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The expenses you incur in the running of your self-managed super fund (SMSF) are generally tax deductible, but that doesn’t give you carte blanche. All deductions must comply with Australian taxation legislation.
Your SMSFs should only pay expenses that are:
- Allowed for under superannuation legislation and the SMSF’s trust deed
- Consistent with implementing the SMSF’s investment strategy.
What are the general principles to follow?
Some SMSF expenses are tax deductible while others are not. To be tax deductible, the expenses must relate to your fund earning taxable (assessable) income.
All superannuation funds (including SMSFs) are taxed on member contributions and their investment earnings. These contributions and earnings are taxed at the concessional super rate of 15% in Australia, up to certain contributions limits. Higher income earners pay an additional 15% tax on contributions if their combined income and super contributions are above a certain threshold, currently $250,000.
SMSF expenses are not tax deductible if they are capital expenses, such as the cost of purchasing fund assets.
Does it matter whether SMSF members are in accumulation or retirement phase?
Yes. SMSF expenses are not tax deductible if they relate to non-taxable (non-assessable) income. Non-taxable SMSF income includes earnings from assets supporting members’ super pensions.
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If your SMSF has members in both the accumulation and retirement phases, its expenses must be split proportionally between its taxable and non-taxable income. This can be a complex calculation, so SMSFs in this situation should consider hiring the services of an actuary to determine their non-taxable income. Only the expense amount apportioned to taxable income is tax deductible.
No expense-splitting is necessary for costs associated with collecting and processing fund member contributions or on the insurance premiums paid on behalf of members. However, splitting is necessary for most other types of SMSF expenses.
What SMSF expenses are tax deductible?
SMSF tax-deductible expenses fall into the following categories:
- Operating expenses
- Investment-related expenses
- Tax-related expenses
- Insurance premiums
- Statutory fees and levies
- Legal expenses
- Collectables and artwork expenses
Let’s look at each of these categories in more detail.
Operating expenses include:
- Fund management and administration fees that trustees incur in carrying out their obligations. For example, collecting and processing member contributions.
- Audit fees. SMSF trustees are legally obliged to appoint an approved SMSF auditor to examine their fund’s operations each year to ensure compliance with super legislation.
Investment-related expenses include:
- Fees paid to fund investment advisers, provided that these fees are directly related to an investment that earns assessable income for the SMSF. Financial advice fees that do not meet this requirement include any of the following situations:
- General financial advice
- Financial plan preparation
- Initial or upfront adviser fees
- Ongoing advice fees for accumulated super in the fund
- Advice for non-assessable pension income.
- Bank fees
- Rental property expenses if the fund holds one or more investment properties in its portfolio of assets
- Brokerage fees for share investments and the like
- Interest on any SMSF investment loans under a limited recourse borrowing arrangement
- Depreciation on investment assets (such as the plant and equipment in a commercial property owned by the fund)
- Claiming subscriptions (for example to SuperGuide) and attending seminars.
Any expense associated with preparing and lodging an SMSF’s financial statements and annual return to the Australian Taxation Office (ATO) is tax deductible.
In addition, funds can deduct any actuarial costs they incur to determine the amount of tax-exempt income for any of their members.
Insurance premiums your SMSF pays on behalf of members are tax deductible. SMSFs are legally entitled to take out the following types of insurance for their members:
- Income protection
- Total and permanent disability (TPD)
- Terminal illness
Other types of insurance (such as trauma or health insurance) can’t be taken out by SMSFs on behalf of their members.
Statutory fees and levies
Your SMSF must pay an annual ATO supervisory levy which is tax deductible.
In addition, SMSFs with a corporate trustee structure must also pay an initial Australian Securities and Investments Commission (ASIC) registration fee, as well as ongoing annual fees. These ASIC fees are also tax deductible.
Some SMSF legal expenses are deductible, including costs associated with:
- Amending the fund’s trust deed so that it remains compliant with any changes to super legislation
- Ensuring the fund’s compliance with its tax obligations.
Collectables and artwork expenses
Storage and insurance costs for any collectables and artwork owned by your SMSF are tax deductible. Insurance for these assets must be in the name of the fund and it must be taken out within seven days of them being acquired.
What is the process for claiming these expenses and deductions?
Tax-deductible SMSF expenses can generally be claimed in the year they are paid. The only exception is depreciation claims, which are ‘non-cash’ expenses that are claimed over the estimated life of the associated assets.
All SMSF tax-deductible expenses should be claimed in the annual ATO return so the appropriate tax debt or refund each year can be determined. Importantly, fund trustees should ensure that:
- All tax-deductible expenses (excluding depreciation) are paid directly from their fund’s bank account
- All receipts and invoices are in their fund’s name
- They retain all their receipts and invoices for at least five years after their annual returns have been submitted to the ATO.
Which expenses can’t I claim?
SMSF expenses you can’t claim (and which you might have expected you could) include:
- Any expenses associated with non-taxable income
- Legal expenses, such as those involved with preparing your SMSF’s initial trust deed (or significantly amending it a later date)
- Any other costs associated with establishing the fund, as these are regarded as capital expenses.
In addition, if the trustees of the fund incur any administrative penalties from the ATO for non-compliance, these expenses must not be paid by the fund. It’s also not legal for trustees to be reimbursed by the fund for payment of these penalties. Administrative penalties are therefore not paid by the SMSF and so are not tax deductible.
SMSF expenses that relate specifically to your fund’s taxable income are tax deductible. However, some SMSFs have both taxable and non-taxable income. In this situation, fund expenses must be split between these two types of income, and only the amount apportioned to taxable income is tax deductible.
The information contained in this article is general in nature. It’s generally worth seeking independent professional advice about the tax-deductibility of your SMSF’s expenses.