GST and self-managed superannuation funds
Brooke Hepburn-Rogers dissects the relationship between GST and SMSFs, pointing to gaps in legislation.
Goods and services tax (GST) is a 10 per cent tax directed towards the sales of goods and services acquired by a business or individual. GST is imposed on self-managed superannuation funds (SMSFs) as they are an investment fund, which is considered to be a financial service. However, there are gaps in legislation that allow SMSFs to reduce their input tax credit (RITC).
Why the GST is different in an SMSF to outside
As SMSFs are taxed with GST, it is more often than not charged on the payment of superannuation benefits. However, GST applies when SMSFs purchase goods and services where no GST credit has been applied. Alternatively, RITC may apply towards SMSFs.
Input taxes are imposed on SMSFs through GST due to payments being considered financial supplies. Therefore, the proceeds from a SMSF are not eligible for credit or a refund through GST. To clarify, the GST exemption will not apply to goods and services paid by SMSFs that provide services that yield proceeds.
In contrast to the above, an RITC can be used by SMSFs for partial credit on payments that are made. It can be used on the services paid to external managers of these funds, which can amount to a maximum of 75 per cent of the GST paid.
The services included are accounting, actuarial, legal fees if required, and other fees for maintaining an SMSF (see table).
However, certain services provided by SMSFs are taxed GST but with available credit, such as rent. Certain transactions made by SMSFs are taxed with GST but are, however, RITC exemptions. These transactions may include purchasing of computers and software as well as office supplies.
The claiming of GST (input tax credits) falls into three groups:
- Fully claimable – You can claim 100 per cent of the GST;
- Reduced input tax credits (RITC) - You can claim 75 per cent of the GST;
- Not claimable – No GST can be claimed.
Below is a general summary (and is not detailed):
|Full – 100% claimable||RITC – 75% claimable||NO CLAIM – 0% claimable|
|Commercial property purchase, including legal fees||Administration fees (except audit and tax return fees)||Audit fees|
|Commercial property expenses|
(excluding government charges such as rates)
|Investment management fees||Fees to prepare tax returns|
|Actuarial fees||Fees to prepare activity statements|
|Residential property purchase and expenses|
Provisions such as the imposition of GST on SMSFs that have exceeded the $75,000 threshold are important for SMSFs. Alternatively, SMSFs can register for GST and apply for exemptions. To further illustrate this point, SMSF’s financial supplies include the buying and selling of shares, the interest from a regulated financial instrument and renting and selling residential properties.
Common mistakes people make and why registering is sometimes not the best option
SMSF registration can be initiated by an individual, however, due to the complexity of the process of GST and the managing of their SMSF, they are more prone to mistakes. It is recommended that they receive help with the management of their GST and their fund.
When a fund has a turnover of less than $75,000, trustees of an SMSF are not required to register for GST but can still choose to.
However, if a fund is under the maximum $75,000 it is not recommended due to the work and administrative cost of registering.
Registering a SMSF is a long, drawn out process. The process requires the establishment of members and trustees, creating a trust and trust deed, opening a bank account and registering with the ATO before the SMSF can create an investment strategy.
When that is completed, an end date of the SMSF must be indicated in a plan.
After creating an SMSF, the trustees must rollover their existing super funds, organise the employer contributions, accepting contributions and investments following the legislative requirements. An SMSF must document and maintain records for 10 years.
Each year, the SMSF also needs to value its assets, prepare financial statements, appoint an auditor (which is an added cost), declare annual return, pay SMSF levy, and pay the tax due to the ATO. These requirements are lengthy, laborious and would entail additional accounting time and cost, which is not always in the best interest of the growth of SMSF fund.
It is recommended to hire a consultant that has an in depth knowledge of this process.
The errors created by people who lack the in depth financial knowledge are prone to making mistakes that can cost significant financial loss either in the short or long term, which can make the difference between a difficult or comfortable retirement.
A frequent mistake is the purchase of GST-free commercial property.
This is an ongoing concern because it requires both the seller and the buyer to agree that the property was under the s 38-325 of the A New Tax System (Goods and Services Tax) Act 1999. It can be easily missed as it is in the fine print of the contract.
Once the property is purchased, it is entered into the company’s record – this would exclude GST. However, SMSF would treat the property as GST refundable even though the property should be GST free.
When these type of errors are made and not immediately addressed, the SMSF is breaching the legislation, which states it is unlawful to declare an inaccurate value of a property asset. This would thereby trigger an audit from the ATO. This in turn would impose a cost due to charges and penalties.
Whether the error is intentional or not, the SMSF is more likely than not to be penalised. The longer it is left unreported the more sizeable the fine.
Brooke Hepburn-Rogers, manager at Stellar Super Pty Ltd.