Taxation Ruling
IT 2428
Income tax : lump sum service fee payable on issue of units in property trust
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FOI status:
May be releasedFOI number: I 1206467PREAMBLE
In a decision dated 2 March 1987 the Administrative Appeals Tribunal (Mr B.J. McMahon, Senior Member) held that a taxpayer was not entitled to a deduction for a 'once for all' service fee paid in relation to the acquisition of units in a property trust. The Tribunal's decision is now reported as Case U53 87 ATC 351 and 18 ATR Tribunal Case 42.
FACTS
2. In the year ended 30 June 1982 the taxpayer purchased units in the Hooker Future Growth Fund No.4 and the Hooker Property Investment Trust No.5. He claimed deductions for amounts paid by way of "service fee" to the respective trusts.
3. The service fee for the No.4 Fund was 6 per cent of any unit par value i.e. each $1 unit cost $1.06. The service fee for the No.5 Trust was 7 cents per dollar and was included in the issue price of $1 i.e. 93 cents plus 7 cents service fee.
4. In each case the service fee was to be paid only once during the life of the Trust. The offer document for the No.4 Fund made no reference to the type of services to be rendered or how or when they were to be rendered, it simply stated it was a payment in advance for services to be rendered throughout the life of the Fund.
5. The prospectus for the No.5 Trust stated the fee was "for the setting up and promotion of the trust and a continuing information service for unit holders throughout the life of the trust".
6. The net cost of the units was not deductible, of course, being of a capital nature. The only question at issue was whether the service fee was deductible or whether it was also of a capital nature.
DECISIONS OF THE TRIBUNAL
7. Mr McMahon held that the two components of the issue price of the units were an indissoluble whole and both fall to capital.
8. The service fee was a once only charge for which subsequent owners of a unit would not be liable. This would be reflected in the price someone would be prepared to pay for a unit already issued.
9. In so far as a service fee is a reimbursement for the cost of setting up and promotion of the Trust, it is clearly a capital item.
RULING
10. The Tribunal's decision is consistent with the long held official policy, stated in Taxation Ruling No IT 5, that the service fee expense is of a capital nature, being incurred as part of the purchase price of units in the particular Trust.
COMMISSIONER OF TAXATION
9 July 1987
References
ATO references:
NO 87 5795-0
Date of effect:
Immediate
Related Rulings/Determinations:
IT 5
Subject References:
PROPERTY INVESTMENT TRUSTS
SERVICE FEES
Legislative References:
51(1)
Case References:
Case U53
87 ATC 351
Tribunal Case 42
18 ATR 3270