ATO ID 2004/968: Deductions: management fees debited to an allocated pension account
Date of decision: 3 November 2004
Year of income: Year ended 30 June 2001 Year ended 30 June 2002 Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, a retiree in receipt of an allocated pension, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the management fees debited to their allocated pension account?

Decision
No. The taxpayer, a retiree in receipt of an allocated pension, is not entitled to a deduction under section 8-1 of the ITAA 1997 for the management fees debited to their allocated pension account as the fees have already been deducted when calculating the amount of pension included in assessable income.

Facts
The taxpayer, a retiree, is in receipt of an allocated pension. The taxpayer is paid a yearly amount of pension between a prescribed minimum and maximum limit. These limits are calculated each year according to the taxpayer's age and balance of their allocated pension account. The yearly amount of their pension payment(s) is withdrawn from their allocated pension account balance. The allocated pension account balance comprises: The fund manager invests the allocated pension amount and any earnings are credited to the taxpayer's allocated pension account. If the investments generate a loss this is debited to the allocated pension account. The fund manager incurs costs in managing the investments of the allocated pension amount. A proportion of these costs are passed on to the taxpayer in the form of a management fee which is debited to the taxpayer's allocated pension account each year. The management fee is an amount equal to a set percentage of the balance of the allocated pension account as at the end of the financial year.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a taxpayer to deduct from their assessable income any loss or outgoing to the extent it is incurred in gaining or producing assessable income. Taxation Determination TD 95/60 provides the Commissioner's view that on-going management fees are expenditure incurred in 'servicing' an investment portfolio and therefore allowable deductions under section 8-1 of the ITAA 1997. The allocated pension payments are included in the taxpayer's assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936). The amount of pension included in the taxpayer's assessable income under section 27H of the ITAA 1936 is the yearly amount of their pension payment that is withdrawn from their available allocated pension account balance after the annual management fees have been debited. Therefore the on-going management fees have been taken into account before the pension payment has been made and included in the taxpayer's assessable income. The taxpayer has therefore only been assessed on the 'net' amount of their pension, that is after the management fees have been taken into account. Accordingly no further deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997 for these on-going management fees.

Legislative references: Income Tax Assessment Act 1936 section 27H
Related public rulings and determinations: Taxation Determination TD 95/60
Subject references: Allocated annuities & pensions Management fees expenses