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SMSF: Capital vs revenue expenses

Self-managed super funds (SMSFs) have access to a range of tax deductions for expenses incurred. Whether the expenses are capital in nature or are considered as revenue will affect eligibility for claiming such deductions.

The Tax Office considers an expense that is incurred in establishing or making enduring changes to a super fund’s structure or function as capital and not deductible under the general deduction provision. For example, the costs of establishing an SMSF are capital in nature. An expense incurred in acquiring capital assets is also usually capital in nature.

Trust deed amendment costs incurred in establishing a trust, executing a new deed for an existing fund and amending a deed to enlarge or significantly alter the scope of the trust’s activities are generally not deductible as they are capital in nature.

If trust deed amendments are required to facilitate the ongoing operations of the super fund, they are generally deductible. For example, if a fund amends a trust deed to keep it up to date with changes in super legislation this would be deductible.

Furthermore, expenses incurred in making changes to the internal organisation or day to day running of the fund are not considered to be capital in nature provided such changes do not result in an advantage of a lasting character. If a super fund is carrying on a business, it may be entitled to deduct certain capital expenses under the specific deduction provision, section 40-880 of the ITAA 1997.

Funds that incur expenditure in gaining or producing exempt income or incur expenditure of a capital, private or domestic nature cannot access a deduction under Section 8-1 of the ITAA 1997.

Contact our office if you have any questions about the deductibility of your SMSF’s expenses.

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