ATO Guidance: Deductibility of Financial Advice Fees

Written by Ben Waite

In the complex world of taxation, individuals often seek clarity on what expenses are deductible. In particular, certain Financial Advice Fees are in fact tax deductible. The Australian Taxation Office (ATO) has recently released a draft Taxation Determination shedding light on this matter. This draft determination outlines the circumstances under which an individual may be entitled to claim deductions for fees paid for financial advice.

Key Points from the Draft Determination:

Section 8-1 – General Deductions: Under this section, deductions are allowed for expenses incurred in gaining or producing assessable income. However, expenses of a capital nature or private/domestic expenses may not be deductible.

Section 25-5 – Tax-Related Expenses: Deductions can be claimed for expenses related to managing tax affairs, provided the advice is from a recognised tax adviser.

Apportionment: If expenses serve multiple purposes, such as both income generation and tax management, apportionment may be necessary to determine deductible amounts.

Evidentiary Requirements: Taxpayers need to provide sufficient evidence, such as itemised invoices, to support their deduction claims.

Examples Illustrating Deductibility:

Example: Sarah's Financial Advisory Fees

Sarah, a full-time employee, decides to seek financial advice from a certified financial adviser, Rachel, to better manage her investments and plan for retirement. Rachel charges Sarah a fee for her services.

Initial Consultation and Investment Recommendation:

Rachel conducts a comprehensive assessment of Sarah's financial situation, provides investment recommendations, and advises on tax implications.

Sarah pays Rachel a fee for this service.

In this case, the fee incurred for the initial consultation and investment recommendation may not be deductible under section 8-1, as it could be considered capital in nature. However, the portion of the fee specifically related to tax advice may be deductible under section 25-5.

Ongoing Investment Monitoring and Tax Planning:

Sarah engages Rachel on an ongoing basis to monitor her investments and provide tax planning advice.

Rachel charges Sarah a recurring fee for these services.

The portion of the ongoing fee directly related to investment monitoring may be deductible under section 8-1, as it contributes to the production of assessable income. Similarly, the portion specifically allocated to tax planning may be deductible under section 25-5.

Example: Mark's Estate Planning and Superannuation Advice

Mark, a self-employed consultant, approaches his financial adviser, Emily, for assistance with estate planning and optimising his superannuation strategy.

Estate Planning and Will Update:

Emily conducts a thorough review of Mark's assets, liabilities, and family situation to devise an estate planning strategy.

Emily also recommends updates to Mark's will and power of attorney to ensure his wishes are legally documented.

Mark pays Emily a fee for these services.

The portion of the fee directly related to estate planning and will updates may not be deductible under section 8-1, as it could be considered a private or domestic expense. However, any component specifically attributed to tax advice relating to estate planning may be deductible under section 25-5.

Superannuation Optimisation:

Emily advises Mark on strategies to maximise his superannuation contributions and take advantage of available tax benefits.

This includes setting up a self-managed superannuation fund (SMSF) and implementing salary sacrifice arrangements.

Mark pays Emily a fee for these superannuation advisory services.

The portion of the fee associated with establishing the SMSF may not be deductible under section 8-1, as it could be considered capital in nature. However, the component directly related to tax advice on superannuation contributions and salary sacrifice arrangements may be deductible under section 25-5.

In Mark's case, the deductibility of financial advice fees varies depending on the nature of the services provided and their specific relevance to tax matters. While certain components may be deductible under either section 8-1 or 25-5, careful consideration and apportionment are necessary to ensure compliance with the proposed guidelines.

Conclusion:

Understanding the proposed guidelines outlined in the draft determination is crucial for individuals seeking to claim deductions for financial advice fees. It provides clarity on the deductibility of such expenses and the evidence required to support deduction claims.

Remember, while the draft determination provides preliminary guidance, it's essential to monitor updates and consult with a tax professional for personalised advice tailored to your specific circumstances. Contact the team here at Salt to find out whether you will be eligible to benefit from this deduction.

You can also read more about the draft Taxation Determination here from the Australian Taxation Office.