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Superannuation Quarterly March 2011 © Copyright Taxpayers Australia 2010-11March 2011 www.superaustralia.com.au Issue 52 • 2011SuperannuationquarterlyTax deductions for SMSFsBy Graeme EvansThis article looks at various tax deductions that are available to a complying Self Managed Superannuation Fund (SMSF) and then explains the general principles governing the deductibility of that expenditure. The article also briefly examines certain non-deductible items of expenditure typically incurred by SMSFs.The taxable income of a complying SMSF is determined as if the trustee were a taxpayer and a resident for tax purposes (s295-10).As a general rule, the deductibility of expenditure incurred by an SMSF is determined under s8-1 of the Income Tax Assessment Act 1997 (ITAA97), unless a specific provision applies (eg. tax compliance costs under s25-5). A deduction is available only to the extent to which the relevant expenditure is ‘incurred’ in gaining or producing assessable income of the SMSF (see TR 97/7 for the Commissioner’s views on the meaning of ‘incurred’).PRUDENTIAL WARNINGTax deductibility implications aside, SMSFs should always pay careful consideration to the ‘sole purpose test’ and other provisions of the Superannuation Industry (Supervision) Act 1993 (SISA93) and its supporting regulations before incurring any expenditure.Payments made by third partiesThe treatment of SMSF expenses paid by third parties on behalf of an SMSF is set out in Taxation Ruling TR 2010/1 (see para 172). Where a person pays an amount to a third party (eg. an Independent SMSF Auditor) on behalf of an SMSF, the payment is treated for all tax purposes as though the person had made an in-specie contribution to the SMSF and the fund has separately paid an equal amount to the third party. (Note: TR 2010/1 replaces MT 2005/1.)[Unless otherwise stated, all legislative and regulatory references are to the ITAA97.] PART A – Allowable deductions (non-exhaustive)General deductionsIn the absence of a specific provision, expenditure of an SMSF which is not of a capital, private or domestic nature, is deductible under s8-1 to the extent that:• it has the essential character of an outgoing incurred in gaining or producing assessable income, or• it has the character of an operating or working expense of a business or is an essential part of the cost of the fund’s business operations.TIPAs a SMSF would be in breach of the ‘sole purpose test’ if it ran a business, the second element to s8-1 is not relevant to SMSFs.TIPThe general principles governing the deductibility of expenditure incurred by all superannuation funds is contained in Taxation Ruling TR 93/17.List of general deductionsSubject to the possible need for ‘apportionment’ (see TR 93/17 and below), the expenses of an SMSF which are ordinarily deductible under s8-1 include:• administration fees (see TR 93/17)• actuarial costs (see TR 93/17)• accountancy fees (see TR 93/17)• audit fees (see IT 2625 & TR 93/17)• trustee fees and premiums under an indemnity insurance policy (see TR 93/17)• legal fees (eg. costs of amending a trust deed in order to satisfy regulatory requirements or increase day to day operational efficiency) except where of a capital nature (see IT 2672 & TR 93/17) • costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself ), such as interest on money borrowed to secure temporary finance for the payment of benefits, medical costs in assessing invalidity benefit claims etc (see TR 93/17)• investment advisor fees and costs in providing pre-retirement services to members• membership subscriptions paid to professional associations • costs of collecting or receipting of contributions (even if they are not assessable contributions) (see s295-95(1))