Edited version of private ruling

Authorisation Number: 1011655884384

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. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income Tax - CGT Cost Base

Question 1

Can you include the fees you have incurred to set up your managed fund portfolio into the second element of the reduced cost base of your managed fund under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You and your spouse approached a financial institution's financial advisor on the best returns for your funds.

You advised they recommended that you set up a managed fund, for which as advisors, they would charge a fee (up to a maximum of $X) for the set up of the managed fund portfolio.

Later, you transacted the setting up of the fund, and a month later, the financial institution subsequently sold down on one of the funds in the portfolio and withdrew $X from the managed fund as their set up fee.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 110-25(3)

Income Tax Assessment Act 1997 section 110-35

Income Tax Assessment Act 1997 section 110-55

Income Tax Assessment Act 1997 subsection 110-55(2)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Summary

You can include the fees you have incurred to set up your managed fund portfolio into the second element of the reduced cost base of your managed fund under section 110-25.

Detailed reasoning

Section 110-55 is the operative provision which contains general rules about the reduced cost base of a capital gains tax (CGT) asset.

Section 110-55 states that the reduced cost base of a CGT asset consists of five elements. Subsection 110-55(2) provides that all of the elements (except the third one) of the reduce cost base of a CGT asset are the same as those for the cost base. Accordingly, subsection 110-25(3) states that the second element is the incidental costs incurred. Section 110-35 establishes that incidental costs are costs incurred to acquire a CGT asset or that relate to a CGT event that happens in relation to the asset and include remuneration for the services of a broker.

Taxation Determination TD 95/60 provides the ATO view on the deductibility of fees paid for obtaining financial advice. TD 95/60 provides that where the fee is for drawing up an investment plan, the cost is considered to be a capital expense, incidental and relevant to outlaying the price of acquiring the investment(s).

In your case, you incurred a fee to set up your managed fund portfolio. Your managed fund portfolio is a capital asset from which assessable income is expected to be derived. Similar to fees for drawing up an investment plan as mentioned in TD 95/60, your set up fees are expenses directly related to your acquisition of your managed fund portfolio as you would otherwise not be able to set up the managed fund. Therefore, these set up fees are also of a capital nature.

The set up fees are considered in the nature of brokerage fees, which, in line with subsection 110-35(2), are incidental costs. As a result, according to section 110-25, you can include these set up fees into the second element of the reduced cost base of your managed fund.