Many SMSF trustees may be under-claiming deductions

27 July 2012 – The SMSF Professionals' Association of Australia (SPAA) says many SMSFs may be under-claiming valuable tax deductions. Technical director of SPAA Peter Burgess says discussions with industry players following the recent release of a Tax Office decision "has lead SPAA to conclude that many SMSF trustees may not be taking full advantage of tax deductions they are legally entitled to claim.

"In some cases this has resulted in funds paying hundreds of dollars extra of tax a year which, over the course of a few years, quickly adds up to a substantial amount of money," he says.

The Tax Office decision, issued in May, says that super funds are entitled to include the total value of all contributions (not just taxable contributions) and rollovers received during the income year when determining the proportion of a general administration expense that is attributable to gaining or producing the fund's assessable income — and therefore the proportion of the expense that can be claimed as a tax deduction.

Burgess says this has relevance in situations where the fund may have some exempt income because it has members both in the accumulation and pension phase. "As the fund has earned some exempt income, it is not entitled to a deduction for the full amount of the general administrative fee," he says. "Instead, the fund is required to work out the proportion of the general administrative expense that is attributable to gaining or producing the fund's assessable income to be deducted from the fund's assessable income."

SPAA says it has become aware that a common practice of SMSF trustees is to only include the value of taxable contributions in the fund's assessable income total when calculating the proportion of general administrative expenses that can be claimed as a tax deduction. But Burgess says that the Tax Office decision makes it clear that the full amount of any contributions or rollovers received by the fund during the income year can be treated as assessable income.

"By including the full value of contributions and rollovers, a higher proportion of the general administrative fee can then be claimed as a deduction versus what would be the case if rollovers and non-taxable contributions, such as non-concessional contributions, are excluded."

Based on the professional association's observations, it is common practice for many SMSFs to do the latter, which means they may have been under-claiming tax deductions for general administrative expenses where they have members both in the accumulation and pension phase.

SPAA is urging practitioners to review their current tax calculation programs and processes to ensure SMSF clients are not under-claiming tax deductions.

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