IFM36340 - Disguised fees: Definition of management fee

Definition of management fee

ITA07/S809EZB

There are three conditions (IFM36300) to consider when deciding if a disguised fee has occurred. Condition 2 (IFM36315) makes reference to a ‘management fee’ arising. This section explains what a ‘management fee’ is for the purposes of the disguised investment management fees (DIMF) rules.

What is a management fee?

Broadly the intention is to include any sum arising from an investment scheme (IFM36230) (including a sum in the form of a loan or advance or allocation of profits) which is not:

• a repayment (in full or part) of capital invested by the individual in the scheme;
• arm’s length profits on an investment made by the individual in the scheme; or
• amounts that are determined to be carried interest (which are not income based carried interest).

Essentially management fees are remuneration paid by investors to a management team for the performance of services.  It will be difficult, if not impossible, for a manager to transfer or alienate the right to that remuneration in a way that avoids the DIMF rules.

Are the profits on an investment at arm’s length?

A return on an investment is considered to be at arm’s length if the return:

• is on an investment which is of the same kind as investments made in the scheme by external investors;
• is reasonably comparable to the return to external investors on those investments;
• has terms governing it that are reasonably comparable to the terms governing the return to external investors on those returns.

For a return to be reasonably comparable to a return due to external investors, we would expect the rate of return to be reasonably comparable and any other factors relevant to deciding the amount of the return to be reasonably comparable.