As individuals approach retirement, they often seek financial guidance to ensure their wealth is optimised for the future. Financial advice can also be sought for various other reasons throughout one’s lifetime, such as navigating investment strategies or structuring assets. One common question that arises when receiving financial advice is whether the associated costs can be claimed as a tax deduction.
This question has been addressed by the Australian Taxation Office (ATO) in Tax Determination TD 2024/7, issued on 25 September 2024. The determination provides clarity on when financial advice fees are deductible, particularly for individuals, and outlines the conditions under which tax deductions can be claimed. It’s important to note that this ruling applies solely to individuals, not to superannuation funds or businesses, and is only relevant if the individual is not operating an investment business.
Key Factors to Consider
The ATO’s stance on the deductibility of financial advice fees isn’t new but has been reaffirmed in the latest tax determination. A key principle in determining whether an expense is deductible is whether it is incurred in the process of deriving income. However, even if the expense is related to income generation, it will not be deductible if it is classified as being of a capital nature or as private and domestic in nature. These exclusions can apply depending on the specifics of the financial advice and the context in which it was sought.
For example, if you seek advice about a proposed investment, the ATO does not consider the expense to be directly connected to the future income that may arise from that investment. This lack of “nexus” means that such advice is not deductible. Similarly, any fees related to setting up an investment for the first time cannot be claimed as a deduction.
Even if you have an existing investment and seek advice regarding the addition of new funds to your portfolio, the ATO has ruled that these expenses are also non-deductible. The same applies if you switch to a new financial adviser to develop a new investment strategy for your existing investments.
Another scenario where financial advice fees are not deductible is when seeking help with personal budgeting for a home. The ATO deems this type of advice as being private or domestic in nature, and therefore not eligible for a tax deduction.
What Financial Advice Is Deductible?
There are circumstances under which financial advice fees can be claimed as tax deductions, particularly if the advice relates to managing or maintaining an existing investment portfolio. Regular or ongoing financial advice about adjusting or managing your investments can be deductible because these fees are not considered capital expenses. The ATO recognises that the advice is not about setting up new investments but about the ongoing management of existing ones.
Furthermore, any financial advice that includes tax advice is deductible, as there are specific tax laws that allow for such deductions. For example, advice regarding tax-efficient strategies, including the sale of investments, will qualify for a deduction.
When it comes to insurance advice, the type of insurance matters. For example, income protection insurance advice is deductible because, in the event of a claim, the insurance proceeds would be included in your assessable income. However, advice related to life insurance, home and contents insurance, or general insurance is not deductible, as the payouts from these insurance types are not included in assessable income.
In some cases, you may receive advice that covers both deductible and non-deductible topics. In such instances, it’s crucial to apportion the costs accordingly. While it’s helpful if your financial adviser can break down the deductible and non-deductible portions on the invoice, this doesn’t always happen, and you may need to calculate the deductible amount yourself.
Navigating the Complexities
While the ATO’s guidance in TD 2024/7 provides a clear framework for claiming deductions, some of the views expressed in the determination may be open to debate from a technical tax perspective. However, to avoid potential complications with the ATO, it’s essential to adhere to their official stance.
If you are unsure about whether certain financial advice fees are deductible, consulting a professional accountant in Perth can provide clarity. Symmetry Accounting & Tax offers expert business advisory services and can guide you through the nuances of tax deductions for financial advice, ensuring that you are compliant with current tax regulations.
In summary, while there are various circumstances where financial advice may or may not be deductible, understanding the specific conditions and consulting with a professional tax advisor is key to ensuring you maximise your tax benefits without running into trouble with the ATO.
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