In this article we break down the tax deductibility of advice fees and what you can and cannot claim what completing your tax return when it comes to your financial advice fees.
As an industry we have been lobbying for years for all our fees fully deductible, however the ATO haven’t played ball entirely. So, what can, and cannot be claimed under the current ATO ruling?
At a high level, initial fees for a Statement of Advice are not deductible to the client. Ongoing adviser fees may be, depending on how they are paid and what advice is provided.
Let’s break down the ATO determination and general principles that explain why this is the case.
The ATO states that in order to claim a tax deduction on fees, the fee must relate to either:
- Advice in managing the individual tax affairs, or
- Producing the client’s assessable income and is incurred directly by the client or indirectly via deductions from their personal investments.
Let’s break these two statements down even further. Regarding the first point, in order for the fee to be claimable, the advice must relate to the client’s tax affairs. This includes advice about salary sacrifice and the tax implications of making deductible superannuation contributions.
The second point refers to fees charged for advice that is gaining or producing an assessable income for the individual – for example, establishing and managing an investment portfolio.
Unfortunately, the initial advice fees don’t fall under these determinations as the ATO sees that this fee is incurred too early to be an expense incurred in producing an assessable income.
Another caveat in the deductibility is how the fees are funded. For example, if the ongoing fees are funded by superannuation, the client cannot claim these as a personal expense as it was not funded individually. The fees need to be funded by the individual or by an investment held in the individuals name (non-super)
That said, depending on the client’s situation, if the fees are funded from superannuation, they may likely be paid using pre-tax funds anyway.
To assist clients with the administration of deductibility, Catapult Wealth provides tax invoices automatically once an ongoing fee agreement is signed as well as a receipt once paid that can be provided to your tax accountant.
As you can see, it’s not as clear cut as we would like. The non-deductibility of the initial advice fees may be stopping many Australians from taking the step to receiving financial advice that would help them, and in turn the Australian economy.