A technical expert has confirmed the extent to which insurance premiums for risk cover held inside an SMSF are tax deductible is not dependent on whether the fund’s income is taxed proportionately.
Speaking at the SMSF Association Technical Summit 2023 held on the Gold Coast today, Accurium head of education Mark Ellem acknowledged a common misconception practitioners had is in regard to the deductibility of insurance premiums when an SMSF is claiming exempt current pension income (ECPI) using the proportionate method.
To this end, Ellem pointed out these advisers are using section 8.1 of the Income Tax Assessment Act 1997 (ITAA) as the basis for their belief the full amount of insurance premiums for cover held in an SMSF cannot be claimed as a tax deduction, but that this premise was incorrect.
“Section 8.1 [of the ITAA] says if you’ve incurred an expense, you can only claim [a deduction for it] to the extent that it was used in deriving assessable income. So if it is derived in earning exempt income, you can’t claim a deduction and if it’s a bit of both, you’ve got to apportion [the deduction],” he noted.
“[However], section 295.460 [of the ITAA] says if [the expense] meets one of the requirements [such as] a superannuation death benefit policy, you get the full deduction. Full stop.
“So there is no need to apportion a deduction under a section [of the ITAA] unless it does say you have to apportion.”
According to Ellem, under ITAA section 8.1 this includes items such as accounting fees and audit fees.
Further, he recognised capital expenditure and depreciation were other expenses requiring trustees to apportion the amount available to the fund for a tax deduction governed by Division 43 and section 40.10 of the ITAA respectively.
“[But] I still get that [sentiment] today from accountants saying: ‘I’ve got to deduct [the insurance premiums] from the accumulation account because if I deduct it from the retirement-phase pension, the income earned by that pension is exempt.’ Well, no it’s not. The fund claims ECPI [as a whole] so it doesn’t matter which interest you deduct it from,” he said.