Types of financial advice and their tax deductibility
The tax deductibility of financial advice fees can vary depending on the type of advice received.
Deductions for financial advice fees may be claimed if they meet the requirements outlined in either section 8-1 (general deductions) or section 25-5 (tax-related expenses) of the ITAA 1997.
Section 8-1 allows deductions for financial advice fees to the extent that the loss or outgoing is incurred in gaining or producing assessable income. However, specific exclusions apply, including expenses of a capital or private nature, those incurred for non-assessable income, and those prevented by a provision of the Act.
Section 25-5 allows deductions for financial advice fees to the extent that the advice relates to managing tax affairs. The definition of ‘tax affairs’ is broad, covering a wide range of matters related to tax.
If financial advice fees are deductible under both sections 8-1 and 25-5, they can only be deducted once under the most appropriate provision. In such cases, the most appropriate provision is the specific deduction in section 25-5.
In certain circ*mstances, it may be necessary to apportion the deduction under sections 8-1 or 25-5. This arises when the full amount of fees paid may not be entirely deductible. Expenses may be partly deductible under section 8-1 if incurred for both income-producing activities and other purposes. For advice relating to both tax affairs and non-tax matters, apportionment on a fair and reasonable basis is required.
Generally, fees paid for investment advice related to income producing investments are tax deductible. On the other hand, fees for general financial advice or advice that does not directly contribute to assessable income may not be tax deductible.
Developing a Financial Plan
When you seek professional assistance to set up an investment portfolio or develop a comprehensive financial plan, the associated fees are generally classified ascapital expenses. These expenses are typically incurred to establish the foundation for long-term financial growth and stability.
According to the Australian Taxation Office (ATO) Draft Tax Determination TD 2023/D4, fees related to providing general financial advice or preparing a financial plan are generally not tax deductible. This determination is based on the understanding that these fees do not directly contribute to the generation of assessable income.
Management and Retainer Fees
The ongoing management and retainer fees you pay are eligible fortax deductionsfor managing and optimizing your existing investment portfolio. These fees are typically associated with assets that generate income, such as shares or rental properties.
However, it’s worth noting that expenses related to items in your investment portfolio that don’t generate income may have limited deductibility—for instance, pension assets’ management, insurance premiums, private loans, etc.
Investment Loan Arrangement Costs
If you seek financial advice for an investment loan, you will incur a fee for the loan arrangement. This fee is classified as a borrowing expense and is associated with securing funds for your income-generating investments.
The tax deductibility of your investment loan arranging fees depends on the purpose of the loan and its direct association with income generation. If you use the loan to acquire assets that generate assessable income, you can deduct the fees from your taxes. However, if the loan serves personal purposes or is used to acquire assets that do not generate assessable income, you cannot deduct the fees.
Managing Cash Flow
You cannot claim tax deductions for fees associated with financial advice unrelated to earning assessable income, such as general cash flow management or personal budgeting advice. These fees are considered personal expenses and do not directly contribute to income generation.
Commissions
Indirect commissions, such as those paid to financial advisors by product providers or investment companies, do not qualify for tax deductions. Since these commissions are payments made by third parties and not directly incurred by you, the individual seeking financial advice, they are typically not eligible for tax deductibility.
