Can an SMSF claim this as a deduction?
SMSF auditors have been witness to some outlandish expense claims and get frequently asked: “Can an SMSF claim this as a deduction?”
One of the most extraordinary claims was for the cost of a 20,000-litre water tank purchased for a property owned by the fund. Unfortunately, it was a small two-bedroom townhouse that couldn’t accommodate a 1,000-litre tank, let alone a 20,000-litre one.
And while it was purely coincidental that the trustee’s residential address was in a rural area, the expense was quickly identified as a mistake and promptly removed from the fund.
The current COVID-19 crisis has only highlighted more uncertainty, with a recent private binding ruling (PBR) providing additional insight into allowable deductions for SMSF expenses claimed by trustees.
The ATO has said that while PBRs cannot be relied upon by taxpayers, this particular ruling applies to the 2021 financial year where the fund attempted to claim a deduction for the costs of a course and subscription for share trading.
Nature of expenses
The general nature of a deductible expense extends to whether it relates to assessable income or not. Where an expense relates to the gaining of non-accessible income (such as exempt current pension income [ECPI]) or when it’s capital in nature means that it is non-deductible.
It is also essential to make sure that the expense is in line with the assets and investments outlined in the fund’s investment strategy and also allowed under the trust deed and SIS.
Paragraph 4 of TR 93/17 states that subject to any apportionment of expenditure, the following expenses are deductible:
- Actuarial costs
- Accountancy fees
- Audit fees
- Costs of complying with SIS (unless the cost is a capital expense)
- Trustee fees and premiums for an indemnity insurance policy
- Costs in connection with the calculation and payment of benefits to members
- Investment and adviser fees and costs
- Subscriptions for memberships paid by a fund to industry bodies
- Other administrative costs incurred in managing the fund
There is even more confusion about general deductions, which get classified in this way when a specific deduction provision is absent.
These types of deductions are subject to exclusions that include:
- Whether it is incurred in gaining or producing assessable income
- Whether it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income
According to the ATO website, expenses that fall under this category (unless a specific deduction provision applies) include:
- Management and administration fees
- Audit fees
- Subscriptions and attending seminars
- Ongoing investment-related expenses
Several other exclusions also apply in understanding whether a general deduction is allowable. An SMSF cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital (or of a capital nature) or private or domestic nature.
Some income tax laws also prevent the fund from deducting an expense as well as where the fund produces non-assessable income, such as ECPI.
Additionally, a fund cannot claim more than one deduction for the same expenditure and can only claim under the most appropriate tax provision for the expense.
A very well-debated question within the SMSF industry is whether investment-related expenses are deductible or not.
The answer is that it’s the exact nature of these expenses which is critical in determining deductibility.
The focus of the PBR was whether an SMSF could claim a deduction for the reimbursement of the costs of a course and subscriptions for share trading purposes under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
The answer from the ATO was a resounding no.
One of the reasons is that subsection 295-85(2) of the ITAA 1997 operates to modify the operation of ordinary income and general deduction provisions so that the CGT rules are the primary code for calculating gains or losses realised by a complying SMSF on the disposal of CGT assets.
The exception to this treatment includes CGT assets that are debentures, bonds, bills of exchanges, certificates of entitlement, promissory notes, deposits with a bank or other financial institution, or a loan.
While there is also an exception for trading stock, shares and derivatives of shares are not trading stock because they are covered assets under section 275-105 of the ITAA 1997.
Courses and subscriptions not deductible
Any gains made by an SMSF trading in shares will be assessable under the CGT provisions, and any expenditure regarding courses or subscriptions is capital in nature.
The costs incurred for the course and the subscriptions relate to specific activities that will only generate capital gains and not ordinary income and are therefore not deductible.
Additionally, they have not been incurred in the administration, operation or management of the SMSF and are not of the type as referenced in paragraph 4 of TR 93/17.
In particular, the PBR noted that the subscriptions were not for memberships to the Association of Superannuation Fund of Australia Limited and other such industry bodies.
Based on the information provided, the expenses were not incidental, relevant or sufficiently linked to any of the fund’s trading activities.
Seminar-type expenses may also not be deductible if the expenditure does not have a sufficient connection with assessable income and is an investment of capital made to prepare for the future commencement of an investment business as found in Petrovic and FCT (2005) 59 ATR 1052,  AATA 416.
In this case, the taxpayer was denied a deduction in respect of property seminars after it was found that the expenditure was not incidental to his pre-existing rental income.
Apart from depreciating assets, SMSFs should be claiming fund expenses in the year the trustee incurs them. From a compliance point of view, it is also best practice to have all invoices in the name of the SMSF and to pay them directly from the fund’s bank account.
Where the fund incurs expenses specifically relating to assets that generate capital gains or losses, a deduction cannot be claimed under section 51AAA of the ITAA 1936.
To this extent, the latest PBR makes it clear that trustees are unable to claim a deduction for the costs of courses and subscriptions that relate to share trading activities which are capital in nature.
Which means that the answer is no, an SMSF can’t claim this as a deduction.
Shelley Banton, head of education, ASF Audits