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The inaugral SMSF Accountants' Day, presented by selfmanagedsuper, CoreData Research and NowInfinity & trustdeed.com.au provides a great opportunity to access practical solutions for growing your business and ways to benefit from the huge flow of retail directed to SMSF.

Attendance will arm you with practical and actionable solutions for growth with cutting edge market insight and first-hand experience from leading industry practitioners.

Sydney Event: You will have the oppurtunity to meet our technical director Manoj Abichandani SMSF Specialist Advisor talking about Cloud Disruption in SMSF Audit - Click here to read full agenda.

 

Determining what deductions can be claimed at tax time becomes a little more complex once a SMSF has members in a combination of accumulation and pension phase.

The golden rule is that any expenses incurred by a fund that relate to those assets or activities being used to derive exempt current pension income (ECPI), cannot be claimed as deductions.

The reason for this is simple. Any income (ordinary or statutory), that a SMSF earns from assets held to provide for a pension or super income stream, is exempt from income tax - this is called Exempt Current Pension Income. It is reasonable that if the SMSF is not paying tax on this income, it cannot claim a deduction for expenses incurred in the process of earning that income.

Deductions can still be claimed for expenses incurred by the fund in relation to any assets supporting accumulation balances.

If the SMSF is using a segregated structure, where assets supporting a pension are segregated from those that relate to accumulation balances, the question of what can and cannot be claimed is relatively straightforward. Any expenses incurred in deriving the exempt current pension income should be ignored. They can't be claimed as deductions.

Click here to learn how to obtain an Actuarial Certificate for $97.50

If the fund's assets are unsegregated, some expenses are still fully deductible, including tax-related expenses such as the supervisory levy and death and disability insurance premiums.

Other expenses will need to be apportioned. Expenses are only deductible to the extent that they are incurred in producing assessable income. So how should you go about apportioning expenses for an unsegregated SMSF?

Some accountants apportion expenses by relying on the percentage certified by an actuary and used to determine ECPI but this doesn't usually give the best allowable percentage for claiming deductions.

You may end up with a better outcome for SMSF clients if you use the formula given in TR 93/17, which states that general administration expenses incurred for the fund as a whole can generally be apportioned using this formula:

General Admin expenses    X     Assessable income

                                                           Total income*

*Total income means assessable income plus exempt income

Let's use an example to find out whether a SMSF would be better off using the percentage provided on its actuarial certificate to apportion expenses or by using the TR 93/17 formula. Consider the example of a fund that has received concessional contributions of $50,000 and non-concessional contributions of $100,000 plus a rollover from another fund of $450,000.

Its investment income for the year is $35,000 and it has incurred administrative expenses of $5000. If the exempt percentage certified by the actuary is 60%, the fund can claim deductible expenses of $2000.

If, instead, the TR 93/17 formula is used, the fund's exempt income is 60% of $35,000 or $21,000. Its assessable income is 40% of $35,000 plus $50,000 or $64,000. So, using the formula

$5000     X     64,000                           = $3765

                         85,000

The fund is able to claim deductible expenses of $1765 more than if it relied on the actuary's certified percentage.

The ATO has given accountants and their SMSF clients even more good news in ID 2012/47, which can result in an even higher percentage of expenses being considered deductible.

In ID2012/47 the ATO gave the view that a SMSF's assessable income should include all contributions and rollovers, irrespective of the taxable or non-taxable nature of such amounts. We believe this means non-concessional contributions and rollovers can be included in assessable income when calculating how to apportion expenses.

Using the same example as above, our fund's assessable income totals $614,000 and its total income is $635,000. So our calculation for apportioning expenses between accumulation and pension is

$5000     X     614,000                        = $4835

                         635,000

The outcome for the fund is $2835 better than if the actuary's certified percentage is used.

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 A businessman was interviewing applicants for the position of Divisional Manager. He devised a simple test to select the most suitable person for the job. He asked each applicant the question, "What is two and two"? 

The second applicant was an engineer. He pulled out a calculator and showed the answer to be between 3.999999 and 4.000001. 

The next person was a lawyer. He stated that in the case of Jenkins v. Commr of Stamp Duties, two and two was proven to be four. 

The last applicant was an accountant. The business man asked him, "How much is two and two?" The accountant got up from his chair, went over to the door, closed it then came back and sat down. He leaned across the desk and said in a low voice, "How much do you want it to be?" He got the job.

Accountants and SMSF trustees need to remember that there are certain steps that must be taken before the ATO will recognise a fund as being in pension phase and, therefore, entitled to claim exempt current pension income (ECPI).

 To claim ECPI in a SMSF annual return, the fund must've taken steps prior to commencing the payment of a pension. It is easy enough for accountants and advisers to ensure this happens if they've been involved in the administration of a SMSF since its inception, or at least since the first member moved into pension phase.

However, if you inherit a SMSF client, which informs you that one or more members are already drawing an income stream, it is worth checking that the fund has met all ATO and SIS Act requirements before lodging the fund's next annual return.

For starters, the fund's assets must all be re-valued to their current market value before the commencement of the pension.

The next step is to make sure that the member is/was eligible to start a pension. This means they must have met a "condition of release" by turning 55 (or older) or permanently retiring from the workplace. Other conditions of release relate to the permanent incapacity of the member, a terminal illness or they'd need to prove financial hardship.

Once you've established that the member is, in fact, eligible to start a pension, the next box you will need to tick is whether the fund's current trust deed allows for the payment of pensions. You'll need to double-check, particularly if the trust deed is relatively old, that TTR (transition to retirement) income streams are permitted.

Section XI of our trust deed click here to learn more, for instance, is devoted to the payment of pensions by a SMSF, including TTRs. In fact, our deed describes everything the trustee, accountant or adviser needs to know about pensions, from meeting a condition of release through to the need to acquire actuarial certificates and pension commutation. If the deed you are working with does not give a comprehensive and descriptive guidance for the establishment of and payment of pensions, we recommend you seriously consider using our update service to update your SMSF deed. Click here to lean more.

 As per our trust deed, a SMSF member must have made a written request to the trustee to start a pension, including the intended start date, level of income and frequency of payments.

If the member wishing to receive a pension is under 60, pension payments will be taxable and the trustees will need to register for PAYG withholding tax. Accordingly, the taxable and tax-free components of the member's account balance will need to be calculated.

The fund's investment strategy should be reviewed before a pension is commenced. This ensures that trustees have considered how the fund's assets will be used to support the ongoing payment of an income stream to the member. Asset allocations may need to be reviewed to ensure the fund has enough cash/liquidity in store to meet minimum pension payments.

Once the trustees receive a written request from a member wishing to commence a pension, in turn, the trustees need to provide that member with written confirmation of the minimum payment requirements, any tax-free amount the member is entitled to and, if the member is under 60, the withholding tax amount that will be taken from each pension payment.

Finally, trustees and their advisers/accountants need to consider how they will manage the fund if other members are still in accumulation phase. This is where the question of whether you are better off using a segregated accounts structure or relying on an actuary to determine the fund's exempt current pension income entitlements.

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