ATO signals willingness to update tax deductibility of advice

The ATO is due to review its position on the tax deductibility of financial advice fees and update its position, which was set in 1995.

In a notice last week, the Tax Office announced a draft taxation determination (TD) that would broaden and update TD 95/60.

“This draft determination will set out the Commissioner’s preliminary view on the deductibility of financial advice fees under sections 8-1 (deductions) or 25-5 (deductions for tax-related expenses) of the Income Tax Assessment Act 1997 for individuals who are not carrying on a business,” the ATO said, adding that this is expected to be completed mid-2023.

Responding to the announcement, the Financial Planning Association of Australia (FPA) said the ATO’s decision to update its guidance on the tax deductibility of financial advice fees is very welcome.

FPA chief executive Sarah Abood said the ATO’s consultation process could be a game changer.

“The FPA has long been advocating for broad tax deductibility of both initial and ongoing financial advice fees. One of the quickest and easiest ways to make quality financial advice more affordable for consumers, would be to make it tax-deductible in full,” Ms Abood said.

“While we continue to advocate strongly for this outcome with government, we’ve also been calling out concerns with the ATO’s current guidance on deductibility of advice. Tax Determination 95/60 considers an upfront fee paid for an investment plan in 1995. IT39 reflects an ongoing fee paid on an investment portfolio in 1980. Much has changed in our profession since then, and we believe it’s critical that the guidance be updated to consider the personal advice, subject to the best interest duty, that’s delivered by professional financial planners today.”

Ms Abood explained that the ATO’s commitment to issue a new TD — which she said indicates its willingness to modernise its longstanding view on this important issue — will provide more certainty to both advisers and the broader community of Australians who benefit from comprehensive financial advice.

“There are two critical areas of the current tax determination we’re keen to see reviewed. The first relates to the timing of advice. The current view is that financial planning advice happens ‘too early in time’ to be considered part of the income-producing process. However, in our view, it’s the character of advice that should determine its tax treatment, rather than purely the timing of the fee paid,” she said.

“Secondly, there is currently no ATO view on the tax treatment of tax (financial) advice — which, in our view, should be fully deductible as a cost of managing tax affairs.

“The FPA will continue to work closely with the ATO, and wider profession, to help ensure that tax deductibility of financial advice fees becomes a reality in all stages of the financial advice process.”