December 2023 saw two consequential announcements just a week apart – Financial Services Minister Stephen Jones outlined the second tranche of Delivering Better Financial Outcomes (DBFO) reforms and the Australian Taxation Office (ATO) released a draft determination to clarify the rules around deductibility of financial advice fees.
If advisers were polled at the time on which of these two announcements would have the largest impact on the provision of financial advice over 2024, it’s doubtful tax deductibility would have won.
It’s not exactly a fair contest, given nothing has actually come from the minister’s announcement.
Yes, there has been another update (almost exactly a year after the first), but so far the advice profession has yet to see even draft legislation.
In contrast, the ATO’s draft determination was able to be relied upon immediately and when the Tax Office delivered its final determination in September, it largely reinforced the draft and provided confidence that advisers could rely on the document going forward.
Apparently, the way to get something done is any measure that doesn’t require legislation.
In fairness to the implementation of the DBFO reforms, it wasn’t exactly a quick process getting the tax changes over the line either, with conversations taking place on getting a new ruling in 2019. It was also the first update in almost 30 years, so we can’t over-praise the ATO here.
Many advice firms have not put a system in place to take advantage of the new determination. For any firms that are not confident in their understanding of the change just yet, this is probably the right call.
Speaking on the ifa Show earlier this year, Conrad Travers, director and principal consultant at Tangelo Advice Consulting, said misunderstanding within the profession has led some to believe that upfront fees are not tax deductible under any circumstances, stopping advisers from taking advantage of the recent change.
“I would say be careful who you listen to at the moment, because I’ve seen some advice from people who may not have read the determination properly and they’ve seen the headline that’s not deductible under 8-1 but haven’t gone to the next level of detail to understand that the changes are applicable under 25-5,” Travers said.
“So, the first thing I would say is, if you want to do something in this space, make sure you read it.”
The Financial Advice Association Australia (FAAA) is expected to provide guidance on utilising tax deductions in early 2025. As such, Travers recommended that those who are hesitant or unsure could be better off waiting as they will still be able to reap the benefits for clients down the track.
“I think the majority of financial advice businesses, if they’re wanting some practical guidance, could just wait for the FAAA guidance in the new year because that will explain to them exactly what they need to do to implement it in their practice,” he said.
But for practice principals and advisers more generally, there can be massive benefits to putting in the work to get ahead of the game.
According to Robert Devlin, the head of advice for Tribeca Financial, working out how TD 2023/D4 practically applies can produce great results for clients.
“Our clients have been so appreciative of the proactive approach to this, because clients don’t know about that draft determination. They didn’t know that the change came into December,” Devlin told ifa in August.
He added: “It was a bit of a process to get consistent on what we as a firm believed, then to educate our advisers around what the parameters were, what the ATO examples were, what the specific wording said. Obviously, that requires training and time, but we haven’t looked back.”
Devlin acknowledged that Tribeca was able to go down this path, in part, because it is a self-licensed firm. However, he argued that it is something all firms should be looking into in order to make advice more affordable – particularly considering Tribeca found that around 60 to 80 per cent of its clients’ advice was related to their tax affairs.
“I really do think it’s a worthwhile exercise. If you’re a small firm, it might be a little easier, because you can make your own determinations on your own and work with your close accountants on a large basis,” he said.
“I think you’ve got to put some frameworks around it, lots of education, lots of training. But again, I think you’ll see the value in it. The clients will appreciate it, your accounting partners will appreciate it.”
While the benefits of the change is being felt in some corners of financial advice already, as more firms get across the rules and guidance becomes more widely available, it could be the biggest boost for advice in 2025 as well.
If this was the biggest change of the year, it just shows what a lackluster year it was. No one can actually explain with 100% clarity how these tax deductions work either.
No accountants will apply the deduction and advisers shouldn’t be subject to making calls on apportioned amounts, we don’t even get access to the ato portal. Pathetic ruling and impotent change