The tax deductibility of financial advice has always been an important issue for investors. Most people want a clear set of rules about which advice expenses they can, and can’t, claim as a tax deduction.
Unfortunately, there are no specific rules about the deductibility of advice fees, which means these costs fall under the ordinary deductibility rules.
These rules say that you’re allowed a deduction for any expense you incur in gaining or producing income subject to tax (officially called “assessable income”) except where the expenditure is: of a capital, private or domestic purpose; relates to earning-exempt income; and specifically isn’t allowed as a tax deduction by the tax laws.
Here are some examples (which don’t involve financial advice fees but you’ll understand the point):
• Personal contributions to super wouldn’t ordinarily be tax deductible – because they would be seen as private expenditure – but specific tax rules allow some of these contributions as a tax deduction, if you satisfy various rules.
• The costs incurred in earning pension income in a super fund aren’t allowed as a tax deduction because that income is exempt from income tax.
So where does this leave financial advice fees? Well, let’s look at some different types of fees.
1. Setting up an investment portfolio or financial plan
This is a capital expense and is not tax deductible. Way back in 1995, the Australian Taxation Office (ATO) released a Tax Determination on this subject (TD 95/60). It said putting investments into place has an insufficient connection to earning income from those investments. The costs incurred to draw up a financial plan also fall into the same category.
2. Existing investment portfolio – management and retainer fees
Financial advice fees for servicing an existing investment portfolio are allowed as a tax deduction. However, to be fully deductible, the fees must relate to earning income. This means that if the advice relates to items that don’t earn income (for example, insurance premiums, management of pension assets or private loans), then only a proportion of the fees will be deductible.
Sometimes you might receive advice to alter the mix of investments held. If this is part and parcel of managing your investments, then these costs will be deductible. But if the costs relate to drawing up an investment plan, then it isn’t allowed as a deduction.
3. Investment loan arranging fee
This is considered to be a borrowing expense and is tax deductible over the lesser of five years or the life of the loan.
However, the purpose of this loan has to be to earn income, which is subject to income tax.
4. Cash flow management and other issues
If any advice fees relate to cash flow management or other issues (such as insurance needs), then this doesn’t relate to earning assessable income for tax purposes and is therefore not tax deductible.
These are not incurred directly by you and hence aren’t tax deductible.
Breakdown of costs
Ideally, your financial adviser will break their costs down so you have some documentary evidence on what can and can’t be claimed as a tax deduction.
If they can’t do this, then the ATO will accept a reasonable estimate. For example, if your adviser spends 15 per cent of their time reviewing your current income-producing investments, then 15 per cent of your adviser’s fees is tax deductible.
For more than 30 years, the financial advice industry has been pushing to make all advice fees – including commissions – tax deductible in all instances. The government has successfully ignored all this pleading and I’d be surprised if the rules, as I’ve described them here, change to a significant extent in the near future.
Other things you can claim
There is a tax ruling (TR 93/17) that says the following expenses incurred by a superannuation fund are ordinarily deductible:
• Actuarial costs.
• Accountancy fees.
• Audit fees.
• Costs of complying with the (previous and now superseded) Occupational Superannuation Standards Act 1987 and Regulations (unless the cost is a capital expense).
• Trustee fees and premiums under an indemnity insurance policy.
• Costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself) e.g., interest on money borrowed to secure temporary finance for payment of benefits, medical costs in assessing invalidity benefit claims and costs in calculating and testing reasonable benefit limits of members.
• Investment adviser fees and costs in providing pre-retirement services to members.
• Other administrative costs incurred in managing the fund.
The ATO is about to release a new draft version of the ruling. Its scope and depth are not yet clear, but presumably, it’ll be finalised before the end of 2014, and is something to keep an eye on.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.