Deductibility of management fees – TRA provides warning for taxpayers

Tax Alert - August 2015

By Brad Bowman and Sarah Sussman

The recent Taxation Review Authority (TRA) case of Case 10/2015 [2015] NZTRA 10 considered the deductibility of management fees with respect to management services provided between related parties and, if amounts were found to be deductible, whether the arrangement constituted tax avoidance.

The taxpayer was the corporate trustee of a trust.  The trust had trustee income of approximately $1.116m and was the beneficial owner of a number of subsidiary companies, which were largely in losses.  The taxpayer claimed that one subsidiary provided management services to other subsidiaries held by the taxpayer.  With respect to the provision of these management services, the taxpayer received a deduction of $1.116m (and the subsidiary returned income of $1.116m).  The Commissioner denied the deduction for the management fee.

In the TRA, the Commissioner argued that the management fee was not deductible on the basis it did not have sufficient nexus with the production of the trust’s income or the carrying on of its business.  The Commissioner also argued that, if the management fee was deductible, it was part of a tax avoidance arrangement which was void against the Commissioner for tax purposes.

Nexus with income

The TRA held that the management fee did not have a nexus with the trust’s income.  The management fee was therefore not deductible to the trust.

In drawing this conclusion, the TRA made reference to the following:

  • The entry of a management fee expense paid to the subsidiary in the Trust’s financial statements did not establish that management services were actually provided;
  • There was no evidence of any company resolution or any agreement between the Trust and the subsidiary for the charging of management services; 
  • There was no invoice for the management fee or supporting accounts for any of the work allegedly done; and
  • The subsidiaries held by the trust were separate legal entities.  It followed that any expenses that were incurred in the management of those subsidiaries were deductible by those companies and not by the Trust.


If the management fee is ignored, the trust would have had income of $1.116m with tax to pay of $348,280.  The payment of the management fee had the effect of reducing the trust’s income to a level where it had no tax to pay (i.e. a tax benefit was obtained).

The TRA considered that Parliament would not have contemplated using provisions in relation to the deductibility of management fees in a manner which effectively shifted profits and losses between related parties.  In this structure, instead of using the management fee to transfer profits to the subsidiary, Parliament would have intended a distribution of the trust’s profit as beneficiary income (as the TRA had noted occurred in previous income years).

In addition to this, the TRA noted that the arrangement was effected solely by a series of journal entries and corresponding adjustments of liability for loans (as opposed to any real consideration moving between parties).  This was considered to be contrived and artificial, and to make no commercial sense, which contributed towards the TRA conclusion that the tax avoidance purpose or effect of the arrangement was not merely incidental.

The TRA therefore held that, if the management fees were deductible, the arrangement would have constituted a tax avoidance arrangement and would have been void against the Commissioner.

Deloitte comment

While the facts of this case illustrate clear avoidance, we consider that it is a timely reminder to ensure related party transactions are documented correctly. There must be actual services provided which have been valued appropriately.  It is also important that taxpayers:

  • Make sure agreements to provide management services are documented via a company resolution or an agreement between the related parties;
  • Make sure the provision and payment of management services are accompanied by an appropriate invoice documenting the transaction; and
  • Be wary of merely recording transactions by way of journal entry.  Genuine consideration must move between the related parties

If you have any questions in relation to this, please don’t hesitate in contacting your usual Deloitte advisor.


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