DATE OF ISSUE: 6 APRIL 1995
DEDUCTION OF MANAGED INVESTMENT ENTRY FEES WHERE SUCH FEES ARE REBATED TO PENSIONER
Introduction
The purpose of this instruction is to detail a change in policy concerning the deduction of entry fees from income which is derived from managed investments that are assessed on an ongoing basis.
Background
2.When a pensioner invests in a managed investment, he or she is frequently required to pay an entry fee to the fund manager. Where a managed investment is assessed on an ongoing basis, Section 46AF VEA provides that any such fees paid by a pensioner can be deducted from income assessed on that investment over a 12 month period, provided they represent 'reasonable costs' incurred in making the investment.
3.The fee paid by a pensioner is often used by the fund manager to pay a commission to investment advisers who recommend and sell their managed investment product.
4.In most situations, it is quite clear that the total fee has been paid by the pensioner and that it should be deductible in full from income assessed on the investment. In some cases however, where a pensioner is dealing through an investment adviser, the adviser may refund to the pensioner all or part of the commission paid to the adviser by the fund manager. This is often the case where the pensioner may have paid the adviser a separate amount for financial advice on a fee-for-service basis.
Current DVA Assessment Policy
5.Currently, where a pensioner pays an entry fee but receives nothing in the way of a refund, this Department allows the full amount of the fee to be deducted. Where the pensioner does receive a refund however, the amount allowed as a deduction is the total fee less the refund. This policy is based on the concept that the pensioner has not actually incurred the full fee because a refund has been paid.
6.However, iniquitous treatment could arise under this policy where one pensioner uses the services of an adviser who refunds any commission paid by fund managers, and another pensioner uses the services of an adviser who does not. The pensioner who uses the services of an adviser who does not pay a refund quite clearly incurs the full entry fee and is able to deduct this in full from their managed investment income.
7.In respect of the pensioner who gets commissions refunded however, it is not so clear how much of a particular entry fee the pensioner has actually incurred, since a pensioner in this situation has usually paid a separate amount to their adviser which at least in part covers the entry fees for investments. The adviser pays a refund to the pensioner such that they are not paying entry fees twice - once in the actual entry fee charged by the fund manager and a second time in the fees charged by the adviser. Thus it could be argued that such a pensioner has in fact incurred the full entry fee despite the refund paid to them. Under departmental policy prior to release of this DI, a pensioner in this situation would not have been able to deduct the full fee from their managed investment income.
Policy Change to be Implemented
8.Effective immediately, managed investment entry fees charged by fund managers will be allowed to be deducted in full from income assessed on an ongoing basis, irrespective of any refund paid to the pensioner by an investment adviser. The rationale behind this change is that the previous situation, where any refund paid to the pensioner was subtracted from the value of the entry fee, could lead to inequitable treatment of pensioners in certain circumstances as described above.
9.This change in policy ensures that the inequity described above should not arise and that pensioners will not be discouraged from using fee-for-service advisers. This is desirable since fee-for-service arrangements are becoming increasingly popular and there is also a greater likelihood of independent advice being provided to pensioners under a fee-for-service arrangement.
Review of Existing Assessments Involving Fees
11.This policy change will apply only to new cases arising from the date of issue of this DI, and no retrospective action is required. However, in instances where a pensioner specifically requests review of the value of fees allowed as a deduction, and the fee allowed as a deduction was reduced due to a refund from the pensioner's investment adviser, the full fee should be allowed as a deduction from the date incurred and the pensioner's rate adjusted accordingly from that date.
Enquiries
12.If you have any enquiries in relation to this Instruction, please contact Laurie Howell on telephone 06-289 6706.
W R MAXWELL
A/G DIVISION HEAD
COMPENSATION