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Is a MER tax-deductible?

Discussion in 'Accounting, Tax & Legal' started by Rod_WA, 10th Aug, 2007.

  1. Rod_WA

    Rod_WA Well-Known Member

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    This from the ATO's You and Your Shares 2007:

    Management fees
    Where you pay ongoing management fees or retainers to investment advisers, you will be able to claim the expenditure as an allowable deduction. Only a proportion of the fee is deductible if the advice covers non-investment matters or relates in part to investments that do not produce assessable income. You cannot claim a deduction for a fee paid for drawing up an initial investment plan.


    Does this mean that the MER on a fund is an allowable deduction?
     
  2. voigtstr

    voigtstr Well-Known Member

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    Thats a good point, is Navra charging a management fee now? I cant see anything on the Navra tax statement.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    No - you need to understand the difference between how various fees are charged.

    Upfront and other fees which are taken directly out of your capital would be deductible as per the comments above.

    Other fees such as the fund management fee (MER) are taken from the capital of the entire fund and reflected directly in the unit price. Any returns you receive are net of fees - and you only pay tax on that net amount.

    So you can't claim fund manager MERs since they have already deducted the expense from your income

    If you were to claim you MER, you would also have to declare the gross income from the fund which is higher than what you actually received !!!!!
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Let me be more specific:

    Let's say you invest $10,000

    You pay 2% as an upfront fee to your advisor, this means that $200 is taken from your capital and you actually only invest $9800. As per the comments from the ATO, this $200 is tax deductible.

    Now, you've invested $9800 into your fund.

    Let's say the fund generates 10% gross income from its activities and charges a 1.5% MER.

    At the end of the year, you will actually receive effectively 8.5% net return after fund manager expenses.

    Now, here's where everyone gets confused:

    You don't receive the 10% income and then pay 1.5% of that to the fund manager ... you only receive the 8.5% income - the management fee has already been taken out before you get paid !!!

    In fact, you never get to see what the effective gross income was - the fund manager doesn't publish those figures, you only ever see the net income that you get paid after expenses. You only declare that net income and thus do not have to declare the gross income and claim the expenses.

    The whole process is hidden - you can't see it, as it is reflected directly in the daily unit price.

    Is that clear now ?

    By the way - if for some reason there were other fees payable to a third party (such as your advisor) directly out of your net income or capital (as opposed to out of the capital of the fund itself !!), then this would be another expense that would be tax deductible.