Self-managed superannuation funds – deductibility of expenses

This page outlines expenses that a trustee of a self-managed super fund (SMSF) may claim. The information applies to complying funds. Read this in conjunction with:

• Taxation Ruling TR 93/17 Income tax: income tax deductions available to superannuation funds
• Taxation Ruling TR 97/7 Income tax: section 8-1 – meaning of 'incurred' – timing of deductions.

Find out about:

• Common fund expenses
• When you can claim
• Deductibility of expenses
• Apportionment

Common fund expenses

When considering if it is appropriate for the fund to pay a particular expense, it is important to ensure the payment is:

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

Some of the different types of fund expenses are:

• Operating expenses
• Investment-related expenses
• Tax-related expenses – incurred on income tax affairs
• Legal expenses – including trust deed amendments
• Statutory fees and levies
• Death, total and permanent disability, terminal illness and income protection insurance premiums
• Increased amount of super lump sum death benefit (or anti-detriment payment)
• Collectables and personal use assets such as artwork

Operating expenses

Operating expenses incurred by an SMSF are mostly deductible under the general deduction provision (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).

This is except where they either:

• relate to gaining non-assessable income (such as exempt current pension income), or
• are capital in nature.

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, preparing trustees’ minutes, stationery and postage fees. These costs must be apportioned if the fund earns both assessable and non-assessable income.

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 (alias) to meet the data standards requirements are not apportioned.

An SMSF may incur other more specific management and administrative costs in running a fund. These are dealt with under other sections of this document.

Audit fees

An SMSF is required by the super laws to ensure that an approved SMSF auditor is appointed to give the trustee(s) a report of the operations of the entity for each year of income.

Audit expenditure that relates to meeting obligations under super laws is deductible. It must be apportioned if the SMSF gains or produces both assessable and non-assessable income.

Administrative penalties that can be levied on a trustee under the 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.

Australian Securities & Investments Commission (ASIC) annual fee

ASIC charges an annual fee to special purpose companies, whose sole purpose is to act as a trustee of a regulated super fund. Most SMSFs operate under a corporate trustee structure. However, some choose to use an individual trustee arrangement.

Corporate trustees pay an initial ASIC registration fee. They also pay an annual fee and, as such, this expense is deductible by the fund.

Investment-related expenses

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

• interest expenses
• 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. This is provided it does not amount to 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.

 

See also:

• 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?

Tax-related expenses

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

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

You cannot deduct capital expenditure under this section. However, an expense is not a capital expense merely because the tax affair relates to a matter of a capital 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 following are examples of deductible tax-related expenses incurred in managing an SMSF’s income tax affairs and complying with income tax laws:

• costs relating to the preparation and lodgment of the SMSF’s annual return, including the preparation of financial statements
• actuarial costs incurred in satisfying income tax obligations. For example, to determine the amount of tax-exempt income (or exempt current pension income).

Statutory fees and levies

An SMSF is also liable to pay a supervisory levy under the Superannuation (Self- Managed Superannuation Funds) Supervisory Levy Imposition Act 1991. The levy is a flat amount and is also deductible under section 25-5 of the ITAA 1997.

The costs incurred in preparing and lodging the SMSF’s annual return are deductible. The return is an approved form covering both income tax and super law requirements. However, we don't require SMSFs to have to apportion between the two 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 expenditure relates to audit fees paid by the fund. Audit expenditure to meet obligations under super laws is deductible under the general deduction provisions. It must be apportioned if the SMSF gains or produces both assessable and non-assessable income. Refer to Audit fees.

See also:

• SMSF supervisory levy

Legal expenses

Some legal expenses are covered by specific deduction provisions. For example, legal expenses incurred in complying with income tax obligations 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 super fund are generally deductible under the general deduction provision. If a fund amends a trust deed to keep it up to date with changes to the super law, the expense will be deductible under the general deduction provision. This is unless the amendment results in enduring changes to the SMSF’s structure or function or creates a new asset.

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.

 

 

See also:

• Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues

Death, total and permanent disability, terminal illness and income protection insurance premiums

A specific deduction is available to the trustee of a complying super fund for insurance premiums. This is for premiums paid for insurance policies that are for current or contingent liabilities to provide death or disability benefits.

A deduction is available for insurance premiums for the following types of death or disability benefits:

• 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.

See also:

• 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

Increased amount of super lump sum death benefit (or anti-detriment payment)

From 1 July 2019, there is no tax deduction for anti-detriment payments available. Where a fund member died before 1 July 2017, a tax deduction for an anti-detriment payment was available up to 30 June 2019. Where a fund member died on or after 1 July 2017, a tax deduction for an anti-detriment payment was no longer available.

Previously a tax deduction was available to a complying super fund that paid an increased lump sum, because of the death of a member for the benefit of their spouse, former spouse or child, to compensate for income tax paid by the fund in respect of contributions made for the member during their lifetime.

