ATO ID 2002/658: Deductibility of Approved Deposit Fund Management or Administration Fees
Date of decision: 27 March 2002
Year of income: Year ended 30 June 2001
Business line: Small Business/Individual Taxpayers

Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for management or administration fees charged by the trustee of an Approved Deposit Fund (ADF) that are offset against the accumulated net earnings available to members of the fund?

Decision
No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for management or administration fees charged by the trustee of an ADF as they have not been incurred in gaining or producing assessable income of the taxpayer.

Facts
The taxpayer received a redundancy payment from their employer. The taxpayer rolled over the lump sum payment into an ADF. The trustee of the ADF charges ongoing management or administration fees against the income of the fund. The effect of the fees is to reduce the accumulated net earnings available to the taxpayer.

Reasons for decision
Summary: An ADF is a trust fund that is bound by the ordinary principles of trust law. The trustee of the fund assumes responsibility for managing the assets, deriving income from those assets and paying expenses, such as management or administration fees, incurred in earning that income. As an ADF is liable to pay tax on its investment income, the ADF would be entitled to claim a deduction against its investment income for the administration or management fees charged by the trustee to manage the fund's assets. The fees are incurred by the fund even though the consequential effect is to lower the accumulated net earnings available to members of the fund. The ADF may document its payment of the fees as a debit against the members accounts or deduct it from the gross earnings before crediting the net amount to its members accounts. This does not alter the fact that the fees are actually incurred by the ADF. 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, or relate to the earning of exempt income. When the taxpayer withdraws their deposits and accumulated earnings (net of fees) available from their ADF account, the amount becomes assessable income in their hands as an eligible termination payment (ETP). The taxpayer has not, however, incurred the management or administration fees in deriving this assessable income. As the taxpayer has not incurred the management or administration fees, no deduction is allowable under section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Subject references: Administration expenses Fee expenses Financial services fee expenses Financial services industry expenses Management fees expenses