The ATO issued taxation determination TD 95/60 in 1995 that looked at whether fees for receiving investment advice could be deductible under the general deduction provisions in section 8-1 ITAA 1997 if the taxpayer is not running an investment business. The ATO has guided the deductibility of financial advice fees. According to TD, fees incurred for drawing up an investment plan are generally not deductible as they are considered capital in nature and incurred too soon to produce assessable income. However, the old TD stated that ongoing management fees and retainers can be deductible, provided they cover investments that produce assessable income. If the advice covers other matters or relates partly to investments that do not produce assessable income, only a portion of the fee is deductible.
The ATO has recently withdrawn TD 95/60 and issued TD 2023/D4, which includes comments on the application of section 25-5. This draft determination does not represent a change in the Commissioner’s view on the deductibility of financial advice fees.
The ATO indicates that from 1 January 2022, entities that offer tax (financial) advice services for a fee or other reward must either be a qualified tax-relevant provider registered with ASIC or be a registered tax agent with the Tax Practitioners Board and meet the eligibility criteria to provide tax (financial) advice services.
In section 90-15 of the Tax Agent Services Act 2009, ‘Tax (financial) advice service’ is defined. Basically, it includes a service that is related to advising on or ascertaining liabilities, obligations or entitlements of an entity that could arise under a taxation law where it could be expected that a person would depend on the service to meet liabilities or claim entitlements under a taxation law.
Section 8-1
For a financial advice fee incurred by an individual who doesn’t run a business to be deductible under the general deduction provisions in section 8-1, you must show that the expense is spent in the course of gaining or producing the assessable income of the individual. The ATO makes the following key comments on this point:
• The fact that no income is gained/generated in the year in which the expense is incurred doesn’t necessarily prevent a deduction from being claimed;
• It doesn’t matter that the income that was expected to be earned was never actually earned.
However, timing can still be crucial. For example, fees for advice on a proposed investment before acquiring the asset aren’t deductible under section 8-1. On the other hand, fees incurred on a regular or recurrent basis for existing or ongoing income-generating investments are generally deductible.
Even if there is a relevant connection with income-generating activities, it is still important to consider the negative limbs of section 8-1. The ATO indicates that one-off expenses that can be expected to have lasting benefits are capital in nature. Fees relating to proposed investments are normally capital in nature and won’t be deductible under section 8-1. Also, fees that are private or domestic can’t be claimed as a deduction.
Section 25-5
Under section 8-1, the ATO’s statements on the tax treatment of financial advice fees are consistent with the previous determination, the new draft determination looks at whether financial advice fees given by financial advisers could be deducted under section 25-5. Section 25-5 lets someone claim a deduction for expenses incurred in managing their tax matters. However, a fee for advice about the operation of a Commonwealth law relating to taxation is not deductible under section 25-5 unless that advice is provided by a ‘recognised tax adviser’. Recognised tax advisers can be:
• a registered tax agent
• a registered BAS agent
• a qualified tax-relevant provider
• a legal practitioner
To be within the scope of section 25-5, the fee must relate to advice on managing that individual’s tax matters. Under section 25-5, no deductions can be claimed for capital expenditure, but expense relating to managing tax matters is not capital.
Practical Issues
Both section 8-1 and section 25-5 need the expenditure to be distributed in appropriate cases, where only a part of the financial advice fee can be deducted either under section 8-1 or section 25-5, a reasonable distribution of the fee would be required. According to the ATO, if there is no relevant evidence for the used apportionment methodology, then there will be no deduction.
As per the ATO, a fee disclosure statement, itemised invoice, or advice for agreement form that contains the following details is sufficient evidence:
• The name of the financial adviser
• The amount of the expenditure
• An explanation of the advice given
• The date the expense was incurred, and
• The date the invoice was generated.