Section C: Deductions and non-deductible expenses

Generally, SMSFs that derive exempt current pension income cannot claim a deduction for expenses to the extent they are incurred in deriving that exempt income. Such expenditure must be apportioned.

However, some expenditure is deductible and does not have to be apportioned even though the SMSF has exempt current pension income.

For more information, see How are expenses treated when an SMSF has ECPI? and TR 2006/7 available on the ATO website.

Taxation of financial affairs (TOFA)

If the TOFA rules apply to the SMSF, include expenses from financial arrangements subject to the TOFA rules at the appropriate question. Complete Section I: Taxation of financial arrangements if you include an amount determined under the TOFA rules.

Click this link to open the SMSF home page or click this link to download the PDF of NAT71606 Self-managed superannuation fund annual return instructions PDF download on the ATO website.

Item 12, the Deductions tab comprises 2 sets of labels:

Label A1 and A2 - interest expenses within Australia*

If what you enter at label A1 includes an amount brought to account under the TOFA rules, also complete Section I: Taxation of financial arrangements. Refer to Guide to the taxation of financial arrangements (TOFA) rules on the ATO website.

Show at label A2 the amount for expenses incurred in earning interest within Australia that cannot be claimed as a deduction.

Directly at labels A1 or A2 you can open a Grid. The Grid provide for pairs of values to be entered applicable to this pair of labels. To delete the grid, clear all data.

CCH References

16-740 Deductions for interest expenses

23-020 Overview of Div 230

Label B1 and B2 - Interest expenses overseas*

If what you enter at label B1 includes an amount brought to account under the TOFA rules, also complete Section I: Taxation of financial arrangements. Refer to Guide to the taxation of financial arrangements (TOFA) rules on the ATO website.

Show at label B2 the amount for expenses incurred in earning interest within overseas that cannot be claimed as a deduction.

Directly at labels B1 or B2 you can open a Grid. The Grid provide for pairs of values to be entered for this pair of labels. To delete the grid, clear all data.

CCH References

16-740 Deductions for interest expenses

Label D1 and D2 - Capital works expenditure*

Use the Capital works deductions worksheet (sbw) and set the integration point to MS (non-deduct) to have the total integrated to labels D1, and D2 if required. This worksheet is opened by selecting Preparation > Schedule > Capital works deductions (sbw).

A dissection Grid is also provided at labels D1 and D2. The Grid will show the totals integrated to the return from the sbw. To delete the grid, clear all data.

To remove the sbw amount from the grid, open the sbw and select no integration. Alternatively, use Preparation > Delete Schedules, highlight the sbw and select Delete.

Label D2 is for capital works expenditure that is non-deductible.

CCH References

20-470 Deductions for Capital Works Expenditure

Label E1 and E2 - Decline in value of depreciating assets*

Show at label E1 and E2 the deduction for decline in value of depreciating assets amounts integrate from the asset values entered in the depreciation worksheet (d) where the form type has been selected in the Integration tab of the depreciation worksheet.

The Depreciation worksheet (d) provides for an index of assets to be maintained including details of acquisition, disposal, Low Value Pool assets, private use and PC Effective life. Refer to Depreciation worksheet (d). Select the Populate the return labels checkbox on the Depreciation worksheet (d).

Show at label E2 the amount of expenses that cannot be claimed as a deduction for decline in value of depreciating assets.

Using the Grid

Directly at labels E1 and E2 you can open a Grid. The Grid provides for pairs of values to be entered applicable to E1 and E2. To delete the grid, clear all data.

For label E1 the Grid will also include any amount integrated to the return from the Depreciation worksheet if a group of assets has been linked to E1.

To remove the amount integrated to the grid from the Depreciation Worksheet open the worksheet, and for the assets that are integrated to the fund select no integration. Alternatively, use Preparation > Delete Schedules, highlight the Depreciation worksheet and select Delete.

For more information on deductions for decline in value, refer to the Guide to depreciating assets from Capital Gains Tax and depreciating Assets on the ATO website.

CCH References

17-005 Deduction for depreciating assets

17-010 Assets Used for Taxable Purposes

Label F1 and F2 - Insurance premiums - members*

Show at label F1 the deduction for insurance premiums paid by a complying SMSF to provide benefits upon the existence of a terminal medical condition, or temporary or permanent disability of the member.

Show at label F2 the amount of expenses that cannot be claimed as a deduction for insurance premiums paid by a complying SMSF to provide benefits upon the existence of a terminal medical condition, or temporary or permanent disability of the member.

A dissection grid is provided at labels F1 and F2. The Grid provides for pairs of values to be entered. To delete the grid, clear all data.

CCH References

13-150 Cost of insurance premiums for death or disability benefits

Label G1 - Death Benefit Increase

Show at label G1 the increased amount of superannuation lump sum death benefits.

A dissection grid is provided at labels G1 and G2. To delete the grid, clear all data.

CCH References

13-150 Cost of insurance premiums for death or disability benefits

13-150 Increased death benefits (potential detriment payments)

Label H1 and H2 - SMSF Auditor Fee*

Show at label H1 the amount charged for the services of the Approved Auditor.

Show at label H2 the amount for auditor fees that is not deductible. This includes auditor fees to the extent the fees are incurred for the purposes of earning exempt income, such as exempt current pension income.

Directly at labels H1 and H2 you can open a Grid. The Grid provides for pairs of values to be entered. To delete the grid, clear all data.

Click this link to the ATO website for the SMSF auditors home page.

CCH References

13-120 Audit report

Label I1 and I2 - Investment expenses*

Show at label I1 the amount of investment expenses you are entitled to claim as a deduction incurred in the derivation of investment income, unless allowed by other specific income tax provisions. Do not include any amount that is shown at label J1 Management and administration expenses.

Show at label I2 the amount of expenses (of a revenue nature) that the SMSF incurred in managing or maintaining its investments.

A dissection grid is provided at labels I1 and I2. The Grid provides for pairs of values to be entered. To delete the grid, clear all data.

For detailed information, refer to Section 295-100 of the Income Tax Assessment Act 1997.

CCH References

13-150 Expenses relating to investment life policies and PSTs

Label J1 and J2 - Management and administration expenses*

Show at label J1 the expenses and allowances you are entitled to claim incurred in the management and administration of the SMSF, unless allowed by other specific income tax provisions and is more appropriately included at another label.

Show at label J2 the expenses or normally allowable deductions that you cannot claim incurred in the management and administration of the SMSF.

A dissection grid is provided at labels J1 and J2. The Grid provides for pairs of values to be entered. To delete the grid, clear all data.

Do NOT include investment management expenses or the expense of the SMSF auditor. These expenses should be shown at label H1 SMSF auditor fee.

CCH References

13-150 Allowable deductions

Label U1 and U2 - Forestry managed investment scheme expenses*

Show at label U1 the total amount of deductible payments made to an FMIS.

Show at label U2 the total amount of payments made under an FMIS that are not deductible.

A dissection grid is provided at labels U1 and U2. Use the Forestry managed investment scheme worksheet (fms) provided at these labels to record the details of the deductions. To delete the fms worksheet, select Preparation > Delete Schedules, highlight the fms, and select Delete.

CCH References

18-020 Registered agricultural managed investment schemes

Label L1 and L2 - Other amounts*

To open the Other Deductions (otd) worksheet press [Enter] at label L1 or L2. Refer to Other deductions worksheet (otd).

Use the otd worksheet to record details of the amounts claimed. This worksheet provides sets of repeatable Code, Description, and Amount fields ([Ctrl+Insert]). Select the Code applicable to each from the lists available. Press [Ctrl+Delete] to remove excess or unwanted rows.

The Other Deductions worksheet (otd) also integrates to label L1 or L2 and provides access to all other worksheets that make up these other deductions:

Distributions from Trusts worksheet (dft)
Distributions from partnerships worksheet (dfp),
Dividend Deductions (ddd)
an entry point for Balancing adjustments from sale of depreciating assets where the event resulted in a loss of income.

Show at labels L1 and L2 the total of all other amounts that do not fall into any of the other categories contained in Section C.

CCH References

13-150 Allowable deductions

23-020 Overview of Div 230

Label M1 - Tax losses deducted

Show at label M1 the tax losses the SMSF is claiming this year. The SMSF can only claim tax losses to the extent that its total assessable income exceeds total deductions (other than tax losses).

Click label M1 to open the worksheet to record the amount of prior year losses to be applied to current income, refer to Prior year losses worksheet (pyl).

The trust loss legislation in Schedule 2F to the ITAA 1936 affects the deductibility of prior year losses by all trusts which are not excepted trusts as defined in section 272-100 of Schedule 2F to the ITAA 1936, such as non-complying SMSFs or non-complying ADFs.

The SMSF may need to complete and lodge a current year Losses schedule. Refer to the ATO Losses schedule instructions for the current income year. Refer to Losses schedule (BP).

CCH References

16-895 Carrying forward prior year losses

*Non-deductible Expenses: The labels appearing as A2 through L2 are for all other expenses or normally allowable deductions that you cannot claim as a deduction. For example, all expenses related to exempt current pension income.