Edited version of private ruling

Authorisation Number: 1011647927272

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Ruling

Subject: Deductibility of management fees; Derivation of trust income

1. Are you entitled to a deduction for fees relating to the 'management costs' of your allocated pension, representing the portfolio management charges that are deducted from your account?

Yes.

2. Are you entitled to a deduction for fees relating to the 'other management costs' of your allocated pension, representing a notional amount of costs that are attributable to your account?

No.

3. Does your total trust distribution, representing an entitlement to a share of income of a unit trust, need to be declared in your 2009-10 income tax return, even though part of the distribution was actually paid at a later date?

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You are in receipt of an allocated pension.

You are paid a yearly amount of pension.

The yearly amount of your pension payment(s) is withdrawn from your allocated pension account balance.

The allocated pension account balance comprises:

· The sum used to purchase the allocated pension (allocated pension amount)

· Less pension payments withdrawn

· Plus earnings from its subsequent investment or less losses from its subsequent investment (change in investment value)

· Less ongoing management fees (portfolio management charges (PMC)).

The fund manager incurs costs in managing the investments of the allocated pension account. A proportion of these costs are passed on to you in the form of administration (PMC) fees to pay for the adviser's remuneration.

The fund manager deducts money from your pension account in respect of the administration (PMC) fees.

The Product Disclosure Statement provides that management costs not deducted directly from your account (other management costs) are deducted from the investment returns of the underlying assets before the unit price is struck. They are reflected in the daily unit price for each investment option.

You also hold units in a Cash Management Fund. They have provided an annual tax statement for the income period ended 30 June 2010.

The distribution on the annual tax statement relates to income derived by the trust in the 2009-10 income year.

Part of the amount included in the statement was not paid to you until July 2010.

You have indicated that you wish to account for this part of the distribution on a receipts basis.

You have provided copies of the statements supplied by the Fund.

Reasons for decision

Summary

You are entitled to claim the portfolio management charges you have incurred as a tax deduction as they are ongoing management fees for administration of your account.

The "other management costs" are not deductible as they have already been taken into account before your pension payment has been calculated. This means that effectively you have already received a deduction for this amount prior to receiving your pension amount.

The full amount of your trust income distribution will need to be declared as assessable income in your 2009-10 income tax return, even though part of this amount was actually not paid until July 2010. This is because you are assessable on the distribution in the year of income in which you are presently entitled to it, rather than the year in which the distribution is received by you.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a taxpayer to deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income.

Allocated pension payments are assessable under section 27H of the Income Tax Assessment Act 1936. The amount of pension included in your assessable income is the yearly amount of your pension payment that is withdrawn from your available allocated pension account balance.

The portfolio management charges fees. These fees are deducted from your account after the amount of pension has been calculated and can be claimed as a tax deduction.

The "other management costs" are a notional amount which is allocated to the management of your funds and this amount is taken into account before the pension payment has been calculated. Basically, the notional amounts are deducted to reduce the pension amount before it is calculated and you receive the remaining pension amount each year. Accordingly, you have already received a deduction for this amount prior to receiving your pension amount and as such this amount is not income tax deductible.

On the separate issue of when a distribution from a cash management trust is to be included in the assessable income, Taxation Determination TD 94/72 provides clarification.

TD 94/72 states that a unitholder is assessable on the distribution in the year of income in which the unitholder is presently entitled to a share of the income of the unit trust, rather than the year in which the distribution is received by the unitholder.

Accordingly, your full trust distribution will need to be declared as assessable income under section 6-5 of the ITAA 1997 in your 2009-10 income tax return, even though part of the distribution was actually not paid until July 2010.

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