Did you know that SMSFs are entitled to include the total value of all concessional contributions, non-concessional contributions and roll-overs in the calculation of assessable income when determining the deductibility of general administrative expenses? This could save your funds hundreds of dollars in tax.
Background – deductibility of expenses
A Self Managed Super Fund can claim a tax deduction for general administrative expenses to the extent to which they produce assessable income. The deductibility of expenses is determined under Section 8-1 of the ITAA 1997 (unless a specific deduction provision in the income tax law, such as Section 25-5, applies).
If the expense was directly incurred by a fund in obtaining assessable income then it is entirely deductible, similarly if an expense was directly incurred in producing exempt income (such as investment income on pension assets) it is not deductible at all.
Tax Ruling 93/17 sets out in more detail the general principles governing the tax deductibility of expenses incurred by superannuation funds.
Expenses (e.g. general administrative expenses) incurred partly in producing assessable income and partly in producing exempt income must be apportioned. The expense is deductible only to the extent to which it is incurred in producing assessable income.
In many cases the apportionment of general administration expenses will be determined using the formula in paragraph 8 (b) of TR 93/17:
general administrative expenses x assessable income / total income
where total income means assessable income plus exempt income.
The ATO has recently published new guidance explaining what is included in assessable income for this purpose. The new guidance means many SMSFs may be able to increase their tax deductions.
The Meaning of Assessable Income
Assessable income for apportionment purposes includes all contributions to the fund, net capital gains, imputation credits and foreign income ‘gross ups’.
The ATO Interpretative Decision ATO ID 2012/47 published in May 2012 provides new guidance on what can be included in assessable income in the apportionment calculation. It confirms that 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.
Conclusions – Improving your tax deduction
Including non-concessional contributions and roll-overs in the apportionment will improve the tax deduction a fund can claim.
Up to now it has been quite common for SMSF trustees to only include the concessional contributions in the fund’s assessable income when apportioning the general administrative expenses.
Many SMSF trustees may be therefore under claiming tax deductions they are legally entitled to receive by not including roll-overs and non-concessional contributions in the assessable income when calculating the tax deduction of general expenses.
Let’s consider some worked examples of the extra tax deduction received by including roll-overs and non-concessional contributions as a part of assessable income when calculating the deductibility of expenses:
Example 1 – A fund that has exempt income
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 it’s services. The super fund did not directly incur any expenses in obtaining the roll-over.
During the financial year the fund had monies in accumulation and pension phase and therefore earned exempt income. The fund received an actuarial certificate which stated the tax exempt percentage for 2011/12 was 75%. The fund had $90,000 in other ordinary assessable income to which the tax exempt percentage 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
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 pension 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!
Example 3 – A fund that incurs an expense directly relating to a ‘contribution’
As expenses are deductible to the extent that they produce assessable income, if we incur an expense that directly relates to a contribution (concessional or non-concessional), or an expense that directly relates to a roll-over, then that expense would be entirely deductible.
This is confirmed in ATO ID 2012/47 which says:
It also follows that any losses or outgoings directly incurred by a fund in obtaining ‘contributions’ do not need to be apportioned for the purposes of section 8-1 of the ITAA 1997 where they are incurred in obtaining both assessable and non-assessable contributions (including a single contribution that has both an assessable and non-assessable portion).
- When calculating the deductibility of general expenses include the total value of all concessional contributions, non-concessional contributions and roll-over superannuation benefits in assessable income.
- An expense directly incurred in obtaining contributions or roll-overs can be claimed as fully deductible.
- Even if a fund is 100% in pension phase you may be eligible for a tax deduction on general expenses if the fund received contributions or roll-overs.