Tax Deductibility of Advice Fees: Insights from ATO’s Latest Update
The Australian Taxation Office (ATO) recently issued Taxation Determination TD 2024/7, which addresses the deductibility of financial advice fees paid by individuals not engaged in an investment business. This new determination replaces the withdrawn TD 95/60W. It maintains the same stance on the deductibility of investment advice fees while introducing new content on the deductibility of financial advice fees as tax-related expenses under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
According to TD 2024/7, individuals can claim a deduction for fees paid to a financial adviser if they meet the requirements outlined in section 8-1 (general deductions) or section 25-5 (tax-related expenses) of the ITAA 1997. However, it may be necessary to apportion the deduction in some cases, as the total amount of the fees paid may not be deductible.
General Deduction under Section 8-1
Under section 8-1, an individual is entitled to a deduction to the extent that the loss or outgoing is incurred in gaining or producing assessable income. However, deductions are not allowed for expenses that are:
Capital or of a capital nature
Private or domestic in nature
Incurred in gaining or producing exempt or non-assessable, non-exempt income
Prevented from being deducted by a provision of the Act
For an expense to be deductible, it must be incurred "in the course of" gaining or producing assessable income. This means that the expense must be directly related to the income-producing activity. However, an expense may still be deductible even if the assessable income is not gained or produced in the year the expense is incurred.
Non-Deductible Financial Advice Fees
Fees for financial advice on a proposed investment before the acquisition of an asset are not deductible under section 8-1, as they are considered expenses associated with putting the income-earning investment in place. Similarly, fees for initial advice on pre-existing investments at the commencement of an advisory engagement are not deductible in certain circumstances. Fees for financial advice on new investments are also not deductible, as they are considered capital or of a capital nature.
Deductible Financial Advice Fees
Fees for financial advice incurred regularly or recurrently for an existing or ongoing income-producing investment are deductible. However, if an individual’s existing adviser provides guidance on investing additional funds to grow their investment portfolio, the fees for this advice would be considered capital or of a capital nature and would not be deductible.
Tax-Related Expenses under Section 25-5
Fees for financial advice may be deductible under section 25-5 if the advice relates to managing an individual's "tax affairs." Not all advice provided by a financial adviser is deductible. For the advice to be deductible, it must involve applying or interpreting taxation laws. Additionally, the advice must be provided by a "recognised tax adviser."
Evidentiary Requirements
Individuals must have sufficient evidence of the expenditure to claim a deduction for financial advice fees. According to TD 2024/7, an itemised invoice detailing the financial adviser's name, the expense amount, an explanation of the advice provided, the date the expense was incurred, and the date the invoice was produced would be sufficient evidence.
In summary, TD 2024/7 clarifies the deductibility of financial advice fees for individuals who do not carry on an investment business. By understanding the requirements and limitations outlined in this determination, individuals can better manage their tax affairs and ensure they are claiming the appropriate deductions.
For specialist tax advice tailored to medical practitioners, contact us today to learn how we can help you navigate complex deductions and optimise your tax position under the latest ATO guidelines.