Expense identification key to deductions

expense deductions

Being certain what expenses create assessable income within an SMSF is a key starting point to ensuring the correct deductions are made.

SMSF advisers and trustees must be certain they have correctly identified what expenses are related to the creation of assessable income within a fund before engaging in planning for deductions, an SMSF technical expert has stated.

Smarter SMSF chief executive Aaron Dunn said the concept of apportioning expenses where a fund has assessable and non-assessable income was particularly important, especially when dealing with exempt current pension income (ECPI).

“Where an expense is deductible, under the general deduction rules, the expenditure is only going to be deductible to the extent in which it is incurred in producing the fund’s assessable income,” Dunn said during a recent webinar.

“When we look at the expenses incurred where they were incurred partly in gaining or producing assessable income or partly in gaining or producing non-assessable income, such as ECPI, and the fund can identify a distinct and severable part devoted to producing or gaining assessable income, then it is this part the fund should claim as deductions under that general deduction provision.

“It is a process of identification and once we have those distinct and severable parts, that is the amount that we should be looking to claim under a general deduction provision.”

He noted not all expenses were easy to separate out and there were provisions to estimate the costs related to the creation of assessable income.

“These expenses may be things like paying auditor fees or accounting fees and if we have those type of expenses for the fund and they do not relate in any particular way to the fund’s assessable or non-assessable income, then we are required to do some type of estimate in a fair and reasonable way,” he said.

“This is where we go back to Tax Ruling (TR) 93/17, which provides guidance and examples on what the commissioner may accept as a method of producing a fair and reasonable outcome.”

He said actuarial certificates with ECPI percentages provide that fair and reasonable basis required by the ATO and those can be applied to the deductible and non-deductible expenses of an SMSF.

“This is why our SMSF software spends a lot of time working through that for us because it’s taking this fair and reasonable approach that we see within TR 93/17,” he said.

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