Will tax deductibility improve access to advice?

The Australian Taxation Office’s (ATO) final determination, released on 25 September, confirmed that financial advice fees for tax (financial) advice are deductible under section 25-5 of the Income Tax Assessment Act if provided by a Qualified Tax Relevant Provider (QTRP).

This follows the draft determination (TD 2023/D4) released by the ATO in December 2023 updating its position on the tax deductibility of financial advice, which was set in 1995.

Speaking with ifa, Cowell Clarke financial service lawyer Emma Johnson said she believes this decision could provide some mutual benefits for advisers and clients.

“[It] might help, at least with marketing their business, but also from a financial perspective, is the determination in relation to tax deductibility advice,” Johnson said.

“I mean, for individuals, if it’s a tax saving, then that’s a very positive thing for both parties.”

While many advisers have found it challenging to navigate the new rules and calculate the tax-deductible portion of their advice, Tribeca Financial’s head of advice, Robert Devlin, told ifa that the firm has undergone considerable efforts to determine how the draft determination could be applied in a practical sense.

Speaking with ifa in August, Devlin noted that, given the holistic nature of the advice the firm provides, it can be challenging to determine what portion of their advice meets the ATO’s criteria. However, with the right approach and appropriate training, it can be achieved.

“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 subtopics 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.”

According to Devlin, despite the challenges to reach this point, it has delivered great results for Tribeca clients with the firm finding 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.

Despite this being a step towards reducing the cost of advice, the ATO maintained that initial advice fees are considered capital expenses and are not deductible, while ongoing fees remain deductible.

Johnson said the persistent cost-of-living pressures and subsequent struggles will continue to stop many from accessing advice as they contend with more immediate financial concerns.

“The issue is that consumers do not want to spend $3,000 to $6,000 or whatever it is to get advice where they don’t have any spare money,” she said.

“So, even though the long-term benefit is positive and these changes will affect the cost of advice a little bit, there’s still going to be an issue is that it’s still a lot of money for a lot of people to be spending where it’s for a longer-term benefit but they might not, they might just need that cash today.

“It’s convincing people they need it as well, that’s an issue.”

Johnson added: “In some people’s mind, it’s a luxury good that they won’t get today, they’ll put it off until tomorrow.”

She explained that for people to see the value of financial advice, financial education and literacy needs to be improved across the board.

“If we can change financial literacy in the early, early years, that would be a good start, I think, and then people understand the benefit if they get their financial situation sorted earlier, then the reward is kind of tenfold to what it could be if they leave it a few years,” Johnson said.

“But I think we get so little education at any point in our schooling or post-schooling lives that people don’t understand that as a simple starting point.”