ATO Interpretative Decision

ATO ID 2004/339

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

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 amounts are not incurred in the gaining or producing of 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 the allocated pension account.

The yearly amount of their pension payment(s) is withdrawn from their allocated pension account balance. The allocated pension account balance constitutes the sum used to purchase the allocated pension plus earnings from its subsequent investment, less ongoing fees and pension payments withdrawn.

The fund manager invests the allocated pension amount and 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 relevant pension fund. 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. The fund manager debits the taxpayer's allocated pension account each year with an amount equal to a set percentage of its balance as at the end of the financial year. The fees paid are not dependent on the amount of earnings of the taxpayer's investment in the fund or the amount of pension payment received by the taxpayer in a given year.

Reasons for Decision

Subsection 8-1(1) of the ITAA 1997 allows a deduction for a loss or outgoing to the extent it is incurred in gaining or producing assessable income. However, subsection 8-1(2) precludes a deduction where the loss or outgoing is of a capital, private or domestic nature, or relates to the earning of exempt income.

The meaning of 'incurred in gaining and producing assessable income' was considered in Federal Commissioner of Taxation v. Cooper (1991) 29 FCR 177; 91 ATC 4396; 21 ATR 1616. In that case Lockhart J said:

For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end.;...This test of deductibility has been explained in subsequent judgements of the High Court, so that to be deductible the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income...The essential character test is also applied to determine if the expenditure is of a capital, private or domestic nature...

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 fund manager incurs costs in managing the investments of the relevant pension fund. A proportion of these costs have been passed on to the taxpayer in the form of a management fee which is debited to the taxpayer's allocated pension account. The management fee is calculated as a percentage of the balance of the taxpayers allocated pension account.

The fees paid by the taxpayer are not dependent on the amount of earnings of the allocated pension amount or the amount of pension payment made in a given year. There is no direct relationship between the management fee and the pension amount which is included in the assessable income of the taxpayer under section 27H of the ITAA 1936.

The fees do not have the essential character of expenditure incurred in the course of producing the pension payments that are included in the taxpayer's assessable income.

Therefore, the management fees are not deductible under section 8-1 of the ITAA 1997.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002 Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Federal Commissioner of Taxation v. Cooper
   (1991) 29 FCR 177
   91 ATC 4396
   (1991) 21 ATR 1616

Keywords
Allocated annuities & pensions
Deductions & expenses
Management fees expenses

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  16 April 2004

ISSN: 1445-2782