‘Be careful’: Should advisers wait to pursue tax deductions?

On 25 September, the Australian Taxation Office (ATO) released its final determination (TD 2024/7), updating its position on the tax deductibility of financial advice fees, which had been unchanged since 1995.

In accordance with the ATO’s determination, under section 8-1 of the Income Tax Assessment Act, upfront fees are not tax deductible, however, under section 25-5, they are to the extent that they relate to tax advice and provided by Qualified Tax Relevant Providers (QTRP).

Despite this, Conrad Travers, director and principal consultant at Tangelo Advice Consulting, said misunderstanding within the profession has led some to believe that upfront fees are not tax deductible under any circumstances, stopping advisers from taking advantage of the recent change.

“I would say be careful who you listen to at the moment, because I’ve seen some advice from people who may not have read the determination properly and they’ve seen the headline that’s not deductible under 8-1, but haven’t gone to the next level of detail to understand that the changes are applicable under 25-5,” Travers said on The ifa Show.

“So, the first thing I would say is, if you want to do something in this space, make sure you read it.”

The Financial Advice Association Australia (FAAA) is expected to provide guidance on utilising tax deductions in early 2025. As such, Travers recommended that those who are hesitant or unsure could be better off waiting as they will still be able to reap the benefits for clients down the track.

“I think the majority of financial advice businesses, if they’re wanting some practical guidance, could just wait for the FAAA guidance in the new year because that will explain to them exactly what they need to do to implement it in their practice,” he said.

“It’s going to give some an invoice template that could help them make it happen. So, that’s kind of option one and it could mean, for example, you can actually go back and deduct fees that you’ve already charged clients from 1 July 2024. So that’s probably an important point to note, is that you can go back and claim that for a client.

“Now, obviously we wouldn’t want anyone to backdate any of those assessments, but basically to say, ‘I charged this fee to this client in August 2024, it was a $9,000 fee, $2,000 of that was super. Of the $7,000, we estimate that 70 per cent of it’s deductible and here’s the evidence to support it’. You could actually do that.”

For those who feel comfortable proceeding without guidance from the association, Travers said they can start to build out a tool or template to help them calculate the portion of advice that is tax deductible.

“A lot of superannuation contribution advice is going to be tax related. A lot of investment advice, whether it’s like an ETF or an investment bond or things like that can be tax related. And then there’s going to be certain strategies that are partially tax related and partially not,” he said.

“The calculations need to allow for all of that and then give you effectively like a net figure that you can quote to the client to say, ‘Look, this is what we estimate could be deductible for you. We will confirm that when we give you the final [statement of advice]. But just to let you know of that $7,000 fee, we think that $4,000 is deductible for you’.”

By calculating tax deductions early in the advice process, Travers said advisers can improve their client conversion rate as it will give clients a better idea of the real cost of the service.

“It also should hopefully help us get more people in that wouldn’t traditionally get financial advice because they’re going to know that a good chunk of their fee is potentially deductible,” he said.

To hear more from Conrad Travers, tune in here.