There appears to be a recent trend where deductions claimed in respect of administration fees charged by portfolio managers to manage collective investment schemes are being disallowed by the South African Revenue Service.
This fee generally relates to the management of the entire portfolio which may have a mixture of returns primarily, local and foreign dividends, interest and capital gains. In practice taxpayer’s generally follow a simplified approach of apportioning the fees on a pro-rata basis across the different types of income.
The portion of the fee allocated to exempt income such as local dividends is not permitted as a deduction. The Income Tax Act also specifically prohibits the deduction of expenses against foreign dividends therefore the portion relating to foreign dividends is also not permitted.
With regards to the portion of the fee attributed to local and foreign interest, this is generally permitted as a deduction, in accordance with SARS practice note 31, but limited to the interest income earned.
The portion of the fee attributed to the capital gain is not permitted as a deduction however this fee is regarded as being related to cost of disposing of assets within the portfolio by the portfolio manager and accordingly should be added to the base cost of the asset in order to reduce the capital gain. In recent times it appears that SARS holds the view that these costs are not directly attributable to the disposing of such assets as this fee has also been attributed to other income such as interest income and therefore cannot be included in the base cost.
However there is a differing view in the industry where it is contended that the administration fee does partly relate directly to the disposal of the assets in the portfolio as it is only reasonable that such portfolio manager would have incurred certain costs in disposing of such assets on the taxpayers behalf and would seek to be remunerated in this regard by way of an administration fee.
As the portfolio managers generally do not provide a breakdown of the administration fees, the reasonable approach of pro-rating the administration fees across the various types of income is considered the most prudent and practical approach. This should not detract from the administration fee changing its nature and not being considered to be a direct cost of disposal of such asset/s.
Due to the complexities around the proper tax treatment of these administration fees it is advised that due care and professional advice be sought in this regard.