Self-managed superannuation fund (SMSF) trustees may be eligible to claim a deduction on fund expenses in the annual return. The deductibility of expenses is determined under Section 8-1 of the Income Tax Assessment Act (ITAA) 1997, unless a specific deduction provision in the income tax law, such as Section 25-5, applies.
Tax Ruling 93/17 also sets out in more detail the general principles governing the tax deductibility and apportionment of expenses incurred by superannuation funds.
Expenses which are fully deductible or not deductible
Actuarial certificate fees are a fully deductible expense to the SMSF
Section 25-5 of ITAA 1997 considers tax related expenses and sets out detail on which fund expenses can be fully deductible in the annual return. Section 4 and 5 of Tax Ruling 93/17 also provides some guidance on expenses which are fully deductible.
Generally, you are not required to apportion expenses incurred for purposes such as managing the fund’s tax affairs. More specifically, common expenses of a fund which are fully deductible include:
- actuarial certificate fees
- costs relating to the preparation and lodgement of the SMSF’s annual return, and
- the superannuation supervisory levy.
Further, when considering deductibility of expenses under Section 8.1 if an expense was directly incurred by a fund in obtaining assessable income then it is entirely deductible. If an expense was directly incurred in producing exempt income (such as investment income on retirement phase assets) it is not deductible at all. These expenses are known as a ‘distinct and severable expense’. Note that expenses that are of a capital nature cannot be claimed as a deduction under Section 8.1.
Expenses which must be apportioned
Expenses (e.g. general administrative expenses) incurred partly in producing assessable income and partly in producing exempt income must be apportioned. These expenses are known as an ‘indifferent expense’. The expense is deductible only to the extent to which it is incurred in producing assessable income.
A common industry approach to determine the apportionment of general administration expenses is to use the actuarial method of (1 – actuarial exempt income proportion) as a fair and reasonable calculation of the extent to which an expense relating to an income year was incurred in producing assessable income. In years where a fund has periods of deemed segregation using just he actuarial certificate result may not be fair and reasonable and the trustee should approach their actuary to obtain a result that is based on all fund liabilities. Accurium provides this expenses deductibility proportion as a separate appendix in the actuarial certificates.
Another method for apportionment of general administration expenses is the ‘income ratio method’ specified in TR 93/17:
general administrative expenses x assessable income / total income*
*where total income means assessable income plus exempt income.
The Meaning of Assessable Income for the income ratio method
Non-concessional contributions and rollovers are included in assessable income when using the income ratio method
Assessable income for apportionment purposes includes all contributions to the fund.
A roll over superannuation benefit (other than an amount transferred from one superannuation interest in a superannuation plan to another superannuation interest in the same plan) is a ‘contribution’ for the purposes the apportionment calculation.
In particular, assessable income can include:
- Concessional contributions;
- Non-concessional contributions; and
Irrespective of whether the contributions are actually included in the assessable income of the fund under the income tax law, non-concessional contributions and roll-overs can be included in the fund’s assessable income for the purposes of the apportionment calculation.
Improving your tax deduction under the income ratio method
Including non-concessional contributions and roll-overs in the apportionment will improve the tax deduction a fund can claim.
When apportioning the general administrative expenses using the income ratio method the trustee may be under claiming tax deductions they are legally entitled to receive if they are not including roll-overs and non-concessional contributions in the assessable income.
Example 1 – A fund that has exempt income and is claiming a deduction using the income ratio method
A super fund received roll-overs totalling $100,000 in the 2011/12 financial year. The fund also received $25,000 in concessional contributions.
The fund’s administrator charged $3,000 in fees for its services. The super fund did not directly incur any expenses in obtaining the roll-over.
During the financial year the fund had monies in non-retirement phase and retirement phase and therefore earned exempt income. The fund received an actuarial certificate which stated the tax exempt income proportion for 2011/12 was 75%. The fund had $90,000 in other ordinary assessable income to which the tax exempt income proportion would apply.
The fund’s exempt income is $67,500 (0.75 x 90,000). For the apportioning the administration expenses the fund’s assessable income is the sum of all contributions and the assessable proportion of the other ordinary assessable income. This totals $147,500 (90,000 – 67,500 + 25,000 + 100,000).
The tax deductible part of the administration fee of $3,000 is therefore:
3,000 x 147,500 / (147,500 + 67,500) = 3,000 x 0.6860 = 2,058
That is, 68.6% of the general administrative expenses can be claimed as a tax deduction. If we had not included the roll over as part of the assessable income then the assessable income and total income would reduce by $100,000 and the tax deduction would be:
3,000 x 47,500 / (47,500 + 67,500) = 3,000 x 0.4130 = 1,239
Now only 41.3% of the general administrative expenses would be claimed as a tax deduction.
This is a significant difference and in dollar terms will save tax for Trustees.
Example 2 – A fund that is 100% tax exempt
Accurium’s actuarial certificate includes an expense deductibility proportion calculated using the actuarial method
In the extreme, imagine a fund which received a $150,000 non-concessional contribution, and say the fund commenced in that year so they rolled over $400,000 from a retail fund into the SMSF. However consider that all of these monies were immediately converted to retirement phase on the date they entered the super fund. The fund earned $30,000 in other income over the financial year and incurred a general administrative fee of $4,500.
The fund would be 100% tax exempt and no actuarial certificate would be required to claim this exemption. You may think that you cannot claim a tax deduction on the expenses. However the ATO ID appears to indicate we can include the non-concessional contribution and roll-over as part of assessable income. The deductibility of the expense would then become:
4,500 x 550,000/(550,000 + 30,000) = 4,500 x 0.9483 = 4,267
This is a 94.83% tax deduction on the general expenses compared to a 0% tax deduction if we did not include all contributions and roll-overs in the assessable income!
When completing the annual return the SMSF trustee needs to determine whether fund expenses are fully deductible, non-deductible or must be apportioned. Some fees such as the supervisory levy and actuarial certificate fee are fully deductible and do not need to be apportioned.
For those general expenses which must be apportioned a common approach is to use the actuarial method. However the use of the income ratio method may provide a higher deduction for some funds, in particular where the fund received material contributions or rollovers during the income year.