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Don't be short-changed with tax deductions when in pension phase

As a growing number of SMSF members move to pension phase, the focus of the regulator is certainly shifting to issues such as exempt current pension income (ECPI).  A lot of focus has been on the claiming of the tax exemption on fund income, but recently the release of ATO interpretative decision, ATO ID 2012/47 has highlighted that funds may be under claiming the level of tax deductions they may be entitled to each year.

ATO ID 2012/47 discusses the issue of whether a rollover is a contribution for the purposes of 295-95(1) of the ITAA 1997.  This interpretative decision outlines that for the purposes of claiming tax deductions, the fund’s assessable income is to include all contributions and rollovers (regardless of the taxable or non-taxable nature of these amounts).  As stated in TR 93/17: income tax deductions available to super funds, general administrative expenses relevant to the operation of the fund as a whole can generally be apportioned according to the formula:

General administrative expenses * (Assessable income / Total income)

To understand this further, let’s consider the following example:

Geoff (56) and Jenny (54) are members of the Green & Gold Super Fund.  During the 2011-12 financial year, the following activity occurred within the SMSF:

  • rollovers of $460,000
  • concessional contributions (CC) of $45,000
  • non-concessional contributions (NCC) of $170,000
  • fund investment income of $38,000
  • general expenses of $4,700

During the year, Geoff started a transition to retirement income stream.  At year’s end, the fund obtained an actuarial tax certificate that outlined a tax exemption percentage of 56%.

Based on the Commissioner’s views expressed in ATO ID 2012/47, the fund is entitled to a tax deduction on the fund’s expenses as follows:

$4,700 x ($713,000 – $21,280)/$713,000 = $4,560

It appears funds may not have been including the non-assessable contributions and transfers in claiming tax deductions where a level of tax exemption is to be applied.  This would result in the following lower level of tax deduction being claimed:

$4,700 x ($83,000 – $21,280)/$83,000 = $3,495

(NB. $21,280 is the tax exempt amount (56%) on fund investment income of $38,000)

As you can see from the above example, the inclusion of the non-concessional contributions and rollovers as assessable income provides a 30% increase in the level of tax deduction that can be claimed within the fund for the financial year.

Have you ensured that tax deductions have been claimed correctly within your SMSF?  You certainly don’t want to be short-changed when it comes to tax time!

Read ATO ID 2012/47, http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID201247/00001

Comments

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9 thoughts on “Don't be short-changed with tax deductions when in pension phase

      • Thanks. Great post. I have been repeatedly told that allowable general admin expense = general admin expense (1-exempt percentage). Moreover the software that I use, does the same.
        However, that gives me a very very low allowable general admin expense compared to above figures.
        I am definitely changing my work papers right now.

  1. Hi Kevin,

    Thanks for your question. It appears to only cover transfers in, not transfers out, as the ATO ID and section 295-95 contemplates what is included as a ‘contribution’.

    Regards,
    Aaron

  2. Aaron
    I’ve been looking at a number of websites regarding this calculation and I’m a bit confused about how to categorise Concessional contributions. Some commentators seem to be including them as Investment income (eg Bendzulla) while others put it in as general income. It can make a difference in the calculation of the deductible investment expenses. What are your thoughts?
    Robert

    • Hi Robert,

      The calculation looks only at assessable income and total income within TR 93/17? Therefore, the concessional contributions don’t need to be classified into either category as suggested? See para 8(b) within TR 93/17, which provides the formula for general administrative expenses attributable to the fund.

      If I’m missing anything, let me know.

      Regards,
      Aaron

      • Aaron
        Thanks for your reply. Perhaps though I should have been more explicit. What you are saying is quite correct when calculating ECPI but when calculating the deductible expenses of the fund all contributions, both concessional and non-concessional plus any non assessable Rollover amounts are added to the assessable income and it is that figure which is used in the formula which is in TR 93/17.

        Anyway since I first sent my question to you I have researched some more and feel reasonably confident that the three items mentioned above would NOT be included as investment income.

        Regards

        Robert

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