Are financial advice fees a tax deduction?

Are financial advice fees a tax deduction?

Earlier this week the Australian Taxation Office issued tax determination TD 2024/7, which provides the Commissioner of Taxation’s views on what is or is not a tax deduction for people not carrying on an investment business.  

For fees paid to financial planners, tax deductions can be under the general deduction provisions of section 8-1 of the Income Tax Assessment Act 1997 or under the tax related provisions of section 25-5.

The tax determination advises:

Financial advice fees for a proposed or new investment are not considered deductible under section 8-1 because they are associated with establishing the income-earning investment.

The determination considers that where a person’s existing adviser provides advice on further investment to grow their portfolio, this is similarly not deductible.  

Where a person pays a new financial planner at the commencement of their engagement, where the advice involves the planner establishing the client’s circumstances and making recommendations or advising on the current portfolio, the determination also considers those fees are not a tax deduction under section 8-1.  

Recurrent fees, as the industry is now effectively required to charge clients, in respect of existing or ongoing income generating investments are deductible under section 8-1. This includes advice fees from the ongoing planner whether the asset mix is still appropriate for the person’s goals, needs and objectives and for advice on retaining or changing the portfolio.

Clients obtain advice from a financial planner regarding insurance products. The deductibility of these advice fees will mirror the tax treatment of the premiums for the insurance product and whether they are deductible under section 8-1. That is, adviser fees in respect of income protection insurance will be deductible under section 8-1 the same as the premiums for the income protection insurance.  Premiums for life, TPD or trauma insurance are not deductible under section 8-1, so the determination does not consider corresponding adviser fees are tax deductible.  

Sections 8-1 and 25-5 refer to tax deductions being available ‘to the extent’ an outlay complies with those provisions. This means that part of an expenditure may be a tax deduction but another part may not. For example, fees for advice on income protection and trauma insurance will be a deduction under section 8-1 ‘to the extent’ that the advice relates to the advice for the income protection cover.  

The determination specifies that the fees need to be apportioned between deductible and no-deductible on a fair and reasonable basis. It concedes that what is “fair and reasonable” will depend on the individual facts and circumstances.  

As always, a person must keep sufficient records, such as adviser tax invoices and payment records, to claim the adviser fees as a tax deduction.  

We can help the adviser or the client with maximising the fair and reasonable tax deduction.