Claiming tax deductions for financial advice fees: The final position

Are financial advice fees tax deductible? We look at the ATO’s final position.

In September 2024, the Australian Taxation Office (ATO) finalised its position on when individuals who aren’t carrying on an investment business can claim deductions for fees paid for financial advice.

TD 2024/7 sets out when an individual may be entitled to a deduction under sections 8-1 (general deductions) or 25-5 (tax-related expenses) of the Income Tax Assessment Act 1997 (ITAA 1997) for fees paid for financial advice. While the final version of the determination is similar to the draft released in February 2024, in many respects, there are some important differences to be aware of.

When can an individual client claim a deduction for financial advice fees?

The answer to what is deductible will largely depend on what the financial adviser is advising on, with deductibility being expanded to include tax (financial) advice services by an adviser who is either registered with ASIC as a tax (financial) adviser or a registered tax agent.

Tax (financial) advice service is defined in section 90-15 of the Tax Agent Services Act 2009. Broadly, it includes a service that relates to advising on or ascertaining liabilities, obligations or entitlements of an entity that could arise under a taxation law where it could be reasonably expected that a person would rely on the service to satisfy liabilities or claim entitlements under a taxation law.

Generally:

And, here is why:

Financial advice in relation to existing or ongoing income-producing investments is generally deductible.

The determination considers how the general deduction provisions in section 8-1 ITAA 1997 apply to financial advice fees.

Consistent with the ATO’s original view, ongoing fees for financial advice in relation to existing or ongoing income-producing investments should generally be deductible under the general deduction provisions. This would include continuing advice on the suitability or performance of an individual’s income-producing investments that they already own.

However, the ATO distinguishes between advice provided by an existing adviser and advice provided by a new financial adviser at the commencement of an advisory engagement.

What’s not ‘generally’ deductible?

In general, tax deductions are only available under section 8-1 if there is a sufficient connection with earning income and if the expenditure is not capital or private in nature.

Deductions typically won’t be available for financial advice fees under the general deduction provisions in the following circumstances:

• Fees relating to financial advice on new proposed investments that have yet to be purchased, including advice on whether such investments are suitable for the individual. These fees are considered either capital in nature or preliminary to the actual earning of assessable income (i.e., related to putting the income-earning investment in place).
• Fees for first time advice from a financial adviser at the commencement of an advisory engagement, recommending and advising on the individual’s income-earning structure. That is, fees for the initial assessment and recommendations on a new client’s investment structure is unlikely to be deductible.
• Fees relating to a client’s contribution of additional investment funds.
• Fees for one-off financial advice that can be expected to provide an enduring benefit, such as advice on estate planning or starting a self-managed superannuation fund. The issue is that these fees are typically considered capital in nature.
• Fees relating to non-deductible life insurance, total and permanent disability insurance, or trauma insurance.
• Financial advice fees that are considered private in nature, such as advice relating to household budgeting.

Tax financial advice on tax-related issues is deductible… in some circumstances

While the ATO’s position in the determination on the application of the general deduction rules in section 8-1 is generally consistent with their previous position, the determination takes a broader view of when tax (financial) advice fees provided by financial advisers could be deductible under section 25-5 (tax-related expenses).

In broad terms, this section allows someone to claim deductions for fees paid for advice on a Commonwealth taxation law to the extent the advice relates to managing their tax affairs. However, some key issues need to be considered.

• The advice needs to be provided by a registered tax adviser, which normally means, in this context, either a qualified tax-relevant provider registered with ASIC, or a tax or BAS agent registered with the Tax Practitioners Board.
• The advice needs to relate to managing the individual's tax affairs. The expenditure also can’t be capital expenditure, although expenditure is not capital expenditure merely because the tax affairs concerned relate to matters of a capital nature.

* Adapted from TD 2024/7 

* Adapted from TD 2024/7 

What’s not deductible as tax financial advice?

While the ATO considers that tax affairs include tax (financial) advice provided by a financial adviser under the Tax Agent Services Act 2009, the warning is that not all advice provided by a financial adviser will qualify. 

Advice that won’t qualify includes factual information about a financial product that does not involve applying or interpreting tax laws to the individual’s circumstances.

How to claim a deduction for financial advice fees

Claiming a tax deduction for financial advice has a few requirements:

• Where only part of the financial advice fee is deductible either under section 8-1 (general expenses) or section 25-5 (tax-related expense), a reasonable apportionment of the fee is required; and
• The individual should have sufficient evidence of the expenditure before claiming a deduction.  The ATO indicates that an itemised invoice (or fee disclosure statement or an advice fee consent form) from a financial adviser which contains the following details should normally be sufficient:
  • The name of the financial adviser
  • The amount of expense
  • An explanation of the advice provided
  • The date the expense was incurred, and
  • The date the invoice was produced. 

What about superannuation funds?

Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Act 2024 clarifies the legal basis for trustees to pay advice fees agreed between a member and their financial adviser from the member’s superannuation account. The amendments enabled by the legislation ensure that these fees will be deductible to the superannuation fund and are not taxable benefits for members.

Part 11A of the Superannuation Industry (Supervision) Act 1993 allows a superannuation trustee to pay for the cost of personal advice for a member if the requirements listed below are met. However, self-managed superannuation funds (SMSFs) are specifically excluded. That is, only large APRA-regulated funds (e.g. retail or industry funds) can pay for the cost of personal advice for a member. An SMSF can only pay for advice that is provided to the fund trustee. Trustee advice could include advice on managing the investments of the SMSF.

To meet the requirements:

• The financial product advice must be personal.
• The trustee or trustees charge the cost in accordance with the terms of a written request or written consent of the member; and
• If the arrangement under which the advice is provided is an ongoing fee arrangement - any applicable requirements of Division 3 of Part 7.7A of the Corporations Act 2001 are met in relation to the arrangement and, if relevant, the deduction of ongoing fees; and
• If the arrangement under which the advice is provided is not an ongoing fee arrangement - the request or consent satisfies the requirements to be a consent form; and
• Paperwork…the trustee has the member’s request or consent or a copy.

The rules apply from 10 January 2025. Transitional arrangements of up to 12 months apply to non-ongoing fee arrangements in force on 10 January 2025.

References

• TD 2024/7
• Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Act 2024