SMSF Technical Education & Strategies

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Tax Deductions in a SMSF

When at least one member of a SMSF has an account in the accumulation (tax paying) phase, its important for SMSF trustees to be aware of which expenses of the fund are tax deductible, and which are not.

General principles

The ATO state in its tax rulings that the general principle governing the expenditure of a superannuation fund, which is not of a capital, private or domestic nature, is that the expenditure is tax deductible to the extent that:

(a) it has the essential character of an outgoing incurred in gaining or producing assessable income; or

 

(b) it has the character of an operating or working expense of a business or is an essential part of the cost of the fund's business operations.

 

Specific expenditure

In its taxation ruling TR 93/17 (yes, that’s a long time ago, but while its been updated its not been withdrawn or superceded) the ATO give us a number of explicit examples of the sorts of expenses that are tax deductible to an SMSF; as follows;

- actuarial costs;

 

- accountancy fees;

 

- audit fees;

 

- costs of complying with Government regulations;

 

- costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself);

 

- investment adviser fees and costs in providing pre-retirement services to members;

 

- other administrative costs incurred in managing the fund.

 

- the fund’s annual lodgment fee, however a late lodgment penalty is not deductible;

 

- legal expenses, although this usually depends on whether the expenses are of a capital or revenue nature;

 

Clearly this list is not exhaustive, and other expenses that a SMSF may incur will need to satisfy the general principles mentioned above to be deductible. Typical examples of deductible expenses can include:

 

- life insurance premiums

 

- "Any occupation" total and permanent disability premiums

 

- partial deduction for "own occupation" total and permanent disability premiums (Click Here for more info on TPD and tax deductibility).

 

- investment research subscriptions

 

What is not deductible?

- upfront fees incurred in investing money are of a capital nature and are not deductible;

 

- investment or administration charges levied by a life assurance company;

- if you have a corporate trustee, the cost of the annual ASIC fee is not deductible, and in fact the SMSF should not actually pay for it;

 

- costs attributable to the earnings of assets backing tax exempt income streams (see below for the note on apportionment).

 

Apportionment

Any expenditure incurred in gaining or producing exempt income only (such as an SMSF income stream) is not deductible.

 

But what if you have both an accumulation and a pension account within the SMSF?

 

Expenditure (e.g. general administrative expenses of managing your SMSF) which is incurred partly in producing assessable income and partly in gaining exempt income must be apportioned.

 

Remembering the general principle, the expenditure is deductible only to the extent to which it is incurred in producing assessable income. Therefore, each of the expenses listed above would need to be apportioned if it is incurred partly in producing assessable income and partly in producing exempt income.

 

What about amending a Trust Deed ?

This issue is specifically covered in Taxation Ruling 2672. Basically, costs incurred by a trustee of a superannuation fund in amending the fund's trust deed are not deductible under subsection 51(1). Rather, they are classed as outgoings of capital or of a capital nature.

Specific examples that the ATO give of amendment costs which are not deductible are costs incurred in:

. establishing a trust; and

. executing a new deed for an existing fund; and

. amending a deed to enlarge or significantly alter the scope of the trust's activities.

 

But there is one exception !

 

Any costs incurred by a SMSF trustee in amending a trust deed are deductible if the amendments are needed due to changes in Government regulations, and are made to ensure that the fund's day to day operations continue to satisfy its compliance obligations.