• Self-managed superannuation funds – deductibility of expenses

    This information applies to taxed, complying super funds. You should read this in conjunction with:

    Find out about:

    Common fund expenses

    When considering if it is appropriate for the fund to pay a particular expense, it is important to ensure the payment is in accordance with a properly formulated investment strategy, allowed under your trust deed and the super laws.

    Some of the different types of fund expenses are:

    Operating expenses

    Operating expenses that are incurred by an SMSF are mostly deductible under the general deduction provision (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)) except to the extent they relate to the gaining of non-assessable income (such as exempt current pension income) or are capital in nature.

    The following are examples of the types of operating expenses that are typically deductible under the general deduction provision:

    Management and administration fees

    These are costs associated with the daily running of the fund such as preparing trustees’ minutes, stationery and postage fees. Such costs must be apportioned if the fund earns both assessable and non-assessable income.

    No apportionment is necessary for costs that are wholly incurred in collecting and processing contributions (for example, costs associated with obtaining an electronic service address (alias) to meet the data standards requirements).

    An SMSF may incur other more specific management and administrative costs in running a fund that are dealt with under other headings.

    Audit fees

    An SMSF is required by the super laws to ensure that an approved SMSF auditor is appointed to give the trustee(s) a report of the operations of the entity for each year of income.

    Audit expenditure that relates to meeting obligations under super laws is deductible but must be apportioned if the SMSF gains or produces both assessable and non-assessable income.

    The administrative penalties that can be levied on a trustee under the super laws are not deductible to the fund as they are incurred by the trustee of the fund (or director of the corporate trustee) and must not be paid or reimbursed from the assets of the SMSF.

    ASIC annual fee

    ASIC charges an annual fee to special purpose companies, whose sole purpose is to act as a trustee of a regulated superannuation fund. While the vast majority of SMSFs operate under an individual trustee structure, many choose to use a corporate trustee arrangement.

    Corporate trustees pay an initial ASIC registration fee but are also required to pay an annual fee. The ASIC annual fee is payable where an SMSF has a corporate trustee and, as such, this expense is deductible by the fund.

    Investment-related expenses

    The exact nature of the investment-related expenses is critical in determining deductibility. Examples of deductible investment related expenses include:

    • interest expenses
    • ongoing management fees or retainers paid to investment advisers
    • costs of servicing and managing an investment portfolio such as bank fees, rental property expenses, brokerage fees
    • the cost of advice to change the mix of investments, whether by the original or a new investment adviser provided it does not amount to a new financial plan.

    If the investment related advice covers other matters, or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible.

    Example 1

    The trustees of an SMSF, approach a financial adviser with the aim to put in place a long term financial strategy incorporating the need to have sufficient liquidity to pay super income stream benefits, lump sum payments and continue with investments that in the long term will provide super or death benefits for the members.

    A fee paid to an investment adviser to draw up an investment strategy for the fund in these circumstances would be a capital outlay even if some of the existing investments are maintained as part of the plan. This is because the fee is for advice that relates to drawing up a new investment strategy. The character of the outgoing is not altered because the existing investments fit in with this new strategy. It is still an outgoing of capital.

    End of example

     

    Example 2

    The trustees of a fund decide to seek the advice of an investment adviser as to what (as specified in the fund’s investment strategy and permitted by the governing rules of the fund) listed securities they should invest in.

    The cost of the advice as to what listed securities to invest in are deductible as it is part of the ongoing maintenance of the current investment strategy and not part of a new investment strategy or plan.

    End of example

    See also:

    • Taxation Determination TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business?

    Tax-related expenses

    A specific deduction is allowable under section 25-5 of the ITAA 1997 for an expense incurred in managing a fund’s tax affairs or complying with a Commonwealth tax law obligation imposed on the trustee.

    You cannot deduct capital expenditure under this section. However, an expense is not a capital expense merely because the tax affair relates to a matter of a capital nature. For example, the cost of applying for a private ruling on whether you can depreciate an item of property may be deductible under this section.

