Contents
- What is Financial Advice?
- Types of financial advice and their tax deductibility
- Other deductible financial advice expenses
- Financial advice that is not tax deductible
- Example scenarios
What is financial advice?
Financial advice refers to professional guidance qualified experts provide to individuals regarding their financial matters. This advice aims to help clients make informed decisions about investments, budgeting, retirement planning, tax strategies, and other aspects of their financial well-being. It encompasses different types of advice, such as:
- investment advice; that focuses on recommending investment opportunities and strategies to optimise returns.
- tax advice, which involves providing guidance on tax planning, deductions, and compliance with Australian tax laws.
- other types of advice, which may include insurance advice, superannuation advice, estate planning advice, and more.
Types of financial advice and their tax deductibility
The tax deductibility of financial advice fees can vary depending on the type of advice received.
Deductions for financial advice fees may be claimed if they meet the requirements outlined in either section 8-1 (general deductions) or section 25-5 (tax-related expenses) of the ITAA 1997.
Section 8-1 allows deductions for financial advice fees to the extent that the loss or outgoing is incurred in gaining or producing assessable income. However, specific exclusions apply, including expenses of a capital or private nature, those incurred for non-assessable income, and those prevented by a provision of the Act.
Section 25-5 allows deductions for financial advice fees to the extent that the advice relates to managing tax affairs. The definition of ‘tax affairs’ is broad, covering a wide range of matters related to tax.
If financial advice fees are deductible under both sections 8-1 and 25-5, they can only be deducted once under the most appropriate provision. In such cases, the most appropriate provision is the specific deduction in section 25-5.
In certain circumstances, it may be necessary to apportion the deduction under sections 8-1 or 25-5. This arises when the full amount of fees paid may not be entirely deductible. Expenses may be partly deductible under section 8-1 if incurred for both income-producing activities and other purposes. For advice relating to both tax affairs and non-tax matters, apportionment on a fair and reasonable basis is required.
Generally, fees paid for investment advice related to income producing investments are tax deductible. On the other hand, fees for general financial advice or advice that does not directly contribute to assessable income may not be tax deductible.
Developing a Financial Plan
When you seek professional assistance to set up an investment portfolio or develop a comprehensive financial plan, the associated fees are generally classified as capital expenses. These expenses are typically incurred to establish the foundation for long-term financial growth and stability.
According to the Australian Taxation Office (ATO) Draft Tax Determination TD 2023/D4, fees related to providing general financial advice or preparing a financial plan are generally not tax deductible. This determination is based on the understanding that these fees do not directly contribute to the generation of assessable income.
Management and Retainer Fees
The ongoing management and retainer fees you pay are eligible for tax deductions for managing and optimizing your existing investment portfolio. These fees are typically associated with assets that generate income, such as shares or rental properties.
However, it’s worth noting that expenses related to items in your investment portfolio that don’t generate income may have limited deductibility—for instance, pension assets’ management, insurance premiums, private loans, etc.
Investment Loan Arrangement Costs
If you seek financial advice for an investment loan, you will incur a fee for the loan arrangement. This fee is classified as a borrowing expense and is associated with securing funds for your income-generating investments.
The tax deductibility of your investment loan arranging fees depends on the purpose of the loan and its direct association with income generation. If you use the loan to acquire assets that generate assessable income, you can deduct the fees from your taxes. However, if the loan serves personal purposes or is used to acquire assets that do not generate assessable income, you cannot deduct the fees.
Managing Cash Flow
You cannot claim tax deductions for fees associated with financial advice unrelated to earning assessable income, such as general cash flow management or personal budgeting advice. These fees are considered personal expenses and do not directly contribute to income generation.
Commissions
Indirect commissions, such as those paid to financial advisors by product providers or investment companies, do not qualify for tax deductions. Since these commissions are payments made by third parties and not directly incurred by you, the individual seeking financial advice, they are typically not eligible for tax deductibility.
Other deductible financial advice expenses
In addition to the specific types of financial advice fees discussed, there are other financial advice expenses that you can claim as tax deductions. These expenses include:
Superannuation Fund-Related Expenses
You can deduct fees for administration, investment management, and advice related to your superannuation fund. To qualify for tax deductibility, these expenses should directly contribute to enhancing the performance and compliance of your superannuation fund.
Actuarial Costs
If you seek professional actuarial advice to assess the financial viability of certain plans or investments, you can deduct the associated actuarial costs. These costs help you make informed decisions about your financial future.
Accountancy Fees
You can deduct fees paid to accountants for financial record-keeping, tax preparation, and compliance-related services. These fees ensure that your financial affairs are well-managed, organized, and compliant with tax laws.
Financial advice that is not tax deductible
It’s essential to be aware of specific fees that are typically not tax-deductible regarding financial advice expenses. These fees are considered personal expenses or fall outside the scope of income generation for tax purposes. Here are the key types of fees that are generally not tax deductible:
Initial Investment Advice Fees
Fees paid for initial investment advice or general financial advice are typically not tax deductible. These fees are considered to have not yet contributed to your assessable income (annual taxable income).
Financial Plan Preparation Fees
Fees associated with preparing a financial plan, such as a Statement of Advice, are generally not tax deductible. These fees are considered personal expenses rather than expenses directly related to income production.
Upfront Fees
Fees charged upfront for financial advice services are usually not