An SMSF must pay certain expenses if it is to continue running for the purpose of providing retirement benefit 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 in connection with the calculation and payment of benefits to Members (but not the cost of the benefit itself);
- investment adviser fees and costs in providing pre-retirement services to members;
- other administrative costs incurred in managing the Fund;
- the SMSF’s annual lodgement fee, however a late lodgement penalty is not deductible;
- legal expenses, although this usually depends on whether the expenses are of a capital or revenue nature;
Other SMSF expenses can include:
- life insurance premiums;
- total and permanent disability insurance premiums;
- partial deduction for total and permanent disability premiums;
- investment research subscriptions; and
- costs for amending a trust deed are deductible if the amendments are needed due to changes in Government regulations, and are made to ensure that the fund’s day to day operations continue to satisfy its compliance obligations.
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).
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.