How do new tax-deductible advice fee rules work in practice?

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.

Essentially, 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 problem for many advisers and practices is that understanding the new rules and how to calculate the tax-deductible portion is not exactly straightforward.

However, according to Robert Devlin, the head of advice for Tribeca Financial, putting the effort into working out how TD 2023/D4 practically applies can produce great results for clients.

“Our clients have been so appreciative of the proactive approach to this, because clients don’t know about that draft determination. They didn’t know that the change came into December,” Devlin told ifa.

He added: “It was a bit of a process to get consistent on what we as a firm believed, then to educate our advisers around what the parameters were, what the ATO examples were, what the specific wording said. Obviously, that requires training and time, but we haven’t looked back.”

This process, Devlin explained, began with the decision to both work on understanding the changes as a firm and bringing in outside help in the form of Conrad Travers and the team at Tangelo Advice Consulting.

“We did some in-house, and then we consulted out as well, just to make sure we were crossing the t’s and dotting the i’s as well,” he said.

“Basically, where we started from was the fact the ATO put out a draft legislation. It was relatively clear, they put example cases out there, we thought there was quite a good basis to build a structure and a process from.

“We started with trying to determine how we solve the problem for, I guess the most subjective part of the rule, which is advice that relates to managing your tax affairs.”

Given that the advice that Tribeca provides is holistic, Devlin said that often, it is simply not entirely clear whether the advice met the criteria for tax deductibility.

Essentially, the team at Tribeca worked through a number of cases, along with Tangelo, to reach a point at which they were comfortable with a series of “general rules” for what was tax related and what was not.

“Then there needs to be a professional lens on the individual cases where it’s really client-dependent,” Devlin said.

“We built a calculator which factored in all the types of advice we give, and it had some variables that the advisers can toggle around how much of that particular advice is tax related, what sub-topics are, and then their justification for why it was related to the client’s tax position.

“That was really important to us, because obviously, I think our philosophical belief is we want to be treated as a profession, and therefore we need to treat our advisers and act like a profession. We need to be able to sometimes make a subjective decision and back our reasoning.”

Working with accountants

Working through the Australian Taxation Office (ATO) examples and applying the determination to their clients made it clear to Tribeca that they would also need to consult with some of the accounting firms with which they already work closely.

“We got them in and asked them what they thought of what our strategy was going to be, and what they thought of our initial estimates on what is tax related and what is not,” Devlin said.

“Honestly, they were very much on the same page as us, so there wasn’t a lot of tweaking required, but it was really nice to get their input.

“I think it built a lot of trust with those accountants that they saw that we were being proactive in this area, and we weren’t just going to send them an invoice and leave it to them to assess, because the reality is, they don’t have the SOA. They could request it, but I don’t think they really want to, and they don’t know the advice as well as we know it, so we wanted to make that determination.”

He clarified that it is important to remember that advisers are not tax accountants and are not the ones saying whether the advice is deductible.

“We’re saying that this is our assessment of the advice,” Devlin added.

Tribeca also put together cover letters for accounting partners and clients’ accountants that had links to the draft determination, as well as a new receipt system that broke down the fees and which parts were tax deductible and which parts weren’t.

“We were trying to make it really easy for the accountants, and I think they really appreciated that as well,” Devlin said.

“Once we had done financial year 24’s look-back, we sent these all out with a cover letter, with a receipt and with a summary of the calculation. We got some great feedback on that across the board.”

He added: “We’re obviously the closest to the advice; we know the advice the best. I think most accountants aren’t going to really want to go through a statement of advice, and I think even if they did, they’d probably need us next to them explaining the nitty gritty of the detail there.”

Should other advice firms go down this path?

Devlin acknowledged that Tribeca was able to go down this path, in part, because it is a self-licensed firm. However, he argued that it is something all firms should be looking into in order to make advice more affordable – particularly considering Tribeca found that around 60 to 80 per cent of its clients’ advice was related to their tax affairs.

“I really do think it’s a worthwhile exercise. If you’re a small firm, it might be a little easier, because you can make your own determinations on your own and work with your close accountants on a large basis,” he said.

“I think you’ve got to put some frameworks around it, lots of education, lots of training. But again, I think you’ll see the value in it. The clients will appreciate it, your accounting partners will appreciate it.”

Additionally, he argued it was an area that licensees could work on to help support their advisers.

“If I was a licensee, I would see this as a tool that my advisers would really appreciate, so I think there’s certainly value to do that,” Devlin said.

“I’m a massive believer that we’ve got to make advice more affordable to more people. This is one tool that helps us do that. Obviously, technology and all of those good things; AI potentially they’re in the pipeline, and some of those are coming online now.

“But anything we can do to break down those walls of your average Australian family getting some financial advice, I don’t think we could spend enough time trying to do that. And if I’m a big licensee, that’s a top priority for me.”