    The following are examples of deductible tax-related expenses incurred in managing an SMSF’s income tax affairs and complying with income tax laws:

    • costs relating to the preparation and lodgment of the SMSF’s annual return including the preparation of financial statements
    • actuarial costs incurred in satisfying income tax obligations, for example to determine the amount of tax exempt income (or exempt current pension income).

    Statutory fees and levies

    An SMSF is also liable to pay a supervisory levy under the Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991. The levy is a flat amount and is also deductible under section 25-5 of the ITAA 1997.

    With respect to the costs incurred in preparing and lodging the SMSF’s annual return, a possible interpretation of the relevant laws would necessitate apportionment between income tax and super-related expenses. Given that the return is one approved form covering both income tax and super law requirements, we are of the view that it would be an impost for SMSFs to have to apportion between the two types of expenses and has taken the approach of allowing in full as a deduction the expenses incurred in preparing and lodging the return.

    A tax-related expense does not need to be apportioned on account of an SMSF deriving both non-assessable and assessable income, unless the expenditure is in relation to audit fees paid by the fund. Audit expenditure that relates to meeting obligations under super laws is deductible under the general deduction provisions and must be apportioned if the SMSF gains or produces both assessable and non-assessable income. Refer to Audit fees.

    See also:

    Legal expenses

    Some legal expenses are covered by specific deduction provisions (for example, legal expenses incurred in complying with income tax obligations under section 25-5 of the ITAA 1997).

    Legal expenses that are not covered by a specific provision are generally deductible under the general deduction provision. This is except to the extent that they are incurred in deriving non-assessable income or are capital, private or domestic in nature.

    Example: Borrowing expenses – capital in nature

    An SMSF engages a legal firm to set up a trust to hold an asset that the fund intends to acquire under a limited recourse borrowing arrangement (LRBA) (as required by the super law).

    Section 25-25 of the ITAA 1997 is a specific deduction provision which enables a taxpayer to deduct expenses incurred for borrowing money to the extent that the money is used for the purposes of producing assessable income.

    Borrowing expenses which can generally be claimed under this specific provision include:

    • loan establishment fees
    • obtaining relevant valuations
    • costs of documenting guarantees required by the lender
    • lender’s mortgage insurance
    • fees for property and title search fees, costs for preparing and filing mortgage documents, etc.

    The costs in establishing a trust for an LRBA are not considered to be borrowing expenses because they are incurred for establishing the arrangement through which the borrowing occurs, not for the borrowing itself. Therefore, the SMSF cannot claim a deduction for its legal expenses in setting up the trust under section 25-25 of the ITAA 1997.

    Also, the SMSF cannot claim these costs as a deduction under the general deduction provision because they are capital in nature.

    End of example

    Trust deed amendments

    Trust deed amendment costs incurred in establishing a trust, executing a new deed for an existing fund and amending a deed to enlarge or significantly alter the scope of the trust’s activities are generally not deductible as they are capital in nature.

    Trust deed amendments required to facilitate the ongoing operations of the super fund are generally deductible under the general deduction provision. If a fund amends a trust deed to keep it up to date with changes to the super law, the expense in doing this will be deductible under the general deduction provision. This is unless the amendment results in enduring changes to the SMSF’s structure or function or creates a new asset.

    Example 1

    An SMSF is a two member fund comprising a couple who are also the individual trustees of the fund. One of the members dies at a time before either member has retired. The surviving member decides to continue the SMSF with a corporate trustee of which they are the sole director.

    The fund incurs legal expenses of $1,000 to amend the trust deed so the corporate trustee can be appointed. Making changes to the trust deed of the SMSF to permit appointment of a corporate trustee relates to the structure of the SMSF and the expenses are capital in nature. The legal expenses incurred in amending the trust deed are not deductible under section 8-1 of the ITAA 1997.

    End of example

     

    Example 2

    The trustees of an SMSF decide that the fund’s trust deed is out of date. It refers to super law provisions which have been repealed and to contact addresses for the trustees that are no longer current.

    The trustees decide to engage a legal firm to update the deed. The firm charges $500. As the changes to the trust deed are an ordinary incident of the day to day running of the fund and are not capital in nature, the $500 charged by the legal firm is deductible to the fund.

    End of example

     

    Example 3

    The trustees of an SMSF decide that, as part of a properly formulated investment strategy, they will borrow money to purchase an apartment under an LRBA.

    The trust deed of the SMSF, as it currently stands, does not permit the trustees to borrow money. The trustees engage a legal firm to amend the trust deed so that it permits the trustees to borrow money under an LRBA.

    The costs incurred in engaging the law firm to change the trust deed are not deductible. This is because the addition of borrowing powers is an enduring change to the function of the SMSF.

    End of example

    See also:

    • Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues

    Death, total and permanent disability, terminal illness and income protection insurance premiums

    A specific deduction is available to the trustee of a complying super fund in relation to insurance premiums paid for insurance policies that are for current or contingent liabilities to provide death or disability benefits.

    A deduction is available in relation to the insurance premiums to provide for the following types of death or disability benefits:

    • super death benefits
    • terminal medical condition benefits
    • disability super benefits
    • benefits provided due to temporary inability to engage in gainful employment for a specified period.

    The amount that can be claimed by the fund is set out in the relevant income tax laws and there is no apportionment required for these expenses between those that relate to assessable and non-assessable income.

    See also:

    • Taxation Ruling TR 2012/6 Income tax: deductibility under subsection 295-465(1) of the Income Tax Assessment Act 1997 of premiums paid by a complying superannuation fund for an insurance policy providing Total and Permanent Disability cover in respect of its members

    Increased amount of super lump sum death benefit (or anti-detriment payment)

    A specific deduction under section 295-485 of the ITAA 1997 is available to the trustee of a complying super fund that pays an increased lump sum amount (commonly called an anti-detriment payment) following the death of a member. An anti-detriment payment is where the fund increases the lump sum by an amount (the tax saving amount) that can be paid from an SMSF on the death of a member to a:

    • trustee of the deceased estate
    • spouse or former spouse of the deceased
    • child (including an adult child) of the deceased.

    Not all funds provide an anti-detriment payment and whether the fund will provide the payment depends on the rules of the fund. An anti-detriment benefit is not available where the death benefit is paid as a pension.

    The payment increases the deceased member’s lump sum benefit to negate the effect of tax paid by the fund while the member's benefit was accumulating in the fund.

    If the lump sum payment is made through the estate of the deceased member, the amount of the deduction available is dependent on the extent to which a spouse, former spouse or child of the deceased is expected to benefit from the estate.

    To ensure this claim is made correctly, trustees must claim the deduction in the financial year in which the lump sum is paid. The lump sum should be paid as soon as practicable following the death of the member.

    The deduction in respect of an anti-detriment payment does not need to be apportioned on account of the super fund deriving non-assessable income.

    From 1 July 2017, the anti-detriment deduction provision has been removed in respect of death benefits.

    This means that if a fund member dies on or after 1 July 2017, a tax deduction for any anti-detriment payment is not available. If a member of the fund dies before 1 July 2017, a tax deduction for any anti-detriment payment is available up to 30 June 2019. From 1 July 2019 there will be no tax deduction for anti-detriment payments available even where the member died before 1 July 2017.

    Collectables and artwork

    Special rules apply to SMSF investments in collectable and personal use assets, such as artwork. These rules were introduced on 1 July 2011 to cover aspects such as storage and insurance.

    Insurance costs for artwork and other collectables are deductible to the SMSF provided the items are insured in the name of the fund within seven days of acquisition and the receipt for the expense is in the name of the fund. You can't, for example, insure the item as part of a trustee's home and contents insurance.

    Storage costs for artwork and collectables are also deductible to the fund provided that these items are stored in accordance to the Superannuation Industry (Supervisions) Regulations 1994. In particular, the trustees must make and keep records of the reasons for deciding where to store the item number.

    When you can claim

    As a general rule, the trustee can claim the fund’s expenses in the year the trustee incurs them. However, deductions for the decline in value of certain depreciating assets (such as plant and equipment) are claimed over the effective life of the asset rather than at the time the trustee incurs the expenditure.

    Trustees should retain any invoices and/or receipts evidencing the fund's expenses. Invoices and receipts must be in the name of the SMSF, and wherever possible, the expense should be paid directly from the fund's bank account.

    Deductibility of expenses

    As a general rule, the deductibility of expenses incurred by a super fund is determined under section 8-1 of the Income Tax Assessment Act 1997 (also known as the general deduction provision) unless a specific deduction provision applies, for example, tax related expenses deductible under section 25-5 of the ITAA 1997.

    If an expense is deductible under the general deduction provision, and the fund has both accumulation and pension members, the expense may need to be apportioned to determine the amount that the fund can deduct. Find out more at Apportionment.

    If an expense is deductible under one of the specific deduction provisions, then the wording of that provision will indicate whether the expense must be apportioned and on what basis.

    See also:

    Specific deductions

    The following is a list of some of the specific deduction provisions that apply to SMSFs. Some can be claimed in full while others will require apportionment:

    General deductions

    In the absence of a specific deduction provision, and subject to exclusions discussed below, a loss or outgoing incurred by a super fund is deductible under section 8-1 of the ITAA 1997 (the general deduction provision) to the extent that:

    • it is incurred in gaining or producing assessable income
    • it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

    Expenses that are an ordinary incident of the operations of the SMSF that gain or produce its assessable income fall under this general deduction provision (unless a specific provision could also apply and is more appropriate in the circumstances).This can include expenses such as:

    • management and administration fees
    • audit fees
    • subscriptions and attending seminars
    • ongoing investment related expenses.

    Is a super fund carrying on a business?

    The investment activities of SMSF trustees must be conducted in accordance with the trustees’ duty to preserve and grow the fund for its members. In that context, the investment activities of most SMSFs would not be characterised as activities in carrying on a business (as compared to similar activities conducted by a trading company).

    However, the activities of some SMSFs in dealing in shares and other investments may amount to the carrying on of a business having regard to factors such as the scale of the activities and the manner in which they are conducted.

    See also:

    Exclusions

    Under the general deduction provision, an SMSF cannot deduct a loss or outgoing to the extent that:

    • it is a loss or outgoing of capital, or of a capital nature
    • it is a loss or outgoing of a private or domestic nature
    • it is incurred in relation to gaining or producing income of the fund that is not assessable income such as exempt current pension income
    • the income tax laws prevent the fund from deducting it.

    You cannot claim more than one deduction for the same expenditure. If two or more tax provisions allow you deductions for the same expenditure you can deduct only under the most appropriate provision.

    Apportionment

    General deductions

    Where an expense is deductible under the general deduction, the expenditure is deductible only to the extent to which it is incurred in producing the fund’s assessable income.

    Distinctly identified part

    Where the expense is incurred partly in gaining or producing assessable income and partly in gaining or producing non-assessable income such as exempt current pension income, and the fund can identify a distinct and severable part devoted to gaining or producing assessable income, then this is the part that the fund should claim as a deduction under the general deduction provision.

    Example

    The trustee of the SMSF appoints a property managing company in respect of three investment properties held by the fund. One of those properties is a holiday rental home and is managed by the company’s regional office. The holiday rental property is also a segregated current pension asset of the fund and so the income derived from this asset is exempt. The company charges the fund $2,000 for its services but the invoice identifies $500 of that amount as being the costs incurred by the regional office for managing the holiday rental home.

    The amount of $500 can be distinctly identified as a cost incurred in gaining the fund’s exempt income while the remaining $1,500 can be distinctly identified as a cost incurred in gaining the fund’s assessable income. The fund may claim the amount of expenditure which relates to the assessable income, being $1,500, as a deduction.

    End of example

    Estimating an expense

    Many expenses cannot be divided into distinct and severable parts in this way. For example, paying an approved SMSF auditor to provide an annual report for the fund is an expense that does not relate in any particular way to either the fund’s assessable or non-assessable income.

    In such a case, the fund has to estimate, in a fair and reasonable way, how much of that expense was incurred in producing the fund’s assessable income.

