An SMSF must pay certain expenses if it is to continue running for the purpose of providing retirement benefits for its Members. Normal operating expenses will be tax deductible in the SMSF. Remember, however, that Trustees cannot be remunerated for their services to the Fund.
An expense that has a ‘private element’ cannot be claimed as tax deductible. For example, if a computer bought for SMSF use is also used privately, the expense cannot be claimed. This is because the SMSF is not a ‘business’.
It is also important to remember that, for Members in pension mode, any expenses paid towards earning this ‘exempt income’ are not deductible. The apportionment formula is defined in the ATO ruling below. When at least one member of an SMSF has an account in the accumulation (taxpaying) phase, SMSF trustees must be aware which of the fund’s expenses are tax deductible, and which are not.
The General Principle
An expense incurred by the SMSF, which is not of a capital, private or domestic nature, will be tax deductible to the extent that it has the essential character of an outgoing, incurred in gaining or producing assessable income.
Taxation Ruling on Specific SMSF Expenditure
The ATO’s taxation ruling TR 93/17 sets out the following list of SMSF expenses that are tax deductible:
- Actuarial costs
- Accountancy fees
- Audit fees
- Costs of complying with Government regulations
- Costs for calculation and payment of benefits to Members
- Investment adviser fees and costs
- Other administrative costs incurred in managing the Fund
- The SMSF’s annual lodgement fee
- Legal expenses
- Life Insurance Premiums
- Total and permanent disability premiums
- Partial deduction total and permanent disability premium
- Investment research subscriptions
- Costs for amending a Trust Deed for compliance purposes
What is not deductible?
- upfront fees incurred in investing money are of a capital nature and are not deductible;
- costs attributable to the earnings of assets backing tax exempt income streams (see below for the note on apportionment).
Apportionment
Expenses incurred in gaining or producing exempt income only (pension income) are not deductible. If the SMSF contains an accumulation account and a pension account, expenses incurred partly in producing assessable income and partly in gaining exempt income must be apportioned.
Remuneration to Trustees
Generally, an SMSF is not allowed to remunerate Trustees unless the Trustee holds the necessary qualifications and expertise for the services performed. For example, if you are an accountant by trade and you have the required qualifications to prepare the SMSF’s annual tax return, you may be able to reimburse yourself from the Fund. To access the legislation in the SIS Act relating to the exceptions please click here.
It is important for all transactions in the Fund to meet the sole purpose test. If you are not sure if you meet the restrictions noted above, it may be best to stay clear of remunerating yourself with benefits from the SMSF to prevent a potential breach of the sole purpose test. For more information on the sole purpose test, please see here:
If the SMSF purchase a computer, it can expense it in the SMSF if its used for the sole purpose of the SMSF.
It is possible for Trustees to pay for expenses on behalf of the SMSF where it is not practicable for the SMSF to pay. For instance, if an expense requires payment using a credit card, an SMSF cannot make these credit card payments however a Trustee can pay for this on behalf of the SMSF.
The SMSF should reimburse the Trustee immediately. The ATO legislation is very prescriptive on this and provides various explanations in the SMSFR 2009/2 [16] ruling.
