Everybody loves a tax deduction, so we thought it would be timely to outline the common tax deductions that apply to SMSFs and hopefully clear up some common misconceptions.
When are expenses tax deductible?
As a general rule of thumb, expenses relating to your SMSF producing assessable income are usually tax deductible. This ‘general deduction’ provision is covered in section 8-1 of the Income Tax Assessment Act 1997. The exceptions to this rule are where the law specifically excludes the tax deduction (e.g. capital losses or private expenses) or there are specific provisions on how to treat that expense (e.g. SMSF borrowing expenses).
There are also some special rules around SMSFs paying pensions and what income and expenses are used in the SMSF tax calculations.
Capital versus revenue expenses
Now would be a good time to highlight an important aspect of ‘expenses being incurred’. Where the expense relates to the establishment of the SMSF it is deemed ‘capital’ in nature, and therefore not tax deductible. For example, the expenses associated with the preparing the establishment trust deed, registering the SMSF etc. On the other hand, expenses incurred in the day to day administration of the SMSF are considered ‘revenue’ in nature and are generally tax deductible.
The old ‘apple tree’ accounting analogy may help here. Consider the expenses in preparing the initial land plot, the buying & planting the apple seeds as being ‘capital’ in nature as they relate to the structure. The fruit is the revenue generated and the ongoing watering, fertilizing etc to produce the fruit are expenses incurred in generating that ‘revenue’.
When can you claim the tax deduction?
As a general rule, the SMSF can claim the expenses in the year the expenses are incurred – as most SMSFs operate on a cash basis that means when the expense is actually paid not just when the invoice is received. Deductions for depreciation (e.g. SMSF property, fixtures & fittings) are claimed over the effective life of the specific asset rather than when the expense was paid.
All invoices must be in the name of the SMSF, and wherever possible, the expense should be paid directly from the SMSF’s bank account. Typically, where most SMSF trustees comes unstuck is when they don’t follow this!
Common SMSF expenses that are tax deductible
Administration (operating) expenses
- Administration and management fees
- Approved auditor fees
- ASIC annual fees (where you have a corporate trustee)
Investment related expenses
- Adviser fees
- Subscriptions to investment recommendation service providers
- Management fees (e.g. investment platforms, rental properties)
- Preparing and lodging the SMSF quarterly Business Activity Statements
- Preparing and lodging the SMSF annual tax return
- Actuarial certificate fees
Statutory fees and levies
- ATO supervisory levy (currently $259 per year)
Legal expenses can be a little more complicated, but generally the following are deductible:
- Trust deed amendments (to keep the SMSF compliant with the current laws)
- Obtaining legal advice to confirm trustee obligations or defend itself
Legal expenses that generally are capital in nature (e.g. not tax deductible) include:
- Trust deed amendments for increasing the scope of the deed
- Property conveyancing
- SMSF bare trusts/Limited Recourse Borrowing Arrangements
SMSF borrowing expenses (e.g. loan establishment fees, valuations, title searches) are deductible but are required to apportioned over 5 financial years.
- Life – 100% deductible
- Total & Permanent Disablement (‘Any’ occupation definition) with life cover – 100% deductible
- Total & Permanent Disablement (‘Own’ occupation definition ) with life cover – 80% deductible
- Total & Permanent Disablement (‘Any’ or ‘Own’ occupation definitions) – 67% deductible
- Income protection – 100% deductible
How can we help?
If you have any questions or would like to how we can help you with your SMSF administration please contact us via email@example.com.
Jason is able to provide you with personalised financial advice about Superannuation & Retirement Planning through his Australian Financial Services License with Three Chairs Financial Services.
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The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice.