Particularly as they see retirement on the horizon, people often seek financial advice to ensure their wealth is maximised. Also, financial advice may be sought for a number of other reasons during the course of one’s life.
When the financial advisor gives you an invoice for their services, can you claim a tax deduction for the amount incurred? This is the topic of Tax Determination TD 2024/7, which was issued by the Australian Taxation Office (ATO) on 25 September 2024.
It is important to note that this TD is only applicable to individuals. That is, you can’t, for example, apply the ruling to investment advice purchased by a superannuation fund. Also, for the TD to be applicable, the individual must not be carrying on an investment business.
The TD restates some long-held views of the ATO about the deductibility of financial advice fees. The TD has been issued due to some changes in the non-tax law.
A deduction for any type of expense can only be claimed where the amount paid is incurred in deriving a person’s income. In addition, even if the expense is incurred in deriving a person’s income, the expense will not be deductible if it is of a ‘capital nature’ or of a ‘private or domestic nature’. All of these exclusions can have application depending on the circumstances in which the financial advice has been sought.
According to the ATO, if you seek financial advice about a proposed investment, there is insufficient connection between the income that may come from the proposed investment and the incurring of the expense to obtain financial advice. It is seen that the expense is preliminary to the deriving of the income and, therefore, does not have sufficient ‘nexus’ with the earning of the income.
Further, fees paid to put an investment in place for the first time are not deductible, according to the ATO.
The TD also says that non-deductibility extends to the situation where you have an existing adviser with existing investments, and you take advice regarding the investment of additional funds to be added to your investment portfolio. A further situation of non-deductibility arises when you have pre-existing investments and you consult a new advisor who devises a new investment strategy for you.
If you obtain financial advice in relation to your personal budgeting for home, the fees for this are also not deductible. The ATO considers this type of expenditure to be of a private or domestic nature.
So, what is deductible?
If you pay fees for ongoing financial advice in relation to an existing investment portfolio on a regular or recurrent basis, these fees will be deductible. This is because such fees are not considered to be of a capital nature. It’s not about setting up the investment structure, it’s about the maintenance and adjustment of the investments on an ongoing basis. This also extends to advice regarding retaining or disposing of existing investments.
To the extent the financial advice provides tax advice, this will be deductible because there are specific provisions in the tax law that give you this deduction.
If you obtain advice regarding an insurance product, the deductibility of the advice will depend on the type of insurance about which you are being advised. Advice about life, home and contents and general insurance is not deductible because the amounts claimed will not form part of your assessable income. On the other hand, advice regarding income protection insurance is deductible. This is because if a claim is ever made, the insurance proceeds will form part of your assessable income.
At times you may seek advice that provides a mix of deductible and non-deductible topics. In this case you must apportion the expenditure for the purposes of claiming it in your tax return. It is helpful if your financial adviser can do that for you on their invoice, but this does not often happen.
There are aspects of the ATO’s views as expressed in TD 2024/7 that are debateable from a tax technical viewpoint. However, if you don’t want trouble with the ATO, you will need to follow what the ATO says in the TD.