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Draft Taxation Determination

TD 93/D138

Income tax: is a taxpayer allowed a deduction under subsection 51(1) for management fees, in an income year, if those management fees are calculated as a percentage of the taxpayer's net profits of that same income year?

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FOI status:

draft only - for comment

Preamble

Draft Taxation Determinations (TDs) present the preliminary, though considered, views of the ATO. Draft TDs may not be relied on; only final TDs are authoritative statements of the ATO.

1. No. A contract or agreement, which provides for management services to the taxpayer in an income year, and states the fee be calculated as a percentage of net profit of that same income year, only authorises the taxpayer to make the payment when due. The taxpayer will only become liable for the management fees when the net profit of the year of income can be determined.

2. The taxpayer's net profit can only be determined after the end of the financial period (Galland v FC of T 86 ATC 4885; (1987) 18 ATR 33). Until then, the management fee is only an expected liability of that income year. This applies even though the management fee is authorised by the contract or agreement. A liability which is only expected or likely to occur is not an allowable deduction in the income year(FC of T v James Flood Pty Ltd (1953) 88 CLR 492; 5 AITR 579).

3. A deduction for management fees calculated as a percentage of an income year's net profit will be allowed in the following income year, ie allowed as deduction in the income year in which the previous income year's net profit is determined.

4. On the other hand, if a condition of the contract or agreement specifically provides for an advance of the management fees, and an advance is made during the income year by the taxpayer, then the amount advanced is incurred for the purposes of subsection 51(1) of the Income Tax Assessment Act 1936.

Commissioner of Taxation
3 June 1993

References


BO UMG0020

ISSN 1038-8982

Related Rulings/Determinations:

TD 93/138W

Subject References:
accruals
advances
consultancy fees
deductibility
management fees
prepayments
provisions

Legislative References:
ITAA 51


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