Understanding the tax deductibility of advice fees

Lost in the shuffle of government announcements around financial advice in December last year was a new tax determination on how to determine the tax deductibility of advice fees.

Coming just a week after Financial Services Minister Stephen Jones announced the introduction of “qualified advisers” and the other measures stemming from the Quality of Advice Review (QAR), it received little attention.

The draft determination (TD 2023/D4) clarifies the rules around deductibility of financial advice fees and broadens and replaces TD 95/60, which was put in place almost 30 years ago.

“This determination replaces TD 95/60 as a result of regulatory reforms to the financial services industry in recent years. However, it does not represent a change in the commissioner’s view on the deductibility of financial advice fees as outlined in TD 95/60,” the Australian Taxation Office (ATO) said.

At the time, Sarah Abood, chief executive officer of the Financial Advice Association Australia (FAAA), said the revised guidance is “sensible and welcome”.

“The existing tax determination is almost 30 years old, and a substantial amount of regulatory change has occurred since 1995. In addition, financial advisers are now recognised as qualified tax relevant providers (QTRPs), and are regularly providing tax advice to clients,” Ms Abood said.

“This draft revised guidance clearly states that upfront fees are deductible to the extent that they relate to tax advice, and there is far greater clarity on the deductibility of ongoing fees.”

What is TD 2023/D4?

Speaking on the Challenge the Standard in Financial Advice podcast, Conrad Travers, principal consultant at Tangelo Advice Consulting, said that while a determination isn’t a change in legislation, they are binding.

“ATO doesn’t make the law, it administers the law,” Mr Travers said.

“They have rulings, tax determinations and tax rulings which interpret the law and it’s called guidance, basically. It’s a lower hanging fruit to get those changed than a piece of legislation which has to go through Parliament and politics.

“This is what ATO officers will use to assess individual tax returns for taxpayers to determine whether something is deductible.”

According to Mr Travers, under the previous tax determination, upfront advice fees were not tax deductible because they were capital in nature, while it was a bit more complicated for ongoing advice fees.

“What we know from the current draft, there is a portion of the upfront fee which will be deductible, so that is different from before,” he said.

Specifically, fees for financial advice an individual incurs may be deductible under section 25-5 of the Income Tax Assessment Act to the extent that the advice relates to managing their tax affairs.

“The thing that’s exciting for me is that I think advisers are giving advice on taxation more than what they think. Most superannuation advice will be deductible,” Mr Travers said.

“They’ve clarified that for example, when you give advice to hold income protection outside of super that’s deductible, a lot of cash flow advice, a lot of investment advice, asset allocation will come back to tax in some way.”

Importantly, the draft tax determination is able to be relied upon now and doesn’t require further ATO action to come into force, but advisers should remain cautious.

“If people are doing this without really understanding what they’re doing, there’s a danger in that,” Mr Travers explained.

“If you have an accounting background, and you’re really confident in this area, there’s no reason why you couldn’t go out and claim a deduction for a client now because the previous tax determination has been removed. TD 95/60 no longer exists. This is the current tax determination.

“We do want to provide that guidance and support; it’s going to take us a while to pull it together and make it easily digestible. But technically, you could use this now to claim a deduction.”

According to Nathan Fradley, senior adviser at Tribeca Financial and co-host of the Challenge the Standard in Financial Advice podcast, the next step is ensuring that accountants are aware of the determination and how the advice business is calculating the deductible portion of their advice.

“The next challenge on that is in communicating this to tax agents who won’t know the ins and outs of what we do,” Mr Fradley told ifa.

“I think we’re going to have to communicate with them, so that when clients do go to their tax agents, they actually know what’s going on.

“It’s such a niche determination that not every accountant is going to be across it. Now the accounting organisations have been a part of the process, but we don’t know what kind of communication is going to come down from that.”

Putting the determination into practice

Robert Devlin, head of advice at Tribeca Financial, said the firm has begun the work of standardising the calculation of the tax-deductible portion of advice provided by its advisers.

“With the new draft guidance being released late last year, we wanted to make sure we had a clear plan for how we would explain this to clients and also train our team on what this guidance entails,” Mr Devlin told ifa.

“Essentially, we first sat down in December to work out a gameplan. We agreed straight away that we need to work hand in hand with trusted accountants as ultimately, they will play a crucial role in how this all works in practice.”

He explained that following this work with accountants, Tribeca determined that a large portion of its work falls into the category of managing a client’s tax affairs and would be captured by the new determination.

“The feedback we got from the accountants and the initial discussions we had identified the key to getting this right will be having a consistent, reasoned and clear way of differentiating advice that relates to a client’s tax affairs and advice that does not,” Mr Devlin said.

“This on the surface may seem simple but there a lot of overlap and subjective interpretations. In some instances, this may be up to 100 per cent of the advice and in others, it will be a smaller percentage.”

He added that the firm is building tools to help distinguish what areas are covered and looking into building back-end processes like invoicing that can articulate this to an accountant and client so come tax time, the process at their end is relatively simple.

“We believe this will be a big step forward to enabling more Australians to get great advice by bringing down the net costs,” Mr Devlin said.

“We know once a client makes the initial commitment in seeking financial advice, we can make a huge difference to their financial outcomes and wellbeing. If it makes that first investment in their financial wellbeing less prohibitive, then this can only be a good thing.”