How to claim expenses
All self-managed (do-it-yourself) super funds cost money to run and while some of the expenses can be offset as tax deductions against income the fund earns, this doesn’t apply across the board. There are certain expenses, especially when a fund is being established, that can’t be claimed and it is important that fund trustees are aware of them as the money may have to come from their own pockets as trustee company directors.
It boils down to knowing the expenses that can be claimed, says Graeme Colley, education director at the SMSF Professionals’ Association of Australia, and making sure you check if there are any doubts about certain entitlements.
A reader highlights this latter point by asking what administrative expenses his fund can claim from the process of switching the trustee arrangement his fund operates under from individual trustees to a corporate or private limited liability company trustee.
A number of administrative expenses, he says, became a necessity when his partner, one of the two individual trustees died, leaving him as the sole trustee and fund beneficiary.
As well as the cost of setting up the company, the process involved changing the fund investment ownership details to the new trustee with the bank, brokers and investment registries, which he described as a long, fiddly and expensive undertaking.
Can his super fund claim these expenses? he asks.
For the reader, it cost about $1100 to change the fund trust deed from individual to corporate and appoint the sole director while changing the trustee for each share holding cost $27 per holding, with 33 holdings costing $891.
A useful principle
The general principle behind a superannuation fund claiming a tax deduction for expenses, says Colley, is that a deduction can be claimed where an expense is incurred in gaining or producing the assessable income of the fund or the expense is an essential expense in managing investments.
In addition to this general rule, there are special concessions available to superannuation funds that are not available to other categories of taxpayers. These special concessions include tax deductions for premiums on certain life insurance policies, some payments relating to the death of a member and exemptions from tax on income earned on investments that are used to support a superannuation income stream or pension.
In relation to specific deductions for a fund’s expenses, the Australian Taxation Office has published special rulings for such expenses as amending a superannuation fund’s trust deed as well as the income tax deductions that are available to DIY funds on a more general basis.
An important fundamental as far as any deductions claimable against fund income are concerned is whether they relate to the fund actually earning investment income or whether
they are capital in nature.
Colley says his understanding is that expenses relating to the establishment of a trustee company, including any fees payable to the Australian Securities and Investments Commission, are not an allowable deduction to the super fund.
In addition, any expenses or fees the company is liable to pay are a matter for the company and are not payable by the fund.
An example would be the annual ASIC fee payable by the trustee company. This fee is not deductible to the DIY fund as it is not incurred in gaining or producing the fund’s assessable income. In fact, as a general rule, a DIY fund should not pay the fee as the liability rests with the corporate trustee and not the fund. This is a situation where the directors of the corporate trustee may lend the company money to pay such fees.
Whether the fund is able to claim a full or partial deduction for expenses relating to changes in the broker account, bank account and investment registry notifications would depend on the type of work carried out and whether the DIY fund was in accumulation phase only, pension phase only or partly in accumulation and pension phase.
If the costs relate to the initial establishment of accounts, the expense would be more likely to be capital and not deductible against the fund’s assessable income. While expenses considered to be capital may not be deductible against the assessable income of the fund, they may be added to the cost base of investments for capital gains tax purposes.
If the fund is fully in accumulation phase, any expenses that are considered to be deductible will be allowed against the fund’s assessable income. Super fund deductible expenses are more along the lines of accountancy and tax preparation costs, audit fees, bank fees, investment research subscriptions, legal advice fees, the administrative costs of managing investments and the fund’s annual lodgement fee but not any late lodgement penalties.
However, if the fund is fully in pension phase, no deduction will be permitted as the income derived by the fund is fully exempt from income tax. If the fund is concurrently in accumulation and pension phase, then the trustees or their tax adviser, says Colley, would need to apportion the expenses between each phase.
The calculation of the amount of the deduction is determined according to a tax ruling (TR 93/17) that sets down how to apportion general administration expenses of the fund by the assessable income and divide it by the total income of the fund. Total income is the total assessable income plus any exempt income.
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