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Many SMSF trustees still seem confused about exactly when they need an actuarial certificate and some are paying exorbitant amounts for this relatively simple service - we have one of the lowest fees available at $97.50

SMSF clients must obtain an actuarial certificate prior to their annual audit if the fund is paying one or more members an account-based (or allocated) pension out of funds that are not segregated from non-pension assets.

An actuarial certificate will be needed if at least one member is in pension phase and other member(s) is still in accumulation phase. It may also be necessary to obtain a certificate if the fund has only one member and is drawing a transition to retirement pension but still making contributions to the fund or If the fund has a reserve account and all members are in pension phase, it may also be necessary to obtain an actuarial certificate.

Most SMSFs do not have segregated accounts as it is easier to administer and manage an SMSF where all assets are pooled together and a percentage of the pooled assets are used to pay a pension while the remainder stay in accumulation phase.

Click here to attend our seminar on Advanced SMSF Strategies.
 

The purpose of the actuarial certificate is to determine the percentage of those pooled funds that are attributable to the pension account and, therefore, exempt income for taxation purposes.

Some SMSF service providers are shrouding the whole actuarial process in mystery, perhaps to justify some of the crazy prices they are charging. We've heard of actuarial costs for an account based pension as high as $360. Many softwares offer a click and flick service for $176, our fee is only $97.50 (including GST).

We will instantly email a preliminary exempt income percentage so the SMSF can continue to finalize its accounts. Once the fund's data is checked by our actuary, the signed actuarial certificate is emailed - usually within hours.

We don't use confusing excel spreadsheets to collect necessary data. We've developed our own question and answer style of data collection. And we offer advanced technical support on pensions from our technical director, Manoj Abichandani, an SMSF Specialist adviser and auditor.

Our support team is trained in helping you on how to maximize this exempt percentage so that the fund pays the least amount of tax on income.

Setting up a bare trust is an essential step in using a limited recourse borrowing facility within an SMSF, so can the costs of establishing that bare trust be claimed at tax time?

Bare trust establishment costs (or a property custodial trust), including the cost of the trust deed, can be claimed as tax deductions because they are considered to be costs of borrowing for investment purposes. The period over which such costs can be deducted is the lesser of five years or the term of the LRBA.

Other costs, such as setting up a corporate trustee for the actual SMSF (even if this is done as a step in the LRBA process), won't be accepted as deductions.

It could only be claimed as a deduction if the superannuation fund was considered to be "carrying on a business" for the purposes of the Income Tax Assessments Act, s. 40-880. And, of course, it would contravene the SIS Act if an SMSF was considered to be carrying on such a business.

Click here to attend our seminar on Advanced SMSF Strategies.

What CAN be claimed?

A more comprehensive understanding of what can and cannot be claimed as a tax deduction by an SMSF comes from TR 93/17, which explains the general principles behind the tax deductible of expenditure incurred by super funds, particularly for income tax deductions allowable under s. 8-1 of the Income Tax Assessment Act 1997.

So what types of expenses are ordinarily deductible under s. 8-1? The ruling includes the following specific list:

1. actuarial costs
2. accountancy fees
3. audit fees
4. costs of complying with superannuation laws and regulations (unless the cost is a capital expense) - see also Taxation Ruling IT 2672
5. trustee fees and premiums under an indemnity insurance policy
6. costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself) e.g., interest on money borrowed to secure temporary finance for payment of benefits, medical costs in assessing invalidity benefit claims and costs in calculating and testing reasonable benefit limits of members
7. investment adviser fees and costs in providing pre- retirement services to members
8. other administrative costs incurred in managing the fund
9. What about borrowing costs?
10. When borrowing to invest, however, the SMSF is allowed to claim deductions for expenses relating to the establishment of the loan and other specific costs. Such expenses would include interest, loan establishment fees and any related legal costs.

Deductible costs can be considered to include:

1. Expenses incurred in relation to the borrowing or acquisition, such as loan establishment fees, brokerage, stamp duty or conveyancing - this is where the costs associated with establishing the bare trust would fit
2. Expenses incurred in maintaining or repairing the acquirable asset (but not improving it)
3. Money applied to refinance a borrowing (including any accrued interest on a borrowing) if the original borrowing was a complying loan in relation to the single acquirable asset (and no other acquirable asset)

It is, however, a tricky area. Expenses relating to SMSF members' accounts which are in pension phase are generally not deductible, so care needs to be taken about how assets and LRBAs are structured and managed if one or more members of the SMSF is in pension phase. In pension funds, if deductible expenses are segregated to accumulation accounts, then it is possible to claim expenses in full.

 If an item is not deductible in terms of the tax rulings outlined above, or in the particulars of the SIS Act which relate to limited recourse borrowing arrangements, if it is a capital expense, it can still be incorporated in the cost base of the investment for calculating (and reducing) capital gains tax.

Finally, make sure you are not paying over the mark for costs such as the establishment of a bare trust. For more information about the process of establishing a LRBA and the costs involved, visit our website. The cost of the bare trust deed is $165 including GST if your fund is borrowing from a bank.

