In an SMSF, two different accounting and tax treatments can be used: the accrual method or the cash method. To avoid discrepancies between the accounting and tax treatments, we are currently undertaking the cash method for the accounting and tax process. The Tax Office has issued a taxation ruling (TR 93/17) clarifying the income tax deductions available to an SMSF. We list three typical questions below regarding deductible expenses.
Can the set-up cost of a Corporate Trustee be deducted from an SMSF when the SMSF is established?
Can the set-up cost of a Corporate Trustee be deducted from an SMSF after the SMSF is established?
Can the Bare Trust set-up fees be deducted from the SMSF?
Tax Deduction of Set-up Fees
The Tax Office confirms that SMSF setup costs (e.g., establishing an SMSF and Corporate Trustee) are not tax-deductible as a tax deduction, as an SMSF is not carrying on a “business” in the usual sense, even though it is “producing” assessable income predominantly from its investments and taxable contributions.
The ATO allows SMSF Trust Deed amendment costs as tax-deductible, unless they change the Fund’s structure, function, or create a new asset.
The default way we set up an SMSF is with individual Trustees. We charge a set-up fee of $450 for an SMSF with individual Trustees. If the Trustee is then converted to a Corporate Trustee after the SMSF is established, the expense of establishing the Corporate Trustee is not deductible. For more info on the pros and cons of the Corporate Trustee, please refer to the link here.
Treatment of the Set-up Fees
Superannuation Warehouse charges a fee of $450 to set up an SMSF with individual Trustees. This contribution is regarded as a non-concessional contribution and will be allocated equally amongst Members. This is regarded as the initial seed money to establish the SMSF, similar to initial funding to establish a family trust. Remember, an SMSF is a type of Trust, hence the need for this initial contribution.
To initiate the set-up of an SMSF, follow our online process by clicking here.
Treatment of the Bare Trust Set-up Fees
An SMSF cannot claim a tax deduction for costs incurred in setting up a Bare Trust. Although Bare Trust establishment costs are capital in nature it is not considered a borrowing expense. We normally add these expenses to the property’s cost base for Capital Gains Tax purposes. Bare Trust setup fees cannot be amortised but form part of the cost base of a property. Please see more details here.
Borrowing Expenses
Borrowing Expenses are costs directly related to obtaining a loan for an income-producing property, such as loan establishment fees, mortgage insurance, valuations, broker fees, and legal fees for loan documents. If total borrowing expenses exceed $100, the deduction is spread over five years or the loan term (whichever is shorter). If $100 or less, they are fully deductible in the year incurred.