    It is not possible to prescribe a single method for apportioning expenditure of a super fund and Taxation Ruling TR 93/17 provides a number of examples, providing guidance on what the Commissioner may accept as a method producing a fair and reasonable outcome.

    Example 1

    The trustee of the SMSF incurs audit expenses of $1,500 for providing the SMSF with a report in accordance with its regulatory obligations. The fund has unsegregated assets and therefore obtains an actuarial certificate each year to determine the exempt current pension income of the fund.

    The percentage specified by the actuary in the relevant year is that 70% of the value of fund assets is held to support current pension liabilities. The remaining 30% of the value of fund assets is held to provide for assessable income in the fund.

    The trustee decides that this percentage is a fair and reasonable method for apportioning the audit expenses. The expenditure that can be claimed as having been incurred in gaining assessable income is $450 (being $1,500 x 30%).

    End of example

     

    Example 2

    The trustee of the SMSF incurs audit expenses of $1,500 for providing the SMSF with a report in accordance with its regulatory obligations. The SMSF earned $60,000 in assessable and $100,000 in non-assessable income.

    The trustees of the fund have decided that the following method is a fair and reasonable way to apportion these expenses:

    • Audit expense x assessable income/total income
    • $1,500 x $60,000/$160,000.

    This results in an amount of $562 for audit expense that can be claimed as a deduction by the SMSF.

    End of example

     

    Example 3

    An SMSF has both pension and accumulation members and does not segregate its assets.

    The trustees obtain an actuary’s certificate to determine the proportion of the fund’s income that is exempt current pension income. The actuary certifies that 40% of the fund’s income is exempt.

    The trustees of an SMSF engage an accounting firm to undertake the administrative functions of the fund. The accounting firm charges a fixed upfront fee of $1,500 per annum for the following services:

    • preparation of annual financial statements
    • preparation and lodgment of the fund’s annual return
    • arranging for the annual audit of the fund
    • preparing member benefits statements
    • preparation of reports on the fund’s investments.

    The fixed fee of $1,500 is not calculated according to the cost of each particular service. The expense therefore cannot be easily divided into distinct and severable parts.

    The trustees decide that it would be fair and reasonable to use the exempt income percentage as certified on the actuary’s certificate to determine the proportion of the accountant’s fee that is deductible. This is calculated as follows:

    • Expense x assessable income %
     

    $1,500 x (100% - 40%) = $900

    This results in a portion of $900 of the $1,500 fee that can be claimed as a deduction by the SMSF.

    End of example

    Capital versus revenue expenses

    An expense that is incurred in establishing or making enduring changes to a super fund’s structure or function is capital in nature and is not deductible under the general deduction provision. For example, the costs of establishing an SMSF are capital in nature. An expense incurred in acquiring a capital asset is also usually capital in nature. Refer to the example under trust deed amendments.

    On the other hand, an expense that is incurred in making changes to the internal organisation or day to day running of the fund is not considered to be capital in nature provided such changes do not result in an advantage of a lasting character. If a super fund is carrying on a business, it may be entitled to deduct certain capital expenses under the specific deduction provision, section 40-880 of the ITAA 1997. Refer to Is a super fund carrying on a business?

    Section 8-1 of the ITAA 1997 does not allow a deduction for expenditure of a capital, private or domestic nature or expenditure incurred in gaining or producing exempt income.

    Example

    One of the members in a two member fund with individual trustees dies and a decision is made once the death benefit has been paid from the fund to change the SMSF to a single member fund with a corporate trustee.

    In addition to the usual fund expenses incurred in running the fund, the following additional expenses are incurred:

    • legal expenses to amend the trust deed to change the fund to a single member fund with corporate trustee – $300
    • Australian Securities and Investments Commission (ASIC) fees associated with setting up the corporate trustee.

    The SMSF will not be able to claim either of these amounts. The legal expenses of $300 are of a capital nature as they are incurred in making enduring changes to the structure of the fund. ASIC fees incurred in setting up the corporate trustee are also capital in nature and, in any event, are not considered to be expenses incurred by the fund.

    Refer to Trust deed amendments for further examples.

    End of example

    See also:

      Last modified: 10 Oct 2017QC 53481