Assessable income: rebate of ongoing management fees

Is the rebate of ongoing management fees for an investment in a unit trust assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The rebate of ongoing management fees for an investment in a unit trust is assessable income under section 6-5 of the ITAA 1997.

The taxpayer has invested an amount in a unit trust. The prospectus for the unit trust provided a choice of different fee structures: • a Nil Entry Fee option with annual ongoing management fees; or • an Entry Fee option of 4% of the initial investment with the same ongoing management fees.

Ongoing management fees are paid by the trust to a fund manager for managing the trust's assets. These fees are expenses of the trust and are taken into account in calculating its net income and resulting distribution of net trust income to unit holders.

Investors who chose the Entry Fee option receive a partial rebate of the ongoing management fees on a regular periodic basis. Their annual Taxation Statement from the unit trust shows the rebate of ongoing management fees and their share of net trust income as separate items and a note on the Statement advises that although the rebate is included in non-primary production income, it is not part of the investor's trust income distribution. It also states that the tax treatment of the rebate is unclear.

The fund manager pays the rebate directly to the investors who chose the Entry Fee option from the unit trust's prospectus. It is only paid to those investors and is not part of the net trust income distributed to all unit holders.

Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of an Australian resident includes income according to ordinary concepts. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer.

The prospectus sets out the conditions for the taxpayer's entitlement to the rebate. As the taxpayer has satisfied those conditions this means that the rebate of ongoing management fees is therefore expected and can be relied upon by the taxpayer as they know that they are entitled to the rebate.

Under the terms of the prospectus, the rebate is payable on a regular periodic basis. Therefore the receipt of the rebate of ongoing management fees by the taxpayer has the necessary element of being an expected periodical payment as in Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 ATR 443. Even if payment of the rebate was on a one-off basis, it would still be assessable income (see Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693; Westfield Limited v. Federal Commissioner of Taxation (1991) 28 FCR 333; 91 ATC 4234; (1991) 21 ATR 1398 and Warner Music Australia Pty Ltd v. Federal Commissioner of Taxation (1996) 70 FCR 197; 96 ATC 5046; (1996) 34 ATR 171 and also Taxation Ruling TR 92/3).

Therefore, as the receipts of rebate of ongoing management fees have the character of ordinary income, they are assessable income under section 6-5 of the ITAA 1997.