Expenses in an SMSF
An SMSF will have to pay certain expenses to keep on running the Fund for the purpose of providing for the Members’ retirement benefit. Normal operating expenses will be a tax deduction in the SMSF, but remember Trustees cannot be remunerated for their services as Trustees.
An expense that has a ‘private element’ in it cannot be claimed as tax deductible expense, for example, if a computer was bought and used both for private and SMSF use, the expense can’t be claimed. You cannot apportion it because the SMSF is not a ‘business’.
Also remember where a Member is in pension mode the portion of the expense towards earning this ‘exempt income’ is not deductible. The apportionment formula is defined in the ruling. When at least one member of an SMSF has an account in the accumulation (tax paying) phase, it is important for SMSF Trustees to be aware of which expenses of the fund 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 issued a taxation ruling TR 93/17 setting out a list of expenses that are tax deductible to an SMSF, as follows:
- 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 expenses in an SMSF 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.
- upfront fees incurred in investing money are of 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).
- some costs related to purchasing shares such as brokerage fees and stamp duty are not tax-deductible expenses in an SMSF. These costs are generally included in the cost base of the shares. Please see ATO guidance here for more details:
Expenses incurred in gaining or producing exempt income only (pension income) are not deductible. If the SMSF has accumulation and a pension account within the SMSF, expenses incurred partly in producing assessable income and partly in gaining exempt income must be apportioned.
Reimbursement of Expenses
If payments of an SMSF are paid by a Trustee, the SMSF has to reimburse these immediately. The Tax Office is specific in that an SMSF cannot incur loans. Therefore, reimbursements has to be done immediately. For further guidance on the ruling 2009/2, please click here.
Remuneration to Trustees
Trustees of an SMSF are generally not allowed to remunerate themselves unless they hold the necessary qualifications and expertise for the services performed. For example, you have the required qualifications as a tax agent to prepare the SMSF’s annual tax return, you may be able to reimburse yourself from the Fund. To access the legislation in the SIS Act relating to the exceptions please click here.
It is important that Trustees adhere the sole purpose test at all times. If you are not sure whether you meet the restrictions noted above, it may be best to stay clear of remunerating yourself with benefits from the SMSF to prevent a potential breach of the sole purpose test. For more information on the sole purpose test, please see here: