines and thoughtful financial planning. With this knowledge, you can make informed decisions and optimize your financial strategy accordingly.