Are financial adviser fees deductible

The ATO has released TD 2023/D4 which looks at when deductions can be claimed for fees paid for financial advice. The draft determination focuses on individuals who do not carry on a business and replaces TD 95/60 which was originally issued almost 30 years ago.

First, the ATO considers how the general deduction provisions in section 8-1 ITAA 1997 apply to financial advice fees.

Consistent with the ATO’s original view, ongoing fees for financial advice in relation an existing or ongoing income producing investments should normally be deductible under the general deduction provisions.  This would include continuing advice on the suitability or performance of an individual’s income producing investments that they already own.

On the other hand, deductions typically won’t be available for financial advice fees under the general deduction provisions in the following circumstances:

• Fees relating to financial advice on new proposed investments that have yet to be purchased, including advice on whether such investments are suitable for the individual. These fees are considered either to be capital in nature or preliminary to the actual earning of assessable income (i.e., relate to putting the income earning investment in place).
• Fees for once-off financial advice that can be expected to provide an enduring benefit, such as advice on estate planning or advice on starting a self-managed superannuation fund.  The issue is that these fees are normally considered capital in nature.
• Financial advice fees that are considered private in nature, such as advice relating to household budgeting.

While this is largely consistent with the previous determination and doesn’t represent a change in the ATO’s position, the new draft determination has been broadened to also look at when tax (financial) advice fees provided by financial advisers could be deductible under section 25-5.

In broad terms, this section allows someone to claim deductions for fees paid for advice on a Commonwealth taxation law to the extent the advice relates to managing their tax affairs.  However, there are some key issues that need to be considered.

First, the advice needs to be provided by a recognised tax adviser, which normally means in this context either a qualified tax relevant provider registered with ASIC or a tax or BAS agent registered with the Tax Practitioners Board.

Second, the advice needs to relate to managing that individual’s tax affairs.  The expenditure also can’t be capital expenditure, although expenditure is not capital expenditure merely because the tax affairs concerned relates to matters of a capital nature.

While the ATO considers that tax affairs include tax (financial) advice provided by a financial adviser under Tax Agent Services Act 2009, the warning is that not all advice provided by a financial adviser will qualify.  Advice that won’t qualify includes factual information about a financial product that does not actually involve applying or interpreting tax laws to the individual’s personal circumstances.

The ATO makes the following observations when it comes to claiming deductions for financial advice fees:

• Where only part of the financial advice fee is deductible either under section 8-1 or section 25-5, a reasonable apportionment of the fee is required; and
• The individual should have sufficient evidence of the expenditure before claiming a deduction.  For example, an invoice with the name of the financial adviser, the amount, an explanation of the advice, the date of when the expense was incurred and the date when the invoice was produced should suffice as written evidence.

Lastly, while the draft determination does not consider the situation of financial advice fees being paid by a superannuation fund, it is important to be aware that Treasury recently issued draft legislation for consultation in this area.  This draft legislation includes a proposed measure that ensures deductions are available for certain personal advice in relation to members when paid for by their superannuation fund.