A very common question from readers is: ‘Can my self-managed super fund pay for this?’ Here is a helpful guide on what expenses your SMSF can legally pay and the tax deductions available to your SMSF that you may not be aware of.
Whether it is common expenses, such as accounting fees and establishment costs, or the more outlandish such as flights, accommodation, laptops and expensive software programs, the simplest way to work out if it is appropriate for your SMSF to pay a particular expense is to ask two questions:
1. Is the payment allowed under your trust deed and the superannuation law?
2. Will the payment be tax deductible?
What does superannuation law say?
Any expense paid by your SMSF must relate directly to the running of your super fund.
Remember the sole purpose test? That is the requirement that any decision you make in relation to your SMSF should be made for the sole purpose of providing retirement benefits to members. Any expense that provides a current benefit to members – say a personal computer, training course or holiday that you want now but can’t afford personally – should not be paid from your super fund.
The sole purpose test is sometimes also known as the ‘sniff’ test! If the expense looks personal or excessive in relation to the size of the fund, it is likely to get some extra attention.
Other rules you need to know:
- Your SMSF can’t provide loans or financial assistance to members of the fund or their relatives. If the expense is really a personal expense, don’t risk paying it from your fund.
- Any payments between your super fund and yourself or your business must be done on commercial terms (arms-length).
- Be very careful selling anything to your super fund that isn’t listed shares or business real property because strict rules apply.
- You can’t pay yourself remuneration for your services as a trustee of your SMSF.
- Check your trust deed too as there should be a clause setting out what expenses are acceptable.
Property, flights and other costs
Can your DIY super fund pay for your flights, accommodation, and associated travel costs to visit an investment property owned by the fund? Yes, it is possible if the visit is necessary for the maintenance of the investment. However, you will need to keep fantastic records and document any personal component of the trip and apportion the costs. Be prepared for extra scrutiny, especially if the trip is for more than a day or two, is overseas, or to a holiday location.
Does your claim make sense?
The expense should ‘make sense’ in the context of what types of investments your SMSF holds.
Let’s say you’ve come across a great share-trading course that costs $6,000 and you want your super fund to pay for it.
If you only have a small amount of money in your SMSF invested in no or only a few listed shares in blue chip companies, the expense represents a large chunk out of your fund balance. If you have no real intention to become a very active investor in your capacity as trustee, then you really shouldn’t contemplate paying an expense like this from your super fund.
If the investments of the fund and your trustee activities clearly indicate the expense is relevant, then go for it.
What can trustees be remunerated for?
While you can’t pay yourself remuneration for your services as a trustee, you may be able to be remunerated for non-trustee services, provided:
- you are appropriately qualified and licensed to perform the service;
- the duties or services are performed as part of a business through which you provide the same services to the public; and
- the remuneration is on an arm’s-length basis.
A common example of this is an accountant receiving remuneration for preparing the financial statements and tax return of his or her super fund in their normal course of business.
Claiming those all important tax deductions
There are times when an expense may be allowed to be paid by your super fund, but no tax deduction is available. For example, the costs of establishing your super fund, or expenses incurred when the fund is in pension phase and paying 0% tax. In these situations the fund should still pay the expense, but there will be little or no tax advantage.
There is a tax ruling (TR 93/17) that contains a detailed list of expenses that are deductible to your SMSF including:
- actuarial costs;
- accountancy fees;
- audit fees;
- updating your trust deed to comply with the SIS Act;
- trustee fees and premiums under an indemnity insurance policy;
- costs in connection with the calculation and payment of benefits to members e.g. interest on money borrowed to secure temporary finance for payment of benefits, medical costs in assessing invalidity claims;
- investment adviser fees;
- subscriptions for membership to ASFA; and
- other administrative costs incurred in managing the fund.
What you can claim
Expenses that are likely to be deductible include bank charges, brokerage, filing fees, fines, interest paid, life and TPD insurance premiums, valuation and storage costs, property expenses, relevant training courses, subscriptions, administration software such as class, and depreciation on plant and equipment.
Two of the most beneficial tax deductions available to SMSFs are:
- Exempt current pension income deduction – available for funds paying pensions; and
- Anti-detriment deduction – a very valuable deduction for any fund paying a death benefit.
Hot tips to keep you out of trouble
- Make sure the invoice is made out to the super fund.
- Wherever possible, pay the expense directly from the super fund bank account.
- Watch paying expenses from your own bank account or company bank account as they could be deemed a loan to your fund or a contribution.
My final pieces of advice – don’t overdo it, and be patient! Remember your superannuation money is there for your retirement. The less you touch it, the better your retirement will be.
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.
Also in the Switzer Super Report:
- Peter Switzer: The testing times have arrived [1]
- Paul Rickard: Gearing to buy shares with a protected equity loan [2]
- Rudi Filapek-Vandyck: The broker wrap: a week of massive change [2]
- Tony Negline: How to start a pension in your SMSF: part 2 [3]