Collectables and personal use assets such as artwork

Special rules apply to SMSF investments in collectable and personal use 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 seven days of acquisition
• the receipt for the expense is in the name of the fund.

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

Storage costs for artwork and collectables are also deductible to the fund. This is provided that items are stored in accordance to the Superannuation Industry (Supervisions) Regulations 1994. In particular, the trustees must make and keep records of the reasons for deciding where to store the item number.

Include allowable deductions for insurance and storage costs for collectables and artworks at the investment expenses deduction label in the SMSF annual return.

When you can claim

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.

Trustees should retain any invoices and receipts evidencing the fund's expenses. Invoices and receipts must be in the name of the SMSF. Wherever possible, the expense should be paid directly from the fund's bank account.

Deductibility of expenses

As a general rule, the deductibility of expenses incurred by a super fund is determined under the general deduction provision in section 8-1 of the ITAA 1997. It won't apply where a specific deduction provision applies. For example, tax related expenses that are deductible under section 25-5 of the ITAA 1997.

If an expense is deductible under the general deduction provision, and the fund has both accumulation and pension phase members, the expense may need to be apportioned. This will determine the amount that the fund can deduct. Refer to Apportionment.

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.

See also:

• Deductions for APRA-regulated super funds

Specific deductions

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

• Expenditure incurred to the extent that it is for managing the tax affairs of the SMSF or complying with an obligation imposed on the SMSF which 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).
• Increased amount of superannuation lump sum death benefit (or anti detriment payment) to the extent specified in the relevant law (section 295-485 of the ITAA 1997. Note: From 1 July 2019, the anti-detriment deduction no longer applies to these payments.

General deductions

In the absence of a specific deduction provision, a loss or outgoing incurred by a super fund is deductible under the general deduction provision in section 8-1 of the ITAA 1997. This is to the extent that:

• it is incurred in gaining or producing assessable income
• it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Expenses that are an ordinary incident of the operations of the SMSF that gain or produce its assessable income fall under this general deduction provision. This can include expenses such as:

• management and administration fees
• audit fees
• subscriptions and attending seminars
• ongoing investment related expenses.

The general deduction provision will apply unless a specific provision could also apply and is more appropriate in the circumstances.

Is a super fund carrying on a business?

The investment activities of SMSF trustees must be conducted in accordance with the trustees’ duty to preserve and grow the fund for its members and their dependants in the event of their death. In that context, the investment activities of most SMSFs would not be characterised as activities in the nature of carrying on a business. This is compared with similar activities conducted by a trading company.

However, the activities of some SMSFs in dealing in shares and other investments may amount to the carrying on of a business. This is having regard to factors such as the scale of the activities and the manner in which they are conducted.

See also:

• Taxation Ruling TR 93/17 Income tax: income tax deductions available to superannuation funds

Exclusions

Under the general deduction provision, an SMSF cannot 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 not assessable income, such as exempt current pension income
• the income tax laws prevent the fund from deducting it.

You cannot claim more than one deduction for the same expenditure. If two or more tax provisions allow you deductions for the same expenditure you can deduct only under the most appropriate provision.

Apportionment

General deductions

Where an expense is deductible under the general deduction provision, the expenditure is deductible only to the extent to which it is incurred in producing the fund’s assessable income.

Distinctly identified part

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.

Estimating an expense

Many expenses cannot be divided into distinct and severable parts in this way. For example, when paying an approved SMSF auditor to provide an annual report for the fund. This is an expense that does not relate in any particular way to either the fund’s assessable or non-assessable income.

In such a case, the fund has to estimate, in a fair and reasonable way, how much of that expense was incurred in producing the fund’s assessable income.

It is not possible to prescribe a single method for apportioning expenditure of a super fund. Taxation Ruling TR 93/17 provides a number of examples. It provides guidance on what the Commissioner of Taxation may accept as a method producing a fair and reasonable outcome.

 

 

Capital versus revenue expenses

An expense that is incurred in establishing or making enduring 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. Refer to the example under trust deed amendments.

On the other hand, an expense that is incurred in making changes to the internal organisation or day to day running of the fund is 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 carrying on a business, it may be entitled to deduct certain capital expenses under the specific deduction provision, section 40-880 of the ITAA 1997. Refer to Is a super fund carrying on a business?

Section 8-1 of the ITAA 1997 does not allow a deduction for expenditure of a capital, private or domestic nature or expenditure incurred in gaining or producing exempt income.

See also:

• 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 2011/6 Income tax: business related capital expenditure – section 40-880 of the Income Tax Assessment Act 1997 core issues

This document provides information about issues you, as a trustee of a self-managed superannuation fund (SMSF), need to consider when determining the deductibility of an expense incurred by the fund.