Any SMSF has to incur particular expenses for the fund to run and provide retirement benefits to its members.
What fund expenses seem common?
Any payment in line with the investment strategy and permitted by the super laws and the trust deed will be deemed appropriate.
Some of the common fund expenses include:
A. Operating expenses
Most of the Operating expenses that an SMSF incurs are usually deductible under the general deduction provision. However, those that are capital in nature or relate to non-assessable income gains (like current pension income) are exempted.
The most common deductible operating expenses deductible under the general deduction provision include:
a) Management and administration fees
In the daily running of the fund, some costs are incurred, like postage fees, stationery and preparing trustees’ minute’s expenses. When the fund earns both non-assessable and assessable income, such costs should be apportioned.
However, costs that are incurred in the collection and processing of various contributions will not be apportioned. Examples of such costs include expenses incurred in getting an electronic service address.
b) Audit Fees
As per the super laws, An SMSF should appoint an approved SMSF auditor to provide trustees with the operations report of the firm for each income year.
For the audit expenditure to be apportioned, an SMSF should generate both assessable and non-assessable income.
Administrative penalties placed on a trustee are not deductible to the fund.
c) ASIC annual fee
Special purpose companies which act as a regulated superannuation fund trustee have to pay an annual fee to ASIC. There are a number of SMSFs which use an individual trustee structure, but there are also others that operate under a corporate trustee arrangement.
Although corporate trustees typically pay an initial ASIC registration fee, they are also required to pay an annual fee. An ASIC annual fee is usually deductible and is payable only when a corporate trustee oversees an SMSF.
B. Investment-related expenses
Deductibility of these kinds of expenses depends on their nature. A couple of Deductible investment related expenses include;
• interest expenses
• payment of retainers or ongoing management fees to investment advisers
• investment portfolio management and servicing costs such as rental property expenses, bank fees, and brokerage fees
• change the mix of investments advice costs
Only a portion of investment advice costs will be deductible when the part to investments does not generate assessable income.
C. Tax-related expenses
For whatever tax affairs or other tax law obligation imposed on the trustee, a specific deduction is usually allowable.
Even if the tax affair relates to a thing that is capital matter in nature, this expense cannot be categorized as a capital expense. For instance, you may deduct the cost of a private ruling to depreciate a property item.
When managing an SMSF’s income tax affairs, some of the deductible tax-related expenses incurred to comply with the tax laws are:
• SMSF’s annual return lodgment and financial statements preparation costs
• Income tax obligations actuarial costs
D. Statutory fees and levies
Apportionment between super-related expenses and income tax is usually a challenge when dealing with an SMSF’s annual return preparing and lodging costs. Since the returns cover both super law and income tax requirements, apportionment between these two types of expenses will not be appropriate. Therefore, it is advisable to have a full deduction of the expenses incurred when preparing and lodging this return.
Unless the expenditure relates to audit fees, a tax-related expense is not apportioned on the basis of non-assessable and assessable income.
When an SMSF produces both assessable and non-assessable income, Audit expenditure incurred for meeting super laws obligations and general deduction provisions are usually apportioned.
E. Legal expenses
Specific deduction provisions cover some legal expenses. For the Legal expenses that specific provision do not cover, they will be deductible under the general deduction provision.
An exemption usually occurs when they are incurred in generating non-assessable income, and they are private, domestic, or capital, in nature.
F. Trust deed amendments
As you well know, trust deeds are essential when setting up an SMSF. Trust deed amendment costs incurred when executing and amending a deed substantially alter trust’s activities scope since they are capital in nature and therefore, are generally not deductible. Likewise, Trust deed amendments for facilitating the super fund’s ongoing operations are usually deductible.
Another deductible expense involves amending of the trust deed to keep it up to per with the super law changes. Unless the amendments alter the function or structure of the SMSF, the treatment will remain the same.
G. Death, total and permanent disability, terminal illness and income protection insurance premiums
A complying super fund’s trustee is entitled to a specific deduction regarding insurance premiums for contingent or current liabilities that provide death or disability benefits.
The deduction for insurance premiums relates to the following death or disability benefits types:
• Disability super benefits
• Terminal medical condition benefits
• Super death benefits
• temporary unemployment benefits
Relevant income tax laws set out the amount claimable by the fund. Therefore, no apportionment will be needed for these kinds of expenses on the basis of assessable and non-assessable income.
H. An increased amount of super lump sum death benefit (or anti-detriment payment)
A complying super fund’s trustee who pays an increased lump sum amount to cover for the death of a member will be entitled to a specific deduction under ITAA 1997 section 295-485.
In case of a tax saving amount that increases the fund in a lumpsum, an anti-detriment payment is usually paid from an SMSF after the death of a member to the deceased:
• spouse or former spouse
• estate’s trustee
• child (as well as an adult child)
An anti-detriment payment is not provided for all funds since the rules of the fund are the ones that determine the payment. Also, where a pension is used to pay the death benefit, the anti-detriment benefit may not be available.
The tax payment is reduced by the deceased member’s lump sum benefit payment as the member’s benefit had been accumulating.
If the lump sum payment is made via the deceased member’s estate, the deceased’s spouse, former spouse or child who benefits from that estate will determine the available deduction amount.
For the claim to be accurately made, trustees need to make the deduction claims in the fiscal year when the lumpsum payment occurs.
The anti-detriment payment deduction should not be apportioned from the super fund account that derives non-assessable income.
As from 1 July 2017, the anti-detriment deduction provision relating to death benefits was removed. Meaning the tax deduction will be available up to 30 June 2019 but from 1 July 2019, no tax deduction will be given in relation to the member died before 1 July 2017.
I. Collectables and artwork
Collectable and personal use assets, like artwork, are usually subject to special rules. The rules which were formed on 1 July 2011 also encompass things like insurance and storage.
Provided the artwork and other collectables are insured in the SMSF’s name, Insurance costs for items are deductible to the fund. Also, As long as artwork and collectables are stored in accordance with the Superannuation Industry regulations, the items are also deductible.
Deductibility of expenses
Unless there is a specific deduction provision, Income Tax Assessment Act 1997 section 8-1 determine the deductibility of super fund expenses.