Click here to learn more.

Make sure your SMSF clients are taking full advantage of depreciation to ensure their super funds are paying as little tax as possible.

It has been estimated that the vast majority of commercial and residential property investors overlook deductions available through depreciation. As more SMSFs decide to hold real property in their portfolios, it makes sense for their accountants and advisers to fully understand the ins and outs of deprecation so their clients can put its magic to work.

If an SMSF has an income-producing property as part of its investment portfolio, it can claim depreciation on items related to the building as they age and wear out over time. The beauty of depreciation is that the investor doesn't have to spend money to claim it from the ATO.

Assets that are part of the property, such as air conditioning, carpets, fittings, appliances, can be claimed over a number of years as they decline in value.

To be entitled to claim depreciation, the asset must be used for a "taxable purpose", so in the case of a property producing rental income for an SMSF, that taxable purpose would be the generation of rental income.

Don't overlook that the depreciation rules fall into two divisions - the first is a capital works allowance, the second relates to claims for 'plant and equipment'.

Click hereto attend our seminar on Advanced SMSF Strategies

Structural or capital works allowances

The first part of the depreciation rules gives investors the ability to claim an allowance for structural or capital works costs. The ATO has determined that structural elements of a building have a useful life of 40 years. Depreciation against the structural elements of a building can be claimed at 2.5% each year for 40 years.

Let's take the example of a brand new residential rental property which cost $600,000 to build of which $400,000 can be attributed to structural elements.  The SMSF could claim 2.5% of $400,000 of that property for the next 40 years. That's $10,000 per year available as a tax deduction.

Wear and Tear

An SMSF can then deduct an amount equal to the decline in value for an income year of a depreciating asset that was held for any time during the year. The deduction is reduced to the extent the use of the asset is for other than a taxable purpose. If an SMSF owns a rental property, the taxable purpose will generally be for producing assessable income.

You will need to know the effective life of the asset to calculate the decline in its value. Its effective life can be defined as how many whole years it can be used for a taxable purpose. You may wish to work this out yourself or rely on the ATO to do so.

One of two methods can then be used to work out the deduction for the decline in value of a depreciating asset:

1. Prime cost method: the depreciating asset's value decreases at a uniform rate over its effective life, or
2. Diminishing cost method: the depreciating asset's value declines each year as a constant proportion of its remaining value, so it produces a progressively smaller decline over time. The rate at which the diminishing cost method is calculated will further depend on whether the asset was purchased before or after 10 May 2006.

Here is an example (using the ATO's depreciation calculator) of the difference between the prime cost and diminishing cost methods on a $400,000 residential rental property purchased on 1 July 2013.

Table of estimated deductible amounts

This table gives you the estimated deduction for the decline in value of your house for 20 years from the date the asset started to decline in value

Dollar for dollar deduction

 So once you understand the nuts and bolts of how to help an SMSF client calculate the depreciation they can claim, how do you then guide them to maximize the benefit of that depreciation within their overall retirement strategy?

The simplest way to explain the benefits of depreciation to an SMSF client is to state that every dollar they can claim in depreciation each year is a dollar less they will pay in taxation. This can amplify the benefits of strategies such as salary sacrifice.  Hence if their personal marginal tax rate is 45% and if they decide to salary sacrifice and start claiming depreciation within their SMSF, instead paying $4,500 tax at individual level, the super fund will pay no tax.

Not only does the SMSF member who is able to salary sacrifice pay no personal tax on pre-taxed amounts added to their SMSF, but they can also reduce the 15% contributions tax paid to zero. They are able to fast-track their retirement savings strategy, potentially maximize the amounts they can pay off any loans made to purchase the property and reduce their personal tax liability outside of super.

This strategy is particularly useful when SMSF members are in accumulation phase and it is most critical to reduce the tax paid by their fund.

Price - $330 - 7.5 CPD Hours

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Speaker

Mr Mark Wilkinson CA SSA

Mark Wilkinson is a Chartered Accountant SMSF Specialist and is recognized as one of Australia's leading self-managed superannuation fund (SMSF) experts. He provides strategic retirement advice and administration services to SMSF trustee's and advisers ( accountants, financial planners and solicitors)

Mark's experience covers the full gambit of the superannuation industry, including:

• 5 years experience as a director of an  Approved Trustee of a large retail master superannuation fund;
• 15 years experience as a Partner with PKF Chartered Accountants  and Deloitte.
• The provision of SMSF  advice to professional advisers who were members' of professional practice networks;
• The provision of SMSF advice to fund trustees on the full range of issues affecting their funds;
• Strategic advice on contributions, fund investments, lumps sums and pensions, borrowing in a fund and estate planning;
• Internal professional training for advisers, trustees and fund members;
• Fund administration and compliance services

Mark is a regular presenter on matters affecting SMSF's, having presented at conferences and seminars for the:

• Institute of Chartered Accountants
• CPA's
• Tax Institute
• Small Independent Superannuation Fund Association
• The Television Education Network
• Superannuation Professionals  Association of Australia

Mark is currently a member of the Institute of Chartered Accountants National Superannuation Committee.

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