Edited version of your written advice

Authorisation Number: 1012963830191

Date of advice: 11 February 2016

Ruling

Subject: Assessable income

Question 1

Is the commission you receive from your professional planner assessable income?

Answer

Yes.

Question 2

Are you entitled to a deduction for a portion of the professional planner fees you incur?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You have insurance policies taken out through a professional planner.

The professional planner passes on the commissions he/she receives to you.

You incur ongoing fees for the professional planner to check on your investments each month, review your professional plan through the year, answer your ongoing questions, give you economic update advice, processing the ongoing commission rebates, to assist with processing any insurance claims, setting the income level as your cash flow requirements change.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1936 section 97

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived from all sources whether in or out of Australia during the income year.

Commission income paid under an agreement is regarded as ordinary income and is assessable under section 6-5 of the ITAA 1997.

Taxation Ruling TR 93/36 states that commission income which is received by an intermediary authority from an investment fund (other than an initial service fee or entry fee) and then passed on to the investor under an obligation or liability, is assessable in the hands of the investor.

TR 93/36 states that if an investment advisor 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 Income Tax Assessment Act 1936 (ITAA 1936).

Under section 97 of Division 6 of the ITAA 1936, a beneficiary who is not under a legal disability (that is, who is not a minor, bankrupt or insane) and is presently entitled to a share of the income of the trust, shall include that share of the net income of the trust as assessable income.

Although the rebate you will receive relates to insurance products, the principles in TR 93/36 also apply to your circumstances. Accordingly your assessable income includes your rebate of the commissions that you will receive from your professional planner.

Management fees

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.

Taxation Determination TD 95/60 discusses the deductibility of expenses incurred in obtaining investment advice.

TD 95/60 specifies that on-going management fees or retainers are deductible where the expenditure is incurred in 'servicing' an existing portfolio. The Determination further explains that over the period of an investment plan, advice may be received suggesting changes be made to the mix of investments held. This would normally be part and parcel of managing the investments in accordance with the plan and the advice may be from the original investment adviser or from a new adviser. Provided the advice is not in relation to drawing up an investment plan, the expenditure incurred will be an allowable deduction. However, any fee paid for initial professional planning or establishing an initial investment portfolio rather than continuing advice on an existing portfolio plan is considered capital in nature and not deductible.

In your case, you incurred professional planner fees to manage your investments, review your professional plan and manage your insurances. The portion of the fees that relate to managing and reviewing your current plan are deductible expenses under section 8-1 of the ITAA 1997. The expenses incurred to manage your insurances and process the commission rebates are not deductible as they do not relate to the earning of assessable income. Although the commissions received are included in your assessable income, the expenses are incurred to manage your insurances, not in the gaining of assessable income in the form of the commissions. Therefore, the portion of the professional planner fees in relation to your insurances is not deductible under section 8-1 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).