What expenses can an SMSF claim?
Every SMSF has to pay expenses. Some costs are tax-deductible, meaning they reduce the taxable income and, therefore, the tax liability of the SMSF. However, some types of fees are not tax-deductible, and other costs the SMSF is not allowed to pay. So, what expenses can an SMSF claim?
Understanding what expenses your SMSF can and cannot pay for is more important than whether the cost is tax-deductible. If your SMSF pays for something it’s not allowed to, you are at high risk of breaching the sole purpose test.
The sole purpose test
At its simplest, the sole purpose test requires an SMSF to be maintained to provide retirement benefits for members. If you break this rule, you can incur a penalty of $4,440 (20 penalty units at $222 each) for each offence. The SMSF trustee has to pay the fine, meaning it comes out of your pocket, not the SMSF.
Where your SMSF pays unnecessary, excessive or otherwise not properly incurred expenses, this is likely to be a breach of the sole purpose test. For example, your SMSF can pay expenses relating to the fund’s management and its investment portfolio. However, the amount cannot be so excessive that it is a financial detriment to your SMSF. Also, you cannot obtain any personal benefit from the expense paid by your SMSF.
On the other hand, where an expense is unavoidable, insignificant and on commercial terms, it’s unlikely to be on the radar of an independent SMSF auditor. Ordinary SMSF expenses such as accounting, audit and ASIC fees fall into this category.
Can you pay yourself as a trustee?
No. You are not able to be paid for acting as trustee of an SMSF. Receiving payment for being a trustee of an SMSF would breach super laws. The independent auditor of the fund has to report you to the ATO.
When carrying out duties as a trustee, expenses incurred can be reimbursed by your SMSF. However, you need to be cautious. If you make an improper payment, you could breach the sole purpose test.
A key question you should ask is: “Is this expense directly related to my SMSF, or is it related to me as the trustee?” If the answer is that the expense relates to you as an individual, then the SMSF should not pay or reimburse you for the cost.
You should pay all SMSF expenses from the bank account of the SMSF. However, if paying from a bank account is not possible, you can make payment by credit card and reimburse it, ideally the same day. With the SMSF setup fee, you should repay the cost as soon as the SMSF has received funds.
You need to have an invoice, receipt or statement in the name of the SMSF for all expenses. Unfortunately, some online services such as investment research or portfolio management tools don’t have anywhere to record your SMSF name. One option is to use the First Name + Last Name fields to register the name of your SMSF.
An SMSF needs to reimburse any expenses incurred but paid by you as the trustee immediately. For example, your SMSF cannot repay you for an expense you paid weeks or months in the past, even if the expense would be an allowable cost of the SMSF.
Tax deductibility of SMSF expenses
Certain costs are capital expenses and, even though paid for by your SMSF, are not tax-deductible. A typical example is the SMSF set-up fee which is not tax-deductible.
When your SMSF undertakes share trading activities, we are required to record all gains and losses as capital gains or losses. Therefore, all expenses relating to share trading (to generate capital gains), including trading tools and investment research subscriptions, are capital in nature and not tax-deductible.
If an expense directly relates to your SMSF generating income, the cost incurred will be tax-deductible. However, there are also specific rules around certain expenses, such as insurance premiums and legal fees, that impact whether they are tax-deductible.
The following SMSF expenses will always be deductible:
- Accounting, audit and actuarial fees;
- Costs of complying with superannuation laws;
- Investment and adviser fees and costs (excluding up-front investment and advice fees);
- Administrative costs incurred in managing the SMSF.
Checklist for SMSF expenses
You should answer the following questions to help decide what expenses can an SMSF claim:
- Is the expense related to managing my SMSF or my SMSF investment portfolio?
- Is the expense necessary?
- Is the expense excessive?
- Will I personally get any benefit from my SMSF paying this expense?
- Can I get an invoice, receipt, or statement that shows my SMSF’s name?
Obtain professional advice
Before you pay an expense for your SMSF that could be disallowed, we strongly recommend you get in touch with us. We will be happy to confirm any potential expense claim.