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Self Managed Super Fund (SMSF) Article
Claiming fund expenses as tax deduction
By Tony Negline.
This article may be out of date.
5th October 2005
Two weeks ago the Administrative Appeals Tribunal handed down a decision which denied a Self Managed Super Fund some tax deductions.
The case arose because the Australian Taxation Office denied a small super fund certain deductions. The trustees objected to this and asked the AAT to decide what was appropriate.
The written judgement tells us that the AAT had intended to hear the matter in December 2004 however the trustees didn't appear. The hearing finally took place in late August this year.
The written judgement also tells us that the SMSF trustee, which was a corporate trustee and was represented by one of trustees' directors, did not provide any evidence to justify why the trustee objected to the ATO's decision to deny the tax deductions.
The super fund claimed expenses which were payments to two companies and also claimed salaries paid to the trustees. The two companies in question are associated with the SMSFs members and trustees. One invoice was for $88,850 and the Tribunal was told that this cost was “for assisting [the super fund] ... achieve significant capital gain in share trading” however the Tribunal noted that no evidence was presented to show what work was performed – or how the work was done – to justify this fee and its payment.
The trustees claimed these costs were contingency fees (that is, a fee payable if a certain event takes place) however “there was no evidence of any agreement between the companies and the trustees to warrant the payment of these expenses. No contingency fee agreement was placed in evidence.”
The invoices tendered as evidence did not relate to a contingency arrangement but to “carrying out work as directed, incl. collating figures, collating articles, admin. work, intuitive analysis, secr. work, etc”.
The AAT also found that there was evidence that the SMSF paid the fees before it had actually received the invoice for the services provided.
The super fund also paid the trustees a salary of $2,285 however the Tribunal received no evidence to justify the amount paid or how it helped the super fund earn income.
The Tribunal noted that for any expense to be tax deductible there must be “genuine relationship between the expenditure of the claimed deductions and the production of assessable income”. The AAT therefore agreed with the ATO and denied all the deductions.
Based on the written judgement it is not possible for us to know what was really motivating the SMSF trustees. Certainly their actions appeared extreme and their endeavours to justify their actions looked like they were clutching at straws.
Perhaps this is a good example of the more extreme actions that some SMSF trustees will go to in order to gain access to their preserved super.
In March 1992, the Australian Taxation Office released tax ruling 2672 (“Deductibility of costs of amending a superannuation fund trust deed”) and over twelve years ago released tax ruling 93/17 (“Income tax deductions available to super funds”).
These are old rulings and refer to legislation which has long been superseded. Nevertheless these rulings have never withdrawn or updated. They give us a good guide as to the sort of expenses super funds can claim as a deduction.
IT 2672 points out that the costs of setting up a new fund and the costs of “amending a deed to enlarge or significantly alter the scope of the trust's activities” are not deductible. However if a super fund's deed has to be amended because of changes in Government regulations then costs incurred are tax deductible. An employer sponsor will always get a tax deduction for costs it incurs in getting a super fund deed amended.
TR 93/17 said that a super can claim the following costs:
- actuarial, accountancy and audit fees
- the costs of complying with all government regulations
- premiums for any trustee indemnity insurance policy
- costs in calculating and paying benefits to members (but not the cost of the benefit itself), for example interest on money borrowed for a short period of time to finance a benefit payment, medical costs in assessing invalidity benefit claims and costs in calculating and testing member's reasonable benefit limits
- investment adviser fees and costs in providing pre-retirement services to members
- subscriptions to relevant industry associations
- other administrative costs incurred in managing the fund
- annual ATO lodgement fees
- some legal expenses
Some costs are not deductible:
- the tax ruling says that a super fund can claim trustee fees as a tax deduction however since this ruling was issued a specific law has prohibited SMSF trustees from being paid any remuneration from the fund or from some other entity because of their trustee functions
- upfront costs of investing money
- investment or administration costs charged by a life insurer
- the annual ASIC regulatory fee for a super fund's corporate trustee. The ATO have said that the super fund should not pay this expense in the first place
- costs with earning income on assets backing pensions; funds with retirees and pre-retirees members will therefore have to apportion expenditure so that only expenses only taxable income is claimed as a deduction.
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