SMSF deductible expenses

About deductible SMSF expenses

Before paying a particular expense from the fund, ensure the payment is:

• in accordance with a properly formulated investment strategy
• allowed under your trust deed and superannuation laws.

The tax deductibility of most expenses incurred by a self-managed super fund (SMSF) is determined under the general deduction provision in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). These rules allow an SMSF to claim a tax deduction for expenses that are:

• either incurred to earn the fund's assessable income or necessarily incurred in running a business for the purpose of gaining or producing assessable income, and
• not related to personal or capital matters.

The general deductibility rules do not apply where a specific deduction provision applies.

You can't claim more than one deduction for the same cost. If 2 or more tax provisions allow you deductions for the same cost, you can deduct only under the most appropriate provision.

If an expense is deductible under the general deduction provisions, and the fund has both accumulation and pension phase members, the expense may need to be apportioned. This will determine the amount the fund can deduct. If an expense is deductible under one of the specific deduction provisions, then the wording of that provision will indicate whether the expense must be apportioned and on what basis.

Specific deductions

There are some specific deductions that can be claimed in full or in part, while others will require apportionment. The following is a list of specific deduction provisions that apply to SMSFs:

• Managing the tax affairs of the SMSF or complying with an obligation imposed on the SMSF that relates to its tax affairs, for example, the SMSF Supervisory Levy (section 25-5 of the ITAA 1997).
• Death, total and permanent disability, terminal illness and income protection premiums to the extent specified in the relevant law (section 295-465 of the ITAA 1997).

When you can claim SMSF expenses

As a general rule, the trustee can claim the fund's expenses in the year the trustee incurs them. However, deductions for the decline in value of certain depreciating assets (such as plant and equipment) are claimed over the effective life of the asset and not when the trustee incurs the expenditure.

To claim, you should ensure:

• wherever possible, the expense is paid directly from the SMSF's bank account
• invoices and receipts are in the name of the SMSF
• you retain invoices and receipts as evidence of the fund's expenses
• the deduction is only claimed once.

Operating expenses

Operating expenses incurred by an SMSF are mostly deductible under the general deduction provision. The following are examples of the types of operating expenses that are typically deductible under the general deduction provision:

• management and administration fees
• audit fees
• Australian Securities & Investments Commission (ASIC) annual fee.

Management and administration fees

These are costs associated with the daily running of the fund. For example, they might include:

• preparing trustee minutes
• stationery
• postage fees.

Expenses that are incurred in making changes to the internal organisation or day-to-day running of the fund are not considered to be capital in nature provided such changes do not result in an advantage of a lasting character.

If a super fund is running a business, it may be entitled to deduct certain capital expenses under the specific deduction provision, section 40-880 of the ITAA 1997.

SMSF auditor fee

An SMSF is required by super laws to appoint an approved SMSF auditor each income year to audit the fund.

Any auditing costs that relate to meeting obligations under super laws are deductible. The costs must be apportioned if the SMSF gains or produces both assessable and non-assessable income.

ASIC annual fee

For SMSFs operating with a corporate trustee structure, ASIC charges an initial registration fee and annual fee. The annual fee is deductible by the fund.

Supervisory levy

An SMSF is liable to pay a supervisory levy under the Superannuation (Self- Managed Superannuation Funds) Supervisory Levy Imposition Act 1991. The levy is:

• a flat amount
• deductible under section 25-5 of the ITAA 1997.

Tax-related expenses

A specific deduction is allowable under section 25-5 of the ITAA 1997 for expenses incurred in either:

• managing a fund’s tax affairs
• complying with a Commonwealth tax law obligation imposed on the trustee.

You cannot deduct capital costs under this section. An expense is not a capital expense merely because the tax affair relates to a matter that is capital in nature. For example, you may be able to deduct the cost of applying for a private ruling on whether you can depreciate an item of property under this section.

The costs incurred in preparing and lodging the SMSF’s annual return, including the preparation of financial statements or actuarial costs incurred in meeting income tax obligations, are deductible. The return is an approved form covering both income tax and super law requirements. However, we don't require SMSFs to apportion between the 2 types of expenses. We allow it in full as a deduction for the expenses incurred in preparing and lodging the return.

A tax-related expense does not need to be apportioned for an SMSF deriving both non-assessable and assessable income. This is unless the cost relates to audit fees paid by the fund.

Legal expenses

Some legal expenses are covered by specific deduction provisions. For example, legal expenses incurred in complying with income tax obligations are covered under section 25-5 of the ITAA 1997.

Legal expenses that are not covered by a specific provision are generally deductible under the general deduction provision. This is except when they are incurred in deriving non-assessable income or are capital, private or domestic in nature.

