ATO Interpretative Decision
ATO ID 2004/968
Income tax
Deductions: management fees debited to an allocated pension accountFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, a retiree in receipt of an allocated pension, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the management fees debited to their allocated pension account?
Decision
No. The taxpayer, a retiree in receipt of an allocated pension, is not entitled to a deduction under section 8-1 of the ITAA 1997 for the management fees debited to their allocated pension account as the fees have already been deducted when calculating the amount of pension included in assessable income.
Facts
The taxpayer, a retiree, is in receipt of an allocated pension.
The taxpayer is paid a yearly amount of pension between a prescribed minimum and maximum limit. These limits are calculated each year according to the taxpayer's age and balance of their allocated pension account.
The yearly amount of their pension payment(s) is withdrawn from their allocated pension account balance. The allocated pension account balance comprises:
- •
- the sum used to purchase the allocated pension (allocated pension amount)
- •
- plus earnings from its subsequent investment or less losses from its subsequent investment
- •
- less ongoing management fees, and
- •
- less pension payments withdrawn.
The fund manager invests the allocated pension amount and any earnings are credited to the taxpayer's allocated pension account. If the investments generate a loss this is debited to the allocated pension account.
The fund manager incurs costs in managing the investments of the allocated pension amount. A proportion of these costs are passed on to the taxpayer in the form of a management fee which is debited to the taxpayer's allocated pension account each year. The management fee is an amount equal to a set percentage of the balance of the allocated pension account as at the end of the financial year.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a taxpayer to deduct from their assessable income any loss or outgoing to the extent it is incurred in gaining or producing assessable income.
Taxation Determination TD 95/60 provides the Commissioner's view that on-going management fees are expenditure incurred in 'servicing' an investment portfolio and therefore allowable deductions under section 8-1 of the ITAA 1997.
The allocated pension payments are included in the taxpayer's assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).
The amount of pension included in the taxpayer's assessable income under section 27H of the ITAA 1936 is the yearly amount of their pension payment that is withdrawn from their available allocated pension account balance after the annual management fees have been debited.
Therefore the on-going management fees have been taken into account before the pension payment has been made and included in the taxpayer's assessable income. The taxpayer has therefore only been assessed on the 'net' amount of their pension, that is after the management fees have been taken into account.
Accordingly no further deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997 for these on-going management fees.
Date of decision: 3 November 2004Year of income: Year ended 30 June 2001 Year ended 30 June 2002 Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
section 27H
section 8-1
Related Public Rulings (including Determinations)
Taxation Determination TD 95/60
ATO ID 2004/339
Keywords
Allocated annuities & pensions
Management fees expenses
Date reviewed: 2 April 2015
ISSN: 1445-2782