Allowable deductions for a super fund

What SMSF trustees should know on taxation.

The costs deductible by a super fund have the same tax law applied to them as an individual. In legal terms they are those items that are losses or outgoings incurred in producing or gaining assessable income.

Super funds and individuals can also claim a tax deduction for tax-related expenses. Therefore a super fund can claim a tax deduction for accounting and other costs associated with meeting its tax obligations. Unlike individuals, a super fund can claim a tax deduction for life and disability insurance premiums.

The important thing to stress is that there must be a connection between the amount spent and the income earned for the expense to be tax deductible. Even if there is a connection between an amount spent and income earned, there are three types of expenditure that are not deductible:

  • items that are of a capital, private or domestic nature
  • expenditure that is incurred in gaining or producing exempt income, and
  • there is something in the Income Tax Act that prevents a tax deduction.

Under the first type super funds would only have capital expenditure and should not have any private or domestic expenditure. For an item to be tax deductible it must relate to producing or earning the income. Where it relates to the cost of buying an income-producing investment it is regarded as a capital cost and is therefore not deductible.

This means the cost of buying investments such as shares; units in an investment trust or a rental property are not deductible against income of the fund. If a fund paid private or domestic expenses on behalf of its members the trustees would be in breach of the sole purpose test.

The second type relates to costs that the trustees of an SMSF cannot claim because they are associated with investments allocated to the pension phase and the income is not taxable.

Examples of the third type, that are excluded by the Tax Act, include the cost of entertaining, fines and bribes paid.

What follows are deductible and non-deductible expenses common to an SMSF. This is not an exhaustive list of all deductible and non-deductible items and should only be used as a guide.

Expenses that are deductible include:

  • costs of life insurance
  • accounting fees
  • costs of ongoing investment advice
  • bank charges
  • rental property costs such as agent fees and repairs
  • annual lodgement fees
  • trustees' out-of-pocket costs required to discharge their duties, such as travel
  • actuarial fees
  • valuation fees
  • investment management fees
  • administration service fees
  • audit fees.

Expenses that are not deductible include:

  • costs of setting up the SMSF
  • costs of initial financial planning advice when the fund is established and/or when investments are selected
  • penalties imposed by the ATO and the Australian Securities & Investments Commission (ASIC)
  • purchase costs of an investment
  • costs relating to certain deed amendments.

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