Trust deed amendments

Trust deed amendments to facilitate the ongoing operations of the SMSF are generally deductible under the general deduction provision. If a fund amends a trust deed to keep it up to date with changes to super law, the expense will be deductible under the general deduction provision. This is unless the amendment results in lasting changes to the SMSF’s structure or function or creates a new asset.

 

 

Investment expenses

The exact nature of the investment-related expenses is critical in determining deductibility. Examples of deductible investment-related expenses include:

• interest
• ongoing management fees or retainers paid to investment advisers
• costs of servicing and managing an investment portfolio, such as bank fees, rental property expenses, brokerage fees
• the cost of advice to change the mix of investments, whether by the original or a new investment adviser, provided any changes do not lead to the creation of a new financial plan.

If the investment-related advice covers other matters or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible.

 

Special rules apply to collectable and personal use SMSF investment assets, such as artwork. These rules were introduced on 1 July 2011 to cover aspects such as storage and insurance.

Insurance costs for artwork and other collectables are deductible to the SMSF provided the:

• items are insured in the name of the fund within 7 days of acquisition
• fund is the owner and beneficiary of the policy.

You can't, for example, insure the item as part of a trustee's home and contents insurance.

Storage costs for artwork and collectables can only be deductible to the fund if the:

• items are stored in accordance with Regulation 13.18AA of the Superannuation Industry (Supervision) Regulations 1994 (SISR) obligations
• trustees make and keep records documenting the reasons for deciding where to store the item.

Member insurance premiums

Trustees of complying super funds can claim a deduction for insurance policy premiums to provide the following death or disability benefits to their members:

• super death benefits
• terminal medical condition benefits
• disability super benefits
• benefits provided due to temporary inability to engage in gainful employment for a specified period.

The amount the fund can claim is set out in the relevant income tax laws. There is no apportionment required for expenses that relate to assessable or non-assessable income.

Non-deductible expenses

An expense that is incurred in establishing or making lasting changes to a super fund’s structure or function is capital in nature and is not deductible under the general deduction provision. For example, the costs of establishing an SMSF are capital in nature. An expense incurred in acquiring a capital asset is also usually capital in nature.

Trust deed amendment costs incurred in establishing a trust, executing a new deed for an existing fund and amending a deed to enlarge or significantly alter the scope of the trust’s activities are generally not deductible. This is because they are capital in nature.

An SMSF can't deduct a loss or outgoing to the extent that:

• it is a loss or outgoing of capital, or of a capital nature
• it is a loss or outgoing of a private or domestic nature
• it is incurred in relation to gaining or producing income of the fund that is non-assessable income (such as exempt current pension income)
• the income tax laws prevent the fund from deducting it.

Administrative penalties that can be levied on a trustee under super laws are not deductible to the fund. They are incurred by the trustee of the fund (or director of the corporate trustee). They must not be paid or reimbursed from the assets of the SMSF.

Apportionment of expenses

Expenses must be apportioned if the fund earns both assessable and non-assessable income.

An expense may be incurred partly in gaining or producing assessable income and partly in gaining or producing non-assessable income, such as exempt current pension income. Where the fund can identify a distinct and severable part devoted to gaining or producing assessable income, this is the part to claim as a deduction under the general deduction provision.

Many expenses cannot be divided into distinct and severable parts. For example, this could be when paying an approved SMSF auditor to provide an annual report for the fund. This is an expense that does not relate to either the fund’s assessable or non-assessable income. In this case, the fund must estimate, in a fair and reasonable way, how much of that expense was incurred in producing the fund’s assessable income.

While it's not possible to prescribe a single method for apportioning costs of a super fund, Taxation Ruling TR 93/17 provides several examples. It also provides guidance on what the Commissioner of Taxation may accept as a method for producing a fair and reasonable outcome.

 

 

No apportionment is necessary for costs that are wholly incurred in collecting and processing contributions. For example, costs associated with obtaining an electronic service address (ESA) to meet the data standards requirements are not apportioned.

Tax and super law requirements that govern deductions

For further detailed information on the tax and super law requirements that govern deductions, see:

• Taxation Ruling TR 93/17 Income tax: income tax deductions available to superannuation funds
• Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?
• Taxation Ruling TR 97/7 Income tax: section 8-1 – meaning of 'incurred' – timing of deductions.
• Taxation Determination TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business?
• Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues
• Taxation Ruling TR 2012/6 Income tax: deductibility under subsection 295-465(1) of the Income Tax Assessment Act 1997 of premiums paid by a complying superannuation fund for an insurance policy providing Total and Permanent Disability cover in respect of its members
• Death, total and permanent disability, terminal illness and income protection premiums to the extent specified in the relevant law (section 295-465 of the ITAA 1997).