A major financial services player has called for reform of the tax treatment of advice fees and commissions, to remove bias in the system against “true fee-for-service” financial advice.

A submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into financial products and services says “all financial advice fees, whether relating to the preparation of the initial financial plan, or its ongoing managment, should be deductible”.

National Australia Bank wealth management subsidiary MLC says there is “a tax bias in favour of commission paid by manufacturers against fees paid by customers”.

“MLC recommends all financial advice fees, whether relating to the preparation of the initial financial plan or its ongoing management, should be tax-deductible,” the submission says.

“MLC recommends that the GST aspects of these fees should also be reviewed. Currently, treatments can vary, but generally an individual investor cannot recover GST on financial advice fees; however, some providers may pass a credit back, depending on the particular structure of their product.”

The MLC submission says that to date, the courts and the Australian Taxation Office have drawn “the rather subtle distinction between fees/payments ‘incurred in the course of gaining or producing assessable income’…rather than fees/payments that are not incidental or incurred in the course of gaining or producing assessable income”.

“As a consequence, the distinction has been made between fees incurred for drawing up the initial financial plan, which are not deductible, on the grounds that it is not expenditure incurred in the course of gaining or producing assessable income from the investments. That is, it is too early in time to be an expense which is part of the income producing process,” it says.

“This is a similar treatment afforded to investments with an entry fee, which is non-deductible as it has an insufficient connection with the earning of any income.

“These costs are considered to be more incidental to the drawing up of the plan and the outlay of the price of acquiring the investment and are capitalised as part of the cost base of the assets acquired.

“This can be contrasted with on-going management fees or retainers which are considered to be deductible on the grounds that they relate to the ‘servicing’ of the portfolio or the management of the income producing investments rather than their actual selection and acquisition.”

MLC says fees for ongoing monitoring, reviewing and adjustments to a financial plan would “normally be regarded as management of the investment mix”.

“On these grounds it would generally be an allowable deduction. However, where significant investments are added (as a result of say a superannuation payment being received), the fee flips over to being more of a capital nature,” it says.

“Where and how the fee moves from being on revenue account to one of a capital nature is very subjective and varies from plan to plan.

“As a comparison, where commissions are paid by manufacturers, they are fully deductible to the manufacturer as the commissions are clearly being paid to generate taxable income for the manufacturer. 

“Clearer rules around the tax deductibility status of all such fees especially the difference between fees paid by investors and commissions paid by companies would simplify the seeking of advice and not lead to particular structures and payment methods being used that are not in the best interests of the investor.”

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