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Ruling

Subject: Trailing commission

Question 1

Is the trailing commission paid from your managed fund assessable income?

Answer

Yes.

Question 2

Are you entitled to a deduction for the initial payment made to the managed fund?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the documents provided with the application for private ruling.

Your financial adviser is paid a trailing commission each month from your managed fund.

Once a year, your financial advisor will return a portion of this payment to you.

You made an initial payment to the financial advisor for the set up of your managed fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97,

Income Tax Assessment Act 1936 Division 6,

Income Tax Assessment Act 1997 section 6-1,

Income Tax Assessment Act 1997 section 6-5, and

Income Tax Assessment Act 1997 section 10-5.

Reasons for decision

Question 1

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. 

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 mentally incapacitated) and is presently entitled to a share of the income of the trust, shall include that share of the net income of the trust.

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 on your personal investments that you received from your financial adviser.

Question 2

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Taxation Determination TD 95/60 deals with the issue of whether fees paid for obtaining investment advice are an allowable deduction for taxpayers who are not carrying on an investment business.

TD 95/60 explains that a fee for drawing up a financial plan is not deductible because it is not expenditure incurred in the course of gaining or producing the assessable income from the investments. It is too early in time to be an expense that is part of the income producing process as it is an expense that is associated with putting the income earning investments in place. Therefore the expense has an insufficient connection with earning income from the investments, and is considered capital in nature.

In your case, you paid an initial fee to set up the managed fund. This upfront fee was incurred at a point too soon to be considered as incurred in gaining or producing your assessable income. The expense in considered to be capital in nature.

Accordingly, the initial fee incurred is not deductable under section 8-1 of the ITAA 1997.