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Deductibility of Financial Planner Fees

The ATO has released a draft Taxation Determination, TD 2023/D4, outlining when an individual may be entitled to a deduction under sections 8-1 (general deduction provision) or 25-5 (tax related expenses) of the Income Tax Assessment Act 1997 for fees paid for financial advice.

This Determination replaces TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business? as a result of regulatory reforms to the financial services industry in recent years.  However, it does not represent a change in the Commissioner’s view on the deductibility of financial advice fees as outlined in TD 95/60.

When the final Determination is issued, it is proposed to apply to years of income commencing both before and after its date of issue.

Summary

The Draft Determination provides the following:

  • Fees for financial advice on a proposed investment prior to acquisition of an asset will not be deductible under section 8-1 because it is an expense that is associated with putting the income-earning investment in place. If the expenditure was not incurred, the taxpayer would not be in a position to earn income. Accordingly, the ATO does not consider the expenditure to have a sufficient connection with earning income from the investment
  • Fees for financial advice on a proposed investment are also not deductible under section 8-1 because the amount is considered to be capital or of a capital nature. This is because the expenditure is incidental to the cost of acquiring the income-producing investment
  • Fees incurred on a regular or recurrent basis for an existing or ongoing income-producing investment will be deductible under section 8-1. However, to be wholly deductible, all of the fees must relate to gaining or producing assessable income, otherwise only a proportion of the fees will be deductible
  • Expenditure incurred in managing your tax affairs is generally deductible under section 25-5, unless it is of a capital nature. Noting that expenditure is not considered to be capital expenditure merely because the taxation advice relates to matters of a capital nature.

Issues

Issues may arise where a taxpayer is invoiced personally for services, commonly, under an umbrella engagement letter for investments held in various entities including their superannuation funds (often in pension mode).

The deductibility to the individual in this case is doubtful.

Apportionment

Where the expenditure is partly deductible appointment is necessary, with fees being apportioned on a ‘fair and reasonable’ basis.  There is limited guidance on what is fair and reasonable in the Draft Determination, other than it ‘will depend on the facts and circumstances of the case’.

Further, it is up to the individual to provide evidence of the fair and reasonable method of apportionment. If sufficient evidence is not available to support the apportionment methodology used, no deduction will be allowable.

Individuals will need to ensure they keep appropriate records of the expenditure they incur during the course of the year from their Financial Planners and also the manner in which they have chosen to apportion the fees in the event of a review by the ATO.

Link to Ruling

https://www.ato.gov.au/law/view/print?DocID=DXT%2FTD2023D4%2FNAT%2FATO%2F00001&PiT=99991231235958

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