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A small investor has won her case against the Inland Revenue Department over the deductibility of a $1292 "establishment fee" paid to financial planning firm IPD.
This is the second recent case where the IRD has had its decision on the deductibility of financial planning fees overturned. (An earlier one, CIR v North, was reported in Good Returns last week - click here to see the story).
In this latest case the department originally disallowed a taxpayer's claim that her $1292 establishment fee paid to IPD in 1991 was deductible. It claimed the fee was paid for the establishment of a portfolio, therefore it was a capital expense and was non-deductible.
The investor objected to that decision and had it overturned by Judge Barber in the Taxation Review Authority last month.
In his decision Judge Barber said the fee was paid to IPD to restructure the taxpayer's $30,000 portfolio which was solely invested in bank deposits. After the changes were made the portfolio included other asset classes such as fixed interest and shares.
"The issue is simply whether she paid the establishment fee for a capital structure, (or a readjustment of a capital structure), or whether the fee was for investment advice in relation to an existing portfolio," the judge says in his written decision.
"I find that, essentially, the objector expanded her investment horizons after taking written advice from IPD. She then allowed her $30,000 bank deposits investment portfolio to be reconstructed using not only her previous investment methods, but also other areas of investment - most of which she had herself considered previously but decided to be then inappropriate.
"I do not think that the expansion or diversification of the objector’s investment fund is so startling or unusual as to represent a capital reconstruction," he says.
However, Judge Barber also noted that there is "a fine line between the restructuring of a portfolio and obtaining and following investment advice".
He said that although IPD had called it an establishment fee, not too much should be read into the name (in the IRD's 1996 binding ruling an "establishment fee" is a non-deductible capital expense, and a "monitoring fee" is a deductible revenue expense).
Judge Barber also noted that the IRD and taxpayers should be able to resolve these cases on the "principles respectively enunciated" in two earlier TRA decisions (and a subsequent High Court judgement), rather than before the courts.
He is also critical of the IRD for chasing "thoroughly decent and honest citizens" over such a small sum of money.
"It seems a shame to me that (the taxpayers have) been so upset by a government department over the sum of $1,292.00.
"One might have thought that the resources involved in chasing sterling citizens for small amounts of money would be better applied to scrutiny of large corporate accounts. Perhaps, the IRD should have focused upon a more compelling similar case," he Judge Barber says.
Click here to see the full TRA decision.
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