Several weeks ago my fellow Switzer Super Report commentator, Jo Heighway, discussed the important issue of claiming expenses in your self-managed super fund (SMSF). You can re-cap on her article here [1].
With the end of the financial year less than two weeks away, many of you will be thinking about what your fund can and can’t claim. Something many of you will need to think about is apportioning your fund’s expenses. This will be particularly relevant if one member of your SMSF is receiving a pension while another is still in the accumulation phase.
Don’t claim this
But before I discuss this, I need to point out one thing your fund definitely can’t claim, and that’s costs of a capital nature incurred by your SMSF. For example, any expenditure on acquiring an asset is not allowed as a tax deduction.
Deductions and pensions
The first point to note is that the tax deductibility of expenses in super funds is made more complex if your fund pays a pension.
If your fund does nothing more than pay a pension, then it can’t claim any administration costs or professional fees as a tax deduction because it doesn’t pay tax on that income.
But what happens when your fund has both pre-retiree and pension money in the fund?
Well, this actually depends on the type of expenditure you hope to claim. Tax Ruling 93/17 details what the Australian Taxation Office (ATO) thinks should occur. It says, “expenditure incurred in gaining or producing exempt [pension] income only is not deductible.” However, any expenditure that is used partly for pre-retiree and exempt [pension] income must be ‘apportioned’ or shared out.
How to apportion your expenses
The ruling provides two methods of apportionment:
1. Ratio approach: this is used if a distinct or severable part of the fund’s expenditure is devoted to gaining or producing tax assessable income. This is the ATO’s preferred methodology for distributing expenses between pre-retiree and pension income.
2. If it’s not possible to use the ratio approach, then another fair and reasonable approach must be adopted. TR 93/17 proposes two other possible ways of apportioning expenses:
- Expenditure to produce investment income only:
Expenditure x ( Assessable investment income ÷ Total investment income )
- General administrative expenses that apply to the whole of the super fund:
Expenditure x ( Assessable income ÷ Total income )
Note: Total income means income from accumulation assets and from pension assets.
The ruling goes on to stress that the apportionment of expenses isn’t necessary for the costs incurred in gaining contributions made to a super fund. Although there have been many changes to the super and related tax laws since this ruling was released, the ATO has said it believes this view still applies. In ID 2012/47, released in late May 2012, the ATO stated that:
“A complying superannuation fund can deduct amounts incurred in obtaining all ‘contributions’, including non-assessable contributions (for example, contributions which the contributor cannot deduct …). That is, … it is not necessary for a fund to consider whether a particular contribution is assessable income, or is assessable income only in part.”
In a Private Binding Ruling (No. 1011710391051 published in April 2011), the ATO said the cost of managing the tax affairs of a super fund can also be used as a full tax deduction.
It said in another Private Binding Ruling (No. 17651) that the following expenses are allowed as deductions:
- Electricity
- Telephone calls
- Internet expenses
- Car expenses incurred for travel to your financial planner, bank and accountant deductible
- The decline in value of a computer that is utilised for managing the fund’s assets
- The decline in value of software that is utilised for managing the fund’s assets
I will discuss how to apportion these expenses next week, especially in regards to situations where trustee costs might be intermingled with your own personal expenses.
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.