A common error that we see here is where an individual is given a tax invoice for advice that relates entirely to a SMSF. For example, a client may ask an adviser to review an investment strategy for their SMSF.
In this case, the client is the SMSF. The tax invoice should be made out accordingly.
Whether the SMSF can claim a tax deduction for the advice depends on the nature of the advice. But, because income contributed to a SMSF is typically taxed more lightly than income received by a client directly, the overall after-tax cost of the advice is less when the invoice is paid by the SMSF.
Consider an example. A client in the 45% tax bracket approaches you to conduct a review of the investments within their SMSF. Your fee for doing this is $2,000 and we will assume that the invoice is not in itself tax deductible. If the invoice is made out to the client, then he or she will need to earn more than $3,600 pre-tax in order to pay the invoice.
If the invoice is made out to the SMSF, the SMSF will need to pay the full $2,000. However, the client only needs to contribute $2,352 of their income into their super fund in order for the fund to have $2,000 remaining after tax. If, instead of having to earn $3,600 in their own hands to afford the invoice, the client could instead contribute that amount to finance a contribution to their super fund, the fund would pay $540 in tax. This leaves $3,060 in the fund. After the fund pays this tax, it pays your invoice for $2,000. It is then left with $1,060 in the fund.
In this way, you can see how invoicing the fund effectively halved the invoice from the client’s point of view. They gave up $2,000 in purchasing power in their own hands, but were left with an after-tax benefit in their super fund of a little over $1,000.
This requires the client to contribute the full $3,600 that they would otherwise have needed to earn to pay the invoice. If, instead, the client simply sacrifices the $2,352 needed for the fund to have $2,000 remaining to finance the invoice payment, then the client has only given up $1,300 or so of actual purchasing power (this is the amount they would have left in their pocket after paying tax on an amount of $2,352). Looked at this way, the effective after-tax cost to the client falls from $2,000 to $1,300 – a saving of 35%.
Either way, you can see how paying an invoice that is not directly deductible to the client via the SMSF is cheaper overall. In cases where your advice covers both an SMSF and other parts of a client’s profile, once again use can be made of the apportionment principle: that part of the fee that relates to the SMSF can be invoiced to the SMSF.