SMSF expenses and are they tax deductible?
Expenses incurred in running the self-managed super fund are generally tax deductible but there are some expenses that are not tax deductible. Expenses can only be claimed if they are according to the Superannuation and tax laws.
Like any other entity in Australia expenses must relate to earning assessable income of the fund. SMSFs are taxed at concessional rate of 15% in Australia and all fund earnings, assessable contributions (employer or member) are taxed at this rate except certain conditions for example for non-complying fund. Some expenses that are capital in nature are not tax-deductible example being cost to purchase asset.
How does the SMSF expenses deduction work if the fund is in accumulation phase or retirement phase?
If the fund is in the accumulation phase and expenses incurred in earning taxable income are tax deductible.
On the other side if the fund is in the pension phase and income generated by the fund is non-taxable then expenses occurred in earning that income are also not deductible. Some expenses that will still be deductible includes Super levy paid to tax office, insurance premium paid on behalf of fund member, cost associated in collecting and processing SMSF member contributions.
If the fund is in both accumulation and pension phase percentage split is required for both non-assessable income supporting pension and assessable income supporting accumulation balance. Same percentage proportion needs to be done for expenses except Super levy, members insurance. To get this percentage SMSF need to obtain actuarial certificate for the calculation of the percentage except if the fund is using the segregated method according to tax and superannuation rules.
What SMSF expenses are tax deductible?
Most common type of SMSF expenses deductible are outlined as below:
a) Operating and management expenses – operating and management expenses are generally tax deductible except if these are incurred in generating non-assessable income (in case of pension fund supporting non-taxable income) or if expenses are capital in nature. Management and administration expenses by trustees for obligations example processing members contributions, minutes preparation etc are tax deductible. Every SMSF needs to be audited every year by an approved SMSF auditor before the lodgement of the return and expense incurred to audit is also tax deductible. Other expenses for managing tax affairs like accounting fee, actuarial certificate fee is also tax deductible. Administration penalties for noncompliance are not to be paid by the fund and if paid by trustees are not SMSF deductible expense.
b) Investment expenses – expenses incurred in earning assessable income are tax deductible. Examples being if fund has LRBA (limited recourse borrowing arrangement) interest paid for loan amount, costs related to investment portfolio examples being rental property expenses, bank fee, property management fee.
c) Costs occurred for update of the SMSF trust deed to comply with superannuation legislation changes. When the fund is set up costs incurred to get trust deed is not tax deductible.
d) Fee paid to tax office (super levy) and fee related to SMSF trustee company for annual
review paid to ASIC is also tax deductible.
e) Insurance premiums paid (according to superannuation laws) are tax deductible.
ATO taxation ruling TR 93/17 sets out the list of expenses.
What SMSF expenses are not tax deductible?
Expenses occurred for SMSF Set Up, amendment of the funds trust deed to include a new member and fines for noncompliance are not tax deductible. Also, if the expenses are related to non- assessable income, they are not tax deductible. For example, if the fund is in pension phase and the income is non-taxable the expenses related to are also not deductible. Some rules apply for super levy and member insurance. If the fund is in pension and accumulation phase actuarial certificate needs to be obtained for tax exempt proportion or calculate accordingly if segregation method is used.