ATO offers guidance on deductibility of advice fees

The Australian Taxation Office (ATO) has provided updated rules on the tax deductibility of financial advice fees (TD 2023/D4).

The clarified tax determination states that an individual may be entitled to a deduction for fees paid to a financial adviser if they satisfy the requirements in sections 8-1 (general deductions) or 25-5 (tax-related expenses).

Under section 8-1, individuals can access a deduction to the extent that the expense is incurred in gaining or producing assessable income. This includes recurrent fees for an existing or ongoing income-producing investment.

Looking at section 25-5, advice related to managing a client’s tax affairs may also be deductible. However, not all advice provided by an adviser is considered to be tax-related.

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“For example, factual information about a financial product that does not involve the application or interpretation of the taxation laws to the client’s personal circumstances would not be considered to be tax (financial) advice.”

This applies to individuals who are not carrying on a business and it does not consider circumstances where fees for advice are paid from a superannuation fund.

While the new guidance replaces TD 95/60 as a result of regulatory reforms to the financial services industry in recent years, it does not reflect a change in the Commissioner's view on the deductibility of financial advice fees as outlined in TD 95/60, the ATO wrote.

To claim a deduction, an itemised invoice from an adviser will need to include the following:

• The name of the adviser
• The amount of the expense
• An explanation of the advice provided
• The date the expense was incurred
• The date the invoice was produced.

The ATO first agreed to reissue guidance on the deductibility of advice fees in 2022 and indicated it would be released by mid-2023.

Sarah Abood, chief executive at the Financial Advice Association of Australia (FAAA), has since welcomed the ‘sensible’ clarification.

“The existing Tax Determination is almost 30 years old, and a substantial amount of regulatory change has occurred since 1995. In addition, financial advisers are now recognised as Qualified Tax Relevant Providers (QTRPs), and are regularly providing tax advice to clients.

“This draft revised guidance clearly states 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,” she explained.

The FAAA said it has worked closely with Tangelo Advice Consulting and industry bodies in consultation with the ATO regarding the tax determination.

In the past, the industry body advocated for full deductibility of advice fees and described it as “one of the quickest and easiest” ways to make financial advice more affordable to Australians.

The ATO’s revised guidance is open to feedback until 2 February 2024.