Think twice about tax deductions

The income tax law also allows a superannuation fund to claim a tax deduction for expenses which are not generally available to other taxpayers. These would include deductions for premiums paid for death and disability insurance or expenses relating to the collection and administration of non-concessional contributions. Expenses that relate to pension phase of the fund are not ordinarily deductible.

As far as it goes for claiming a tax deduction for general (non-statutory) expenses incurred by the fund they must be necessary and relevant to the fund in gaining its assessable income. Non-statutory expenses that would be deductible include those relating to the fund's investments such as bank expenses, fund administration expenses and certain financial planning fees relating to the fund membership. The Commissioner has issued two taxation rulings which cover expenses incurred by superannuation funds - Taxation Rulings IT 2672 and TR 93/17. These rulings are in addition to rulings which relate to tax deductions generally available to all taxpayers.

When it comes to expenses that trustees incur in relation to the fund, care needs to be exercised that the expenses relate to the gaining of the fund's income and not for other purposes which may be considered personal or capital in nature or relate to the gaining of the fund's exempt income. Of course, expenses for capital purposes may be included in the cost base of the investment for capital gains tax purposes, reducing capital gains when the asset is sold. Capital expenses may include rates and taxes on a vacant block of land owned by the fund.

Personal expenses may relate to those which are incurred but relate to the personal or private activities of the trustees. These may include part or all the expenses relating to the trustees attending a conference which has both a personal element and another element that relates to the income earning capacity of the fund. In cases where the fund pays the personal expenses of the trustees or the expenses are required to be divided between the tax deductible and non-deductible expenses there are a number of issues. The first is that the expenses which relate to personal expenses are not deductible. However, there may be wider implications for purposes of complying with the SIS Act.

The Commissioner considers if the superannuation fund pays for or reimburses members or their relatives for expenditure of a private nature it incurs then there is a breach of section 62 relating to the sole purpose test and section 65 as members or their relatives have used the resources of the fund for their purposes. This is confirmed in the ruling on the sole purpose test, SMSF Ruling SMSFR 2008/2 and the ruling concerning the use of the resources of the fund by members and relatives, SMSF Ruling SMSFR 2008/1. Use of the fund in this way exposes the trustees to penalties for failure to meet one or more operating standards, having the fund treated as a non-complying superannuation fund or being disqualified as trustees.

Currently the Commissioner is revising the two rulings on tax deductions for superannuation funds which were published many years ago. It is hoped that these will further clarify the deductibility of certain expenses that may be incurred by the fund particularly those which may relate to expenses incurred in relation to trustees and where relevant expense may have a private, domestic, capital component or relate to the gaining of exempt income.