To help navigate the complicated regulatory regime that dictates what is – and isn’t – tax deductible for financial advice fees, four associations have created a guide to help with best practice.
The guide is co-authored by the Financial Advice Association Australia along with accounting bodies CA ANZ, CPA Australia, and the Institute of Public Accountants covering Tax Determination 2024/7.
TD 2024/7 is the updated tax determination governing which advice fees are tax deductible, which was finalised last September after the Australian Taxation Office concluded on a consultation last year to replace the thirty-year-old TD 95/60.
The determination outlines the circumstances in which individuals may be entitled to claim deductions for financial advice fees because advice is unlikely to be solely comprised of tax advice, therefore full tax deductibility of fees will be rare.
Financial advice topics like super contribution strategies, super pension strategies (whether through APRA-regulated funds or SMSFs), advice on whether insurance policies should be held inside or outside of super, SMSF establishment and maintenance, gearing strategies, estate planning, investment structuring for taxation purposes, and debt reduction plans that involve taxation strategies are among those covered by the new regime.
Sections 8-1 (general deductions) and 25-5 (tax-related expenses) of the Income Tax Assessment Act 1997 outline the deductibility of advice fees.
Section 8-1 applies if the advice fee is incurred as part of producing assessable income; while section 25-5 applies if ongoing advice relates to managing tax affairs. This includes certain superannuation-related advice, tax-deductible debt strategies, CGT planning, or analysing tax implications of different structures and investments.
Any part of ongoing advice fees that do not relate to assessable income producing activities or managing tax affairs will not be deductible.
Ongoing fees may be fully or partially deductible to an individual if incurred while producing assessable income (section 8-1), and ongoing fees may also be fully or partially deductible if they relate to managing the individual’s tax affairs (section 25-5), as is the case with initial advice fees.
Claims can only be made against one section and not twice, and the guide believes the ATO takes the view that tax (financial) advice falls within the meaning of tax affairs in Section 25-5.
“Therefore, to the extent that financial advice is tax (financial) advice provided by a QTRP or registered tax agent, financial advice fees may be tax deductible under s 25-5,” the guide said.
Fees paid from superannuation funds can’t be included in the deduction, as the expense has not been paid by the specific taxpayer.
Fees deducted from investment vehicles other than superannuation – including managed investment schemes and managed accounts – are potentially deductible depending on the contractual arrangements between the financial adviser, client and investment vehicle.
The treatment between an individual and couple varies as well; fees for a couple will have to be apportioned between both parties before a tax deduction is calculated.
The determination only applies to personal needs and does not apply to advice given to companies, trusts or partnerships.
If the client is not entitled to claim GST credits, then the GST component of any deductible fees can also be claimed.
Advisers will also be required to comply with record-keeping requirements under the law to substantiate deductions due to an audit from the ATO.
The guide recommends not only relying on the copy of the Statement of Advice or Record of Advice as evidence, but also any working papers that showed work done on strategies and products ultimately not recommended, and to clearly identify if the advice relates to section 8-1 or section 25-5.
