Claiming tax deductions in your SMSF

I delved into the issue of tax deductible expenses in my last article and promised to talk further about the ability to claim ordinary expenses in your fund, such as telephone and electricity costs etc. You can read my earlier article here if you would like to re-cap.

The provision

General tax law allows self-managed super funds (SMSF) to make a tax deduction for all losses and outgoings to the extent they’re incurred in gaining or producing assessable income. However, those losses or expenses can’t be of a capital, domestic or private nature or be involved in gaining or producing exempt income.

This provision has been in the income tax laws for a long time and has been the subject of many Court cases. If you’ve studied Australian tax law at university, you’ll have enjoyed reading and re-reading some of these cases several times trying to decipher how the judges have interpreted these rules and how it applies to other circumstances! Let’s take a look at some now.

Determining your deduction

In Private Binding Ruling 17651 (issued in September 2002), the Australian Taxation Office (ATO) points out that super fund trustees can claim electricity, telephone and internet expenses as a tax deduction under this general principle. However, the cost will only be deductible if you can demonstrate how you’ve calculated the super fund’s income producing use of these expenses.

In Tax Ruling 93/30 the Tax Office points out that, “if a taxpayer merely sits in the lounge room with his or her family and at the same time does some work related activity, the expenditure for lighting and heating/cooling retains its private or domestic character,” meaning the cost isn’t tax deductible.

“However, if the taxpayer uses the room at a time when others are not present or uses a separate room, he or she is entitled to a deduction,” says TR 93/30.

How much can you claim?

The ATO has a formula for determining how much you can claim: A x B x C, where

A. is the cost per unit used;

B. is the average units used per hour; and

C. is the total hours used for income producing purposes.

TR 93/30 allows a bona fide estimate based on a reasonable percentage.

If your super fund also earns exempt pension income, then you might need to apportion this expenditure according to the rules provided in my previous article, Apportioning expenses for tax deductions.

For what it’s worth, I don’t think it’s worth our while working out these deductions because we don’t need to spend too much time working on our super fund.

Travelling costs

Now what about the cost of travelling to your financial planner, bank or accountant? These are tax deductible to the extent that they are incurred in the servicing and maintaining of your super fund’s investment portfolio and are deductible against your fund’s investment income. You must keep travel records and be able to demonstrate how you calculated the deduction.

Computers and software

Computers and computer software are capital expenditures and aren’t tax deductible. However, you may be eligible to claim a depreciation allowance on these costs. If you use your computer or associated software to access financial information, then you can claim a deduction for the decline in value. The Tax Office usually assumes that software has an effective life of two and a half years.

Certain rules may permit the full cost to be claimed as a tax deduction immediately.

Managed funds

What about expenses incurred by a managed fund? In these cases, the manager of the fund assumes responsibility for managing the assets, deriving income from those assets and paying all expenses related to the earning of income or capital gains.

When calculating net income distributed to unitholders, managers typically reduce the income by these expenses. In effect, your earnings are reduced by these expenses. As these expenses aren’t incurred directly by unitholders, they can’t claim a tax deduction for them. This applies even where the unit trust specifies these expenses and how they apply to each unitholder.

Training

What about attending training courses to help you invest your super fund’s money? It will be deductible to the extent to which it’s used in earning your super fund income. For example, if you use the information to derive a personal benefit, then you must factor that into the size of the deduction your fund is permitted.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.