Financial advice: What’s deductible, what’s not

The cherry on top of your sensible decision to obtain quality tax planning or investment advice is to find that some of the costs involved are tax deductible. But while the tax law allows specific deductions for certain expenditures regarding your tax affairs, not all costs involved with seeking investment advice are deductible. Working out whether a claim can be made for such outgoings involves a close examination of the nature of the expense.

Under the tax law’s general deduction provisions, claims are allowed for outgoings to the extent that they are incurred in gaining or producing a taxpayer’s assessable income. The crux of the matter in regard to financial planning comes down to the fact of there being a “connection” between deriving income and the relevant expenditure in relation to the advice sought.

Further, it is also necessary to consider whether the claim may be disallowed because it is on “capital account”, or is of a private or domestic nature. You should ask this office about these distinctions.

Certain deductions however are specifically made available under tax law – a common example being that taxpayers can claim a deduction for “tax-related” expenditure such as tax return preparation and tax advice from a “recognised tax adviser”.

Obtaining financial advice

With financial planning advice, the first thing to tick off is to make sure that you are taking such advice from a registered Australian Financial Services (AFS) licensee, or their representative, so that you are provided with protection if something goes wrong.

Note that if the financial planner says that they hold an AFS licence, check the company name and AFS licence number on ASIC’s website.

The taxman’s view on claiming a deduction

Guidance on the Tax Office’s stance on these matters can be drawn from certain announcements that have been made by the Tax Commissioner — in this case, a “tax determination” specifically applying to individuals who are not running an investment business (this latter situation is an area of the tax law that is well covered).

The determination covers two types of expenses: (i) drawing up an investment plan, and (ii) ongoing fees or retainers in relation to the investment portfolio.

Generally speaking, the cost of drawing up an investment plan is not deductible, however ongoing fees in relation to an investment portfolio are.

Investment plan costs

The Tax Office does not consider the costs for creating an investment plan as deductible expenses because of three main reasons:

• these costs are incurred too early in time to be directly relatable to gaining or producing assessable income from the investment
• they are an expense associated with putting a possible income-earning investment in place, and therefore has insufficient connection to that income (if there is any at all), and
• the costs are an incidental expense and are an outlay to acquire the investment, and so warrant a conclusion that this is an outlay that is capital in nature.

Ongoing fees

The Tax Commissioner concluded that once in place, the ongoing fees or retainers made in relation to an investment portfolio are typically deductible. This is consistent with the Tax Office’s position adopted in a taxation ruling which concluded that costs relating to the “servicing” of an investment portfolio should be viewed as being of a “revenue character” (although the ruling states that to remain wholly deductible, the entire fee should relate to producing income).

Further, the ruling stated that should advice be obtained over the life of an investment portfolio that suggested changes be made to the make-up of the investments therein, that this would be part and parcel of managing the portfolio, not the drawing up of a new investment plan. As such, the cost of this advice would therefore retain its “allowable deduction” status.

However where a taxpayer with existing investments approaches a planner to advise on a new investment plan, the expenditure would be deemed to be a capital outlay (that is, it would lose its deduction status), even though existing investments are incorporated.

Other deductions that would typically be deductible in relation to financial planning include the costs of attending a property investment seminar. To claim, the taxpayer must own an existing rental property, and expenses claimed must relate to the gaining of assessable income. Also, subscriptions to sharemarket information, investment journals and analysis reports of listed companies may qualify, but again must relate to earning assessable income from such investments.

New law may mean more deductions

The government has been aware for some time that financial planners sometimes incidentally provide advice that strays into the taxation area. This is a natural and at times unavoidable consequence of dealing with money matters, as tax can be a consideration with all manner of financial transactions.

From July 1, 2014, new law amendments require that AFS licensees (or their representatives) who provide what is deemed to be “tax (financial) advice services” will need to be registered with the Tax Practitioners Board (TPB, which is the official regulator of tax agents).

This is an important distinction, and certainly provides scope for taxpayers to claim legitimate deductions – particularly where it does not involve creating an investment plan or are in regard to ongoing fees such as described above.

The ability to claim a deduction for a fee or commission for advice about the operation of a tax law is restricted to advice that is provided by a “recognised tax adviser”. That term includes “registered tax agents” who provide tax advice to their clients. The regulations have now been amended to include a “tax (financial) adviser” – that is, AFS licensees and their representatives who have registered with the TPB.

A deduction for tax advice from a financial planner would seem to be available as a consequence of this amendment. It is fair to say that apportionment will still be required however, where the overall advice contains non-tax related matters, with claims for the non-tax portion to be considered on a case-by-case basis (we can assist you with this).

Note that lodging tax returns on behalf of others (the services we offer, among other things) must still be provided by an appropriately registered tax agent and not by a “tax (financial) adviser” or BAS agent.

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