Substantiation key for advice fee deductions: CA ANZ

Speaking with ifa, superannuation and financial services leader at Chartered Accountants ANZ, Tony Negline, said the Australian Taxation Office’s (ATO) updated determination on the tax deductibility of financial advice fees was a welcome development, especially given the changes in the space over the almost 30 years since the previous determination.

“It was old and there’s been a lot of changes since then in all sorts of areas, not least of which is the recognition that financial advisers are doing some tax advice that obviously came about from legislation that was passed when the last government was in place,” Negline said.

“So, there did need to be some adjustments as to how all of that worked, it did need a refresh. We do think, though, that the general rules of deductibility are still the same that they have always been. You’ve either got something that’s allowed as a specific deduction under a specific tax provision, or you fall under the general tax deductibility rules.”

Under the determination TD 2024/7, 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.

However, in order to substantiate which part of the advice is deductible, Negline said it will be essential for advisers to provide a break-up of their fees.

“There are two different types of clients. There are those that do not have a tax agent, and so therefore the client will be relying on the adviser to say, ‘It’s our estimation that X per cent is deductible’,” he said.

“Let’s say it’s $5,000 and 60 per cent of that was deductible. That’s $3,000 that is tax deductible. But many financial advisers can’t give them tax advice in relation to what may or may not be deductible in that sense. They’re not individual tax agents or registered tax agents for completing tax returns.

“Nevertheless, the client will be relying on the advice and the information the adviser has given them.”

On the other hand, for clients that work with a tax agent, if there is not a clear explanation for how the adviser has calculated the portion that is deductible, there are going to be questions.

“The tax agent is going to want to look at the invoice and say, ‘OK, they’re saying 60 per cent of it should be deductible, where’s my evidence for that?’ Accountants and registered tax agents are going to be looking for evidence for how you justify that,” Negline said.

“Once the client puts in their return, they’re on the hook for what is on that return. And the accountant or the registered tax agent is also on the hook. They’re taking the information and looking at it going, ‘How can I substantiate this cost?’

“I think that’s going to be the tricky thing that advisers are going to have to sit there and [determine] how much time they have actually spent on each different element of the advice piece.”

Collaboration between advisers and accountants

According to Negline, the last thing anybody involved wants is for a disagreement on fees from two trusted sources of advice.

“I think the worst outcome for everybody would be the advice is written, fees are paid, etc. The adviser issues an invoice for whatever the fee is and say, ‘In our view, 60 per cent is tax deductible’, they provide that information accordingly, and the accountant says, ‘I can’t see any justification for that’,” he said.

“That’s not a great relationship. That’s not a great outcome for anybody.”

The way to avoid running into any issues with the apportionment of fees into deductible and non-deductible, Negline explained, is a strong working relationship between financial advisers and accountants.

“I think there needs to be a really good communication channel about how things work and why … and, as I say, really good substantiation,” he said.

“I think advisers are going to have to work with accountants to say, ‘What is going to make you comfortable?’ Let’s face it, the client’s going to take whatever advice the accountant gives about what’s deductible or what’s not.

“[The adviser] will provide the information, and it will be the accountant saying, ‘In order to be comfortable to claim this deduction, I think I’m going to need this information, and I’m going to need it in this form’.”

An option that would make the entire situation simpler for everyone involved would be making financial advice fees as a whole a tax deductible; however, Negline said he does not see this as likely any time soon.

“I know that our good friends at the FAAA and other professional associations have regularly said to the government that all advice fees should be tax deductible. While the government may have some sympathy to those views, I have a feeling that it might just come down to the cost of that to the bottom line from the government’s budget perspective,” he said.

Doing a quick calculation that rounding up to 16,000 advisers with 120 clients each, this would equate to a rough estimate of $9.6 billion in revenue that would no longer be taxed.

“Because if you think about it, you know there’s still back of the envelope calculation. Let me see if I can do this right now.

“If that’s all tax deductible, then a big chunk of tax revenue goes out the window. In my time at CA ANZ, I don’t recall us asking – I’m not saying we have not in the past, but just in my time, I don’t recall us asking for this and I haven’t spoken to the Treasury about why this isn’t allowed.

“From my back of the envelope calculation that we have literally just done, I just think it comes down to raw numbers.”