SMSFs and tax deductions: the facts
It can be tricky for SMSF trustees to understand the ins and outs of allowable tax deductions. So here we look at some recent legislative changes around tax deductions and SMSFs, and other factors to consider when tax planning around the fund.
It can be tricky for self-managed super fund (SMSF) trustees to understand the ins and outs of allowable tax deductions for their fund. So here we look at some recent legislative changes around tax deductions and SMSFs, and other factors to consider when tax planning around the fund.
Allowable deductions around travel expenses are one area about which trustees often have questions. This is especially the case given changes announced at last year’s federal budget that have tightened restrictions around SMSF deductions.
For instance, trustees often question whether it is permissible to claim the cost of airfares to locations where they own investment properties held in their SMSF.
As Elizabeth Wang, a solicitor with Townsends Business and Corporate Lawyers explains, up until the 2017/2018 budget SMSF trustees could claim tax deductions for travel expenses related to residential investment properties held in the fund.
But since 1 July 2017, tax deductions that are related to expenses incurred when inspecting, maintaining or collecting rent for a residential investment property have not been allowed.
“Expenses incurred by an investor to engage third parties, such as real estate agents to provide any necessary property management services, will remain deductible,” Wang explained in a note.
She says the changes to SMSF tax deductions announced at last year’s budget don’t apply to other investment vehicles. These include corporate tax entities, superannuation plans other than SMSFs, public unit trusts, managed investment trusts, unit trusts or partnerships.
“Most importantly, when considering if it is appropriate for the fund to pay a particular expense, it is important to ensure the payment is in accordance with a properly formulated investment strategy, allowed under your trust deed and the super laws,” Wang advises.
Greg Einfeld, a director of SMSF specialists Lime Super, says aside from getting travel expenses right, it is important for trustees to ensure all the fund’s deductions meet the tax rules’ requirements.
“SMSFs can pay for and claim as tax deductions all the expenses related to the operation of the fund and the investments in it. These include accounting, tax, software, audit, legal and actuarial fees. They can pay for and claim costs associated with financial advice, if the advice relates to the investments in the fund,” says Einfeld.
“Additionally, SMSFs can pay for and claim the expenses related to their investments, such as property management fees for a property owned by the SMSF,” he adds.
SMSFs are not allowed to pay any personal expenses of the trustees of the fund, or any other expenses that don’t relate to the SMSF itself.
Says Einfeld: “A common error is paying for financial advice that does not relate to the SMSF’s investments. If the advice covers multiple topics then only the proportion relating to the SMSF’s investments should be paid by the SMSF.” Ideally, he says the adviser should invoice the fund and the individual separately.
“A related error is costs associated with trustee education, including investment research, newsletters and seminars. If the education is solely for the operation of the SMSF then that is allowable. But if the trustees are using the knowledge to help them invest outside superannuation then this is problematic,” he adds.
Einfeld says the SMSF can pay for life insurance, including income protection insurance and total and permanent disability insurance.
“But the policy must be in the name of the SMSF trustee, not the members themselves. It is not always advantageous to hold life insurance inside super and it is worthwhile obtaining advice before going down this route.”
It is also important to recognise that there are some expenses that the SMSF can pay for but which are not tax deductible. SMSF establishment costs are a good example.
“Trustees should keep records, pay the expenses directly from the SMSF rather than personal funds, and ideally have the invoices issued in the name of the SMSF,” he adds.
As ever it is essential for SMSF trustees to keep accurate records of expenses and tax deductions related to the fund.
This will help ensure the fund is administered according to the rules – and will mean trustees can easily demonstrate they have followed tax law when the fund is audited.