Warning about “SMSF-like” funds and DIY super funds under-claiming tax deductions

The Self Managed Super Fund Professionals’ Association of Australia has issued a warning about the limitations of “SMSF-like” funds and also says some SMSFs are under-claiming valuable tax deductions.

At the SPAA’s annual technical conference at Melbourne’s Docklands yesterday, SPAA technical director Peter Burgess told SmartCompany retail funds and industry funds coming out with “SMSF like” offerings is positive because it offers more flexibility for their members.

However, Burgess warns these funds are no substitute for an SMSF and are not suitable for many businesses.

“We get a little nervous when they are portrayed to be like SMSFs because there is much more an SMSF can do. It is not just about investment flexibility,” says Burgess.

He says the funds do not offer products such as estate planning and limited recourse borrowing that are part of SMSFs.

“For small business owners, SMSFs will always have the edge over other products as there are some legislative carve outs for SMSFs that the other funds can’t access.”

Burgess also warned at the conference that, following a recent Australian Tax Office decision, 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,” Burgess says.

“The ATO 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.”

He says this has relevance in situations where the SMSF may have some exempt income because the fund 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.

“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,” Burgess says

He says it is common practice for SMSF trustees 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.

“However, this ATO 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,” says Burgess.

This allows SMSFs to claim a higher proportion of the general administrative fee as a deduction.

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