Deductibility of fees for financial advice | New ATO tax determination
11/10/2024
The Australian Taxation Office (ATO) has published Taxation Determination TD 2024/7, confirming the Commissioner’s view on the circumstances under which individuals who are not carrying on an investment business can claim a deduction for fees paid for financial advice.
On 25 September, the ATO released Taxation Determination TD 2024/7 in relation to the deductibility of financial advice fees incurred by individuals who are not carrying on an investment business. TD 2024/7 does not reflect a change in the Commissioner’s view on the deductibility of financial advice fees as previously set out in Taxation Determination TD 95/60. Instead, it was published following regulatory reforms to the financial services industry. The Commissioner has maintained his view that fees prior to acquisition of assets are incurred ‘too soon’ and therefore capital in nature, and household budgeting advice are private or domestic expenses. Fees for financial advice relating to income products with sufficient connection to assessable income (i.e. income protection) are deductible.
General deductions
This determination addresses the application of section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to fees for financial advice, highlighting the importance that the fees are incurred in gaining or producing assessable income. Broadly, a deduction for any loss is not available under section 8-1 to the extent that:
- it is an outgoing of capital or of capital nature,
- it is an outgoing of a private or domestic nature,
- it is incurred in gaining or producing a taxpayer’s exempt or non-assessable, non-exempt income, or
- a provision of the Act prevents it from being deducted
Gaining or producing assessable income
To be incurred in gaining or producing assessable income, a sufficient connection must exist between the expense and the particular activities through which the assessable income is gained or produced.
An expense can still be deducted even where the assessable income is:
- not gained or produced in the year during which the expense is incurred, or
- expected to be earned but is not actually earned.
Whether or not a sufficient connection exists between expenditure and what produces the assessable income is a question of fact so that the Commissioner must have regard to all the circumstances in each case. In particular, the Commissioner will consider:
- whether the expense was entirely preliminary to the gaining or producing of assessable income, and
- whether there is a lapse of time between incurring the expense and the commencement of the income-producing activity (a significant time delay may indicate that the expense was incurred for a different purpose).
Importantly, there is a difference between fees for financial advice incurred on a recurrent basis for an existing or ongoing income producing-investment, and fees for financial advice on a proposed investment prior to the acquisition of an asset. The former is deductible on the basis that there is a sufficient connection between the fee for the ongoing advice and the investments that produce assessable income.
As there is sufficient connection between an individual’s assessable income and premiums for income protection insurance which are deductible under section 8-1, financial advice relating to income protection products will be deductible.
Capital or capital in nature
Amounts relating to fees for advice on a proposed investment are considered to be incidental to the cost of acquiring the income-producing investment and are therefore capital in nature and are not deductible under section 8-1. Similarly, fees incurred for advice on putting an income-earning investment in place or in relation to an income-earning structure are not deductible since they are capital in nature.
The determination explains that in determining whether an expense is capital in nature, consideration will be given to (the capital vs revenue distinction):
- the advantage sought from incurring the expense,
- the way the advantage is to be used, and
- the means of its acquisition (i.e., whether it is a once-and-for-all expense for the acquisition of something or a periodical outlay for the use and enjoyment of something).
Tax-related expenses
Provided an individual can identify that an amount was incurred for advice to assist them in managing their tax affairs, they will likely be able to claim a deduction under section 25-5 of the Act.
Importantly, to access a deduction under section 25-5, the advice must be provided by a ‘recognised tax adviser’ including:
- a registered tax agent, or
- a registered BAS agent (within the meaning of the Tax Agent Services Act 2009), or
- a qualified tax relevant provider (within the meaning of the Corporations Act 2001) registered with ASIC, or
- a legal practitioner.
Additionally, not all advice provided will be deductible as tax (financial) advice. Where information is provided without application or interpretation of the taxation laws to the individual’s personal circumstances, it will not be for managing that individual’s tax affairs.
How SW can help
Contact your SW contact if you have any questions about the deductibility of expenses you have incurred in respect of financial advice.
SW will continue to monitor and provide commentaries to inform clients of developments as they occur.
