FSC argues for tax deductibility of upfront fees

In December 2023, the Australian Taxation Office (ATO) released a draft determination (TD 2023/D4) that clarified the rules around deductibility of financial advice fees and broadens and replaces TD 95/60, which was put in place almost 30 years ago.

The draft determination outlined that upfront fees (if provided by a qualified tax relevant provider) are deductible to the extent they relate to tax advice under section 25-5 of the Income Tax Assessment Act 2007 (ITAA).

In its submission in response to TD 2023/D4, the Financial Services Council (FSC) has argued that there is further room for financial advice fees to be tax deductible.

“The FSC supports the tax deductibility of financial advice fees,” it said.

“While we believe the law should more fully facilitate this, the FSC welcomes the ATO moving to clarify the circumstances and parameters in which advice fees are permissible under the provisions of the Income Tax Assessment Act 1997.”

The ATO’s updated tax determination does not impact the rules in the same way that a legislative change would, however, it is binding.

“We acknowledge the limits of the ATO’s powers to permit tax deductible outside provisions of the law,” the FSC said.

“However, there is an argument upfront fees should be deductible under 8-1 as per the existing law on the basis the ATO has used the previous rationale from TD 95/60 that an upfront fee is a capital event which is too distant from a client drawing income to say that an upfront fee is not deductible under 8-1.

“In reality, very few clients have a pot of money that invests at some future date they are rolling over super, consolidating funds, moving to pension phase etc (i.e. funds are already invested).

“An upfront deduction for 25-5 is already provided for and the draft TD can be relied on so advisers will be able to claim a deduction on upfront fees proportional to the amount of that advice which is tax related now. This is likely to be a high proportion, especially for holistic and investment advice when considering the number of strategies consumer might have with nexus to taxation (less so for insurance advice).”

The FSC stance is broadly in line with the joint submission from the Financial Advice Association Australia (FAAA), Chartered Accountants ANZ, CPA Australia, and Institute of Public Accountants, which pushed for further clarification of deductibility of upfront fees under section 8-1 of the ITAA (a general deduction).

“We appreciate the clarity provided around the deductibility of upfront fees as it relates to taxation,” said FAAA chief executive Sarah Abood.

“However, we do suggest the commissioner’s prevailing view in one area – that a fee for financial advice in connection with initial financial advice on the proposed investment of existing funds, or even the modification/retention of existing investments, is not incurred in gaining or producing assessable income – can be updated.”

The FSC submission added that ongoing investment arrangements should be deductible.

“An ongoing arrangement to provide advice on suitability and performance of investments should be deductible regardless of whether investments are purchased or disposed when the portfolio is rebalanced,” the submission said.

“Further, the investments are not just for capital gains but for assessable dividends and distribution income.”

It also argued that the rules around an investment being considered of a capital nature do not reflect the practical application in the context of ongoing advice.

“Where the adviser provides ongoing advice on the suitability and performance of investments and the taxpayer also makes regular contributions/ investments to earn assessable income as well as capital growth, we are of the view there is sufficient connection with producing assessable income rather than capital in nature,” the FSC said.

“It is unfair and unreasonable to require deductibility apportionment of the ongoing advice on suitability and performance where the taxpayer also happen to make regular contributions versus a taxpayer who doesn’t make regular contributions.”

The broad argument from the FSC is that the tax determination should accommodate the full spectrum of consumer interactions and clarify documentation requirements.

“The TD should fully contemplate the experience of different advice models within the market providing different forms of financial advice to consumers,” it said.

“The TD should expand further on what the adviser needs to document in the invoice and/or how the cost of advice can be apportioned (e.g. time-based apportionment) to make it clearer for the client and their tax agent in claiming the deduction.”