Edited version of your private ruling

Authorisation Number: 1012320670775

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Rebate of commissions and donation of artwork

Issue 1

Question:

Is the rebate of trailing commissions that you received in relation to your annuity fund assessable income in your hands?

Answer:

Yes.

Issue 2

Question:

Is a deduction allowable in respect of the donation of art work by you and your spouse to a museum overseas?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You bought an annuity via a financial advisor.

You terminated your relationship with your financial advisor because you were dissatisfied with the financial advice that had been given.

However, your former financial advisor still received a certain percentage per annum trailing commission on the purchase price of your annuity, equivalent to a certain amount per year.

During the income year you appointed a new advisor. You immediately informed the annuity fund company that you had terminated the services of your former financial advisor and appointed another entity as your new broker.

During the income year you received from your new broker a cheque for a cash back amount, being a certain percentage of the trailing commissions that your new broker had received from the annuity fund company in respect of your annuity fund.

The cash back payment from your new broker is annual trailing fees and commissions cash back and is not in respect of entry fees. Your new broker receives trailing commissions from the annuity fund company periodically in relation to your annuity, and then rebates a certain percentage of the trailing commissions they have received on your account over the past year back to you.

The cash back amount is paid yearly by your new broker.

During the income year you and your spouse made a donation to a museum in an overseas country. The work was valued by the museum.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-1(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Subdivision 30-B

Income Tax Assessment Act 1997 Subdivision 30-BA

Reasons for decision

Issue 1

Summary

The commission that your new broker receives from the annuity fund company in relation to your capital as an investor (that is, your annuity fund) but is under an obligation to pay to you, is received on your behalf and so is trust income. Under the trust provisions of the income tax law, your assessable income includes the rebate of commissions that you receive.

Detailed reasoning

Assessable income

Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income consists of ordinary income and statutory income. 

Ordinary income is income according to ordinary concepts (section 6-5 of the ITAA 1997).

Statutory income is not ordinary income, but is included in assessable income by specific provisions of the tax law (section 6-10 of the ITAA 1997). These provisions are listed in section 10-5 of the ITAA 1997, and include the trust provisions. 

Trust provisions 

A trust is an equitable obligation binding a person (the trustee) to deal with property over which he/she has control, for the benefit of persons called beneficiaries. 

The trust provisions are set out in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936).

 Under section 97 of Division 6 of the ITAA 1936, the assessable income of a beneficiary who is not under a legal disability (that is, who is not a minor, bankrupt or insane) and is presently entitled to a share of the income of the trust, shall include that share of the net income of the trust.

Assessability of rebate of commissions 

Taxation Ruling TR 93/36 considers the assessability of a commission (that is not in the nature of an initial service fee or entry fee) paid by an investment fund to an investment adviser in relation to the capital of an investor, where the investment adviser is under an obligation to pass on the amount to the investor.

TR 93/36 states that if an investment adviser is legally entitled to receive a commission from an investment fund in relation to the capital of an investor but is under an obligation to pay that commission to the investor, the commission is received on behalf of the investor. The Ruling states that in those circumstances the commission is trust income, and is subject to the provisions of Division 6 of the ITAA 1936. 

The Ruling goes on to state that if the investor is not under a legal disability and is presently entitled to the amount, under section 97 of the ITAA 1936, the assessable income of the investor includes the amount of the commission less all allowable deductions, such as fees paid by the investor to the investment adviser in respect of the collection and administration of the commission. 

In accordance with TR 93/36, under section 97 of the ITAA 1936, your assessable income includes the rebate of commissions that you received from your financial adviser.

Issue 2

Summary

Your donation was not made to a deductible gift recipient (DGR), so a deduction is not allowable for your gift.

Detailed reasoning

Division 30 of the ITAA 1997 deals with the deductibility of gifts. To be deductible a gift must:

· be made to a deductible gift recipient (DGR)

· really be a gift

· be a gift of money or a certain type of property, and

· comply with any relevant gift conditions.

In order for a donor to be able to claim a tax deduction for a gift, the gift must be made to a DGR. The income tax law determines which organisations can receive income tax deductible gifts. They are called DGRs and are either:

· endorsed by the Australian Taxation Office (ATO) or

· listed by name in the tax law.

Therefore, for a gift to be deductible the recipient of the gift must either be a listed or an endorsed gift recipient.

An organisation will be a gift recipient if it is listed in Subdivision 30-B of the ITAA 1997. In your case, the donation was made to a museum in an overseas country, which is not listed as a gift recipient in Subdivision 30-B of the ITAA 1997. 

Subdivision 30-BA of the ITAA 1997 deals with the endorsement of entities as DGRs. A review of the Tax Office's DGR register shows that the museum is not endorsed as a DGR organisation for Australian taxation purposes.  

Your donation was not made to a listed or endorsed gift recipient (DGR), so the donation is not a deductible gift under Division 30 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).