The ATO has released a new draft determination (TD 2023/D4), clarifying the rules around deductibility of financial advice fees.
Last year, the ATO said it is due to review its position on the tax deductibility of financial advice fees and update its position, which was set in 1995.
In line with this, the Tax Office has now published a draft taxation determination (TD) that is broaden and replaces TD 95/60.
“This determination replaces TD 95/60 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,” the ATO said.
It also clarified that this determination does not apply to individuals carrying on a business, and does not consider circumstances where fees for financial advice are paid from a superannuation fund.
Ultimately, what the draft revised guidance states is that upfront fees are deductible to the extent that they relate to tax advice, and there is far greater clarity on the deductibility of ongoing fees.
Welcoming the announcement, Sarah Abood, CEO of the Financial Advice Association Australia (FAAA), said the group is “broadly pleased” with the revised guidance, and will provide further feedback as part of the public consultation process.
“This revised guidance is sensible and welcome. The existing Tax Determination is almost 30 years old, and a substantial amount of regulatory change has occurred since 1995,” said Ms Abood.
In addition, financial advisers are now recognised as Qualified Tax Relevant Providers (QTRPs), and are regularly providing tax advice to clients.
The revised guidance is open to feedback until 2 February 2024.
Examples
The ATO also provided several real-world examples of how the new rules would apply.
Example 1 – initial advice arrangement
Claudio is a financial adviser authorised to provide personal advice to retail clients of a financial services company which holds a financial service licence. Claudio is a recognised tax adviser for the purposes of section 25-5.
Claudio meets with a new client Min-Ji, an Australian resident who earns salary, has savings in an interest-bearing account and who is a member of a superannuation fund. Min-Ji is seeking financial advice from Claudio to enable her to increase her regular income by generating higher investment returns.
Claudio and Min-Ji agree that Claudio will provide the financial advice for a fee. Claudio makes relevant enquiries through the completing of a fact-finding process to determine Min-Ji’s needs and objectives.
Claudio assesses Min-Ji’s financial situation by considering her assets and liabilities, income, risk profile and tax profile. Claudio recommends that Min-Ji invest her savings in a managed investment scheme which provides a periodic return. In providing this advice, Claudio interprets and applies the tax laws to Min-Ji’s circumstances and provides advice about liabilities, obligations and entitlements when acquiring, holding and disposing of the investment. It is reasonable to expect that Min-Ji will rely on the advice provided by Claudio.
To the extent that Claudio charges Min-Ji for his work in recommending the investment and acquiring the units in the fund on her behalf, this is not deductible under section 8-1 because it is a fee incurred as part of putting the income-earning investment in place and does not have a sufficient connection with earning income from the investment. Further, it is considered to be capital or of a capital nature and may be included in the cost base of the investment for capital gains tax purposes.
Min-Ji will be able to claim a deduction under section 25-5 in relation to the tax (financial) advice provided by Claudio. This is because the advice was provided by a recognised tax adviser and was in relation to managing Min-Ji’s tax affairs. The tax (financial) advice in this situation is the advice relating to the taxation implications of the investment in the specific fund nominated. As the advice is provided for multiple purposes, Min-Ji needs to apportion the total amount of the fee between the different components of the advice on a fair and reasonable basis.
Example 2 – continuing arrangement
After Min-Ji acquires the investment in the managed fund, she agrees to enter into an ongoing arrangement where Claudio will continue to provide her with advice on the suitability and performance of her investment for a fee. Claudio also agrees to provide Min-Ji with budgeting advice to enable her to increase her savings.
From time to time, Claudio suggests that Min-Ji change her mix of investments in the managed fund in order to achieve her original goals and objectives. When Min-Ji agrees with these changes, Claudio actions Min-Ji’s request to modify the risk profile of her investment in the managed investment scheme. This does not result in Min-Ji acquiring or disposing of her interest in the managed fund.
In this case, the component of Claudio’s fee that relates to the ongoing advice on the suitability of Min-Ji’s investments is deductible under section 8-1. This is because the expenditure is incurred in the course of gaining or producing assessable income from the managed investment scheme. In this case there is a sufficient connection between the fee for the ongoing advice and the investment in the scheme which produces Min-Ji’s assessable income.
The fee for the advice provided on the budgeting matters is not deductible under section 8-1 as it is not incurred in gaining or producing Min-Ji’s assessable income. It is considered to be a private or domestic expense. The fee is also not deductible under section 25-5 as it is not a fee incurred in managing Min-Ji’s tax affairs. As the advice is provided for multiple purposes, Min-Ji needs to apportion the total amount of the fee between the different components of the advice on a fair and reasonable basis.
Would it not be a whole lot easier and more cost effective for all parties to simply allow all taxpayers an annual deduction of $3,000 for advice fees from a licensed financial adviser whether upfront, ongoing or both? Surely that would encourage more Australians to both seek and keep receiving advice? But then I woke up and realised the brown cardigan wearers in Canberra would have kittens over this idea and feel it is way too simple so they have organised a 2 week meeting to unpack, repack and arrive back at their current mess of a ruling lol…
As mentioned, there is little change from the 30 year old ATO viewpoint.
If you want your client to get a deduction, apportion the advice yourself on a reasonable basis.
Either that or issue a couple of invoices.
Interesting that the ATO think this clarifies it. Why then does it lead me to ask what percentage of the initial advice is tax deductible?
Anyone know a business that will review an SoA and certify the proportion deductible generally and under s25? Will make a lot of $ss
Non the wiser, like so much within this Industry
100%. Clear as mud like much of what comes from Government.
The ATO couldn’t clarify butter.
So the ATO claims that their opinion hassn’t changed, it’s just that they’ve decided, after 30 years, to explain what they mean.
Gee, thanks.
So can we get access to the ATO tax portal now?
So what are the changes?