An expense may need to be apportioned where it is deductible under the general deduction provisionFootnote23 and the super fund has both accumulation and pension members. These expenses may need to be apportioned because income derived from assets supporting most retirement income streams paid to pension members is exempt from tax.
From 1 July 2017, the income tax exemption (under the segregated methodFootnote24 or the proportionate methodFootnote25 is no longer available for all types of super income streams. Instead, exemption will be limited to income earned from assets held to support 'retirement phase super income stream benefits'Footnote26. This may impact on the apportionment of expenses incurred by funds offering income stream products that are not 'retirement phase super income stream benefits' (eg transition to retirement income streams).
See also:
Distinct and severable expenses
Where the expense incurred can be divided into a distinct and severable part devoted to gaining or producing assessable income, this is the portion a super fund should claim as a deduction under the general deduction provision.
Example 5: Distinct and severable expense
The trustee of a complying super fund incurs the custodian's fee of $2,000 in respect of specific assets. The fund determines that $1,500 of the fee is for custodial functions for segregated current pension assets producing tax exempt (or non-assessable) income, and $500 relates to other assets producing assessable income.
The fund should apportion the fee according to those distinct and severable parts – that is, $500 is fully deductible as it is incurred in gaining or producing assessable income and $1,500 is not deductible as it is incurred in gaining or producing non-assessable income.
End of exampleIndifferent expenses
Where the expense cannot be divided, as it is incurred in producing the super fund’s assessable and non-assessable income indifferently, you need to apportion the expense.
A super fund needs to adopt a method of apportioning its indifferent expenses that delivers a fair and reasonable result to reflect the extent to which the expense relates to assessable income.
The following are two income-based approaches for apportioning investment expenses and general administrative expenses. Depending on the particular facts and circumstances there might be other methods that may be fair and reasonable in certain circumstances.
Find out about:
Apportioning investment expenses
Taxation Ruling TR 93/17 Income Tax: income tax deductions available to superannuation funds suggests the following method for apportioning investment expenses:
- Expenditure × (Assessable investment income ÷ Total investment income)
Example 6: Using a section 295–390 ITAA 1997 actuarial certificate to apportion investment expenses
ABC super fund holds unsegregated assets and is required to obtain an actuarial certificate to determine the proportion of its income that is tax-exempt (or its exempt current pension income).
The super fund's pension liabilities total $150 million and the total super liabilities are equal to $1 billion. The actuary determines the proportion of income that is tax exempt to be 15%.
The deductible proportion is calculated as 85% (1 − tax-exempt proportion of 15%). The deductible proportion of 85% of the fund's investment expenses of $3 million provides a deductible amount of $2.55 million.
End of exampleSee also:
- TR 93/17 Income tax: income tax deductions available to superannuation funds
Apportioning general administrative expenses
Some of the typical general administrative expenses incurred by a super fund include processing contributions and rollovers, and running a call centre for members.
Where an expense is not distinct and severable, TR 93/17 suggests the following method for apportioning general administrative expenses:
General administrative expenses × [(Assessable income + non-assessable contributions) ÷ Total income]
Assessable income includes assessable contributions.
Total income means assessable income (includes assessable contributions) plus non-assessable contributions plus exempt income and non-assessable non-exempt income.
The term 'non-assessable contributions' refers to contributions that are not part of the super fund's assessable income – e.g. personal contributions for which a tax deduction has not been claimed and roll-over super benefitsFootnote27. TR 93/17 provides further information and explains the basis for including non-assessable contributions in the formula. Example 1 of TR 93/17 provides an example of where the use of the above formula by a super fund may be considered fair and reasonable.
Example 2 of TR 93/17 provides an example of where the use of the above formula by a super fund does not provide a fair and reasonable assessment. This example involves a merger of two super funds where the merged fund received significant and extraordinary income amounts as a result of the merger. The addition of these amounts into the standard formula resulted in a distortion of the amount that could be claimed as a deduction.
Specific deduction provisions and apportionment
If an expense is deductible under a specific deduction provision (e.g. expenses in managing tax affairsFootnote28), then the wording of that provision will indicate whether (or not) the expense must be apportioned and the basis for so doing. This could occur where an expense needs to be apportioned because the fund earns both assessable and non-assessable income, or for some other basis.
The following list contains some super fund expenses deductible under specific deduction provisions. These do not need to be apportioned between assessable and non-assessable income.
- Tax-related expenses (subject to exclusions such as if a capital expense)
- Super supervisory levy
- Death, total and permanent disability, terminal illness and income protection insurance premiums in the proportions as specified in super lawFootnote29
- An anti-detriment payment to the extent to which dependantsFootnote30 will benefit. The deduction is calculated according to the formula in super lawFootnote31. This deduction will no longer be available for lump sum death benefits where the member died on or after 1 July 2017
- Financial assistance levy
An example of a specific deduction provision that indicates when apportionment is required is the deduction available to business-related capital expenditure (or blackhole expenditureFootnote32). If the expenditure relates to the whole of the business carried on by the super fund, but part of the business is carried on to derive exempt income or non-assessable non-exempt income, then to that extent the expenditure will not be deductible.
See also:
- TR 93/17 Income tax: income tax deductions available to superannuation funds
- Footnote 23
- Section 8–1 of the Income Tax Assessment Act 1997.
- Footnote 24
- Section 295–385 of the Income Tax Assessment Act 1997.
- Footnote 25
- Section 295–390 of the Income Tax Assessment Act 1997.
- Footnote 26
- Sections 307–75 and 307–80 of the Income Tax Assessment Act 1997.
- Footnote 27
- ATO ID 2012/47 Income Tax Complying Superannuation Fund: roll over superannuation benefit treated as assessable income when applying deduction provisions – meaning of contribution. See also TR 2010/1 Income Tax: superannuation contributions.
- Footnote 28
- Section 25–5 of the Income Tax Assessment Act 1997.
- Footnote 29
- Table in subsection 295–465(1) of the Income Tax Assessment Act 1997.
- Footnote 30
- Includes a spouse, former spouse or child of the deceased member at the time of death or payment.
- Footnote 31
- Subsection 295–485(3) of the Income Tax Assessment Act 1997.
- Footnote 32
- Subsection 40–880(3) of the Income Tax Assessment Act 1997.