Can you follow the ATO’s SMSF tax return instructions and submit your own SMSF annual return?
The answer depends on your circumstances and how qualified you are to assess your tax debt or refund.
The problem is that getting it wrong can negate one of the primary reasons for choosing a self-managed superannuation fund – that it is a vehicle for low taxation. Getting the maximum benefit requires a pretty significant understanding of taxation and legislation, and meticulous attention to detail and record-keeping throughout the year.
The ATO acknowledges that their instructions are not a guide to taxation or superannuation law. You may need a recognised adviser to address your particular circumstances.
Even accountants and financial advisers with multiple self-managed super fund clients may prefer to have administration and tax experts handle the task of putting everything together for the SMSF annual return!
The annual return is the fund’s income tax return and member contributions statement (required by the Taxation Administration Act) and the annual return required under the Superannuation Industry (Supervision) Act (SIS Act).
It has eleven sections, indexed from A – K.
The content from the SMSF’s audit report and audited financial statements will be used for some sections, such as the assets and liabilities in Section H.
Some sections look very simple, requiring only yes/no answers or single amounts. However, they would have needed expert help behind the scenes.
Section F is for member statements of contributions and account balances. The ATO will match it to each member’s personal tax return.
Getting each one right means tracking all transactions, keeping within concessionary limits, and applying different calculations depending on whether members are in the accumulation or pension phase. This is probably handled best on an ongoing basis throughout the year, using SMSF software packages and automated feeds for bank account and brokerage information.
Please read our article on reporting requirements for more information on member statements.
Here are answers to some frequently asked questions about sections B, C and D of the return.
Assessable income includes:
Income from assets that wholly support a retirement income stream is deducted from the total assessable income. No tax is payable, provided the SMSF takes the required steps to claim it.
Taxable income is the assessable income minus allowable deductions.
Super funds generally pay 15% on taxable income.
This rate does not apply
In these cases, the income will be added to assessable income but taxed at the highest marginal rate (up to 47%).
SMSFs should take careful note of – and get expert advice about – the following:
If a member has not provided a TFN, the fund will pay additional tax on mandated employer contributions and debit the member’s account. It cannot accept other contributions.
If the member supplies the TFN later, the additional amount can be claimed back as a No-TFN tax offset, and credited to the member’s account, provided this is within three years.
The ATO recently issued a ruling (LCR 2021/2) about non-arm’s-length expenses (NALE).
If losses, expenditure or other outgoings are less than commercial rates or not incurred at all, then all the associated income will be NALI – i.e., non-arm’s-length income. It will be added to assessable income but lose the concessional tax rate.
So, for example, income from a distribution from a trust from which the SMSF has a fixed entitlement to income is usually taxed at 15%.
However, it will be NALI, if:
This ruling also applies to general expenses, such as audit or accounting costs.
For any investment judged to be NALI, all income from the asset will be taxed at maximum rates, capital gains tax (CGT) concessions will be lost if the asset is sold, and the zero tax benefit for the pension phase will also be lost.
The formula for a net capital gain is
Capital losses (e.g., on the sale of assets) can be offset against capital gains in the current financial year or carried over to the next financial year (Section E of the return). They cannot be offset against other revenues. Neither are they tax-deductible.
A fund can only pay for expenses that are allowed in terms of the fund’s trust deed and super laws.
With some exceptions, expenses are tax-deductible only if they can be related to gaining or producing assessable income. Exceptions include member insurance premiums, audit fees and the ATO Levy.
They are not deductible if
How does this play out in practice when lodging an SMSF annual return?
Trustees need very detailed records.
For example, daily running costs (stationery, postage, preparing minutes), audit fees and investment advice form part of operating or investment-related expenses.
Trustees must distinguish how much activity in these areas was related to assessable vs. non-assessable income. They must then apportion the costs correctly, report both, and only claim tax deductions for the assessable portion.
Expense apportionment can be based either on the actuarial %, by reference to the ATO formula, or by a method determined by the trustee which would need to have some reasonable basis.
Trustees also need to understand the differences between revenue and capital expenses.
This is a complex area of taxation. Even the ATO, in its Taxation Ruling TR 2011/6, says:
“The expression ‘capital expenditure’ is also not a defined term. Whether expenditure is capital in nature is determined on the facts of each particular case having regard to the principles established by case law. ”
Some examples may be helpful.
The Taxation Determination TD 95/60 discusses adviser fees in the following two examples:
The fund’s current investment strategy and trust deed include listed securities. Trustees use an adviser to decide on the specific securities to invest in.
This is a deductible expense because it is part of managing income-producing investments and, therefore, revenue.
There is a proviso that if the adviser addresses other matters during the investment discussion, then a portion of the costs must be allocated there and is not deductible.
The fund asks the adviser to set up a new long-term investment strategy.
This is a capital outlay, even if the fund’s current investments form part of the new strategy. It is part of the cost of acquiring assets for capital gains purposes. These expenses are not deductible.
An example from the ATO highlights the need to understand specific provisions of tax legislation.
The fund intends to acquire property, using the limited recourse borrowing arrangement (LRBA). This means setting up a special trust to hold the asset, and the fund engages a legal firm to do this.
All the costs associated with the actual borrowing (valuations, guarantees, mortgage documents, insurance, property and title searches) are deductible. Although acquiring the property is capital in nature, there is a specific deduction provision in section 25-25(2) of the Income Tax Assessment Act 1997 that covers borrowing money to produce assessable income.
However, the fund cannot claim the fees for legal services. They were incurred to “establish the arrangement for the borrowing”, not the borrowing itself – and are, therefore, capital in nature and added to the cost base of the purchase.
Fortunately for trustees, they can claim costs related to preparing and lodging annual returns. This includes preparing financial statements, actuarial certificates to determine the amount of tax-exempt income, and pre-lodgement audits.
All administration expenses are apportioned, except for the ATO Levy.
Costs such as late lodgement penalties or interest on overdue payments are not deductible expenses.
Section D of the SMSF annual return is where trustees will be glad if they have had good financial and tax advice during the year. This is where they can claim offsets to lower their tax liability or get a refund.
One such offset is franking credits, also called imputation credits. It leverages the low 15% tax rate for income on investments.
Franking credits are received predominantly from direct investment in Australian shares. They can also come from managed funds that invest in Australian shares.
How do they work?
The SMSF tax return instructions help complete the SMSF’s annual return.
However, gaining the full benefit of the tax concessions available to SMSFs and ensuring that they remain compliant with all regulations may need more expertise.
The SMSF Engine is 100% Australian-based and has specialised tax accountants with many years of SMSF administration experience. We specialise in providing administration services for SMSF accountants and advisers and also have a service for trustees.
We act as tax agents for our Daily Plus clients, preparing and lodging all returns on their behalf. Clients of our Daily and Annual administration packages will receive a proforma tax return. We can act as their tax agent for a small additional amount.
We have the software that gives real-time information on assets and balances, automates capital gains tax on listed securities, and has direct links to the ATO, SuperStream, and MyGovID to facilitate lodgements.
It is cloud-based, so you have 24/7 access to the information about all of the SMSFs you manage.
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