Many individuals engage financial advisors to assist them in selecting, managing and reviewing investments. While many assume that financial advice fees will be tax deductible, unfortunately this is often not the case.

The Australian Taxation Office (ATO) recently released Taxation Determination (TD) 2024/7, providing updated guidance on the income tax deductibility of financial advice fees. We explain below the tax treatment on various financial advice fees outlined in the ruling and others that we typically see with our clients.

Tax Treatment of Typical Financial Advice Fees

Generally, we see our clients incur the below financial advice fees. We have separated these into whether they are likely to be deductible for tax purposes or not.

The specific circumstances of each individual may change the tax impact outlined below. Therefore, these categories should be considered as a general guide only.

Deductible

Fees Relating to Income-Earning Investments

Where an individual is not carrying on a business, financial advice fees will be deductible where there is a clear link which can be established to the earning of assessable income, for example interest, dividends or trust distributions from investments.

Advice fees incurred in relation to pre-existing income producing investments (e.g. regular annual reviews) will generally be deductible, as there will be a clear link established to the earning of assessable income from the investments (See Example 1).

However, advice fees will not be deductible if they relate to earning income which is not assessable for tax purposes (see Example 2).

Fees Relating to Managing Tax Affairs

Advice fees incurred in relation to managing an individual’s tax affairs are specifically tax deductible (see Example 3 – Part B). Under these rules, the services must be provided by a “recognised tax advisor” (financial advisor who either meets relevant requirements under the Corporations Act 2001 or is a registered tax agent).

The fees concerned must be for advice provided in relation to the individual’s specific circumstances and the application of taxation laws (not factual information regarding a particular product).

Not Deductible

Fees Relating to New Investments or Changes to Investments

Advice fees will not be deductible where they are considered “capital in nature”. This generally includes fees incurred at the start of an advice engagement or fees relating to changes to the “income-earning structure”.

Similarly, advice provided in relation to acquisitions of new investments will not be deductible (see Example 3 – Part A).

Fees Relating to Private or Domestic Matters

Fees relating to private or domestic matters, such as household expenditure and budgeting are generally not deductible.

Examples

Example 1

Nick organises and attends an annual review meeting with his financial advisor. During this meeting, his advisor evaluates the performance of his investments (shares, term deposits and bonds) over the past 12 months, and their ongoing suitability based on an existing long-term strategy.

As the financial advice is being provided in relation to the performance of Nick’s current investments which produce assessable income, the advice fees for the meeting are tax deductible.

Example 2

Jenny is a dentist who decides to set aside a portion of her income as part of a long-term investment strategy. As a high-income earner subject to a high marginal tax rate of 47%, Jenny is particularly interested in investments that are tax effective for her.

Her financial advisor recommends that she invests a portion of her funds into an “investment bond”. The earnings on the bond are taxed at 30%, with the tax paid by the bond issuer (not Jenny). Jenny is able to withdraw the funds tax-free after 10 years.

As the investment bond does not produce income which is assessable to Jenny (as the tax is paid by the bond issuer), the financial advisor fees are not deductible. This is because they are not incurred in deriving Jenny’s assessable income.

Example 3

Part A

Bruce engages a financial advisor (Steph), as he wants to build wealth for his retirement. Steph is a financial advisor and also a recognised tax advisor.

Bruce has an initial meeting with Steph, where she ascertains his financial situation and goals for his retirement. Following the meeting, Steph advises Bruce to acquire various investments in a managed portfolio.

As the initial meeting relates to the start of the advisory engagement and acquiring new income producing assets, Steph’s fees for the initial meeting and subsequent advice are not tax deductible for Bruce.

Part B

Several years later, Bruce decides that he would like to retire, sell his investments and use the funds to acquire a beach house. He meets and consults with Steph about the Capital Gains Tax implications of selling his investments.

Steph’s fees for the meeting and advice in relation to the sale of the investments are deductible to Bruce as a cost of managing his tax affairs, as they relate to the application of taxation laws to his specific circumstances and Steph is a recognised tax advisor.

Financial Advice Fees with Mixed Tax Treatments

Where advice fees are incurred only partly in relation to earning assessable income or in managing an individual’s tax affairs, it is necessary to apportion the deduction for the fees on a fair and reasonable basis.

As in all cases, the specific facts and circumstances must be considered to determine the appropriate income tax treatment. Where there is uncertainty, seeking the advice of a qualified tax advisor is recommended.

Contact Pilot

If you would like advice in relation to the tax treatment of financial advice fees, contact Kristy Baxter, Angela Stavropoulos or your Pilot advisor on (07) 3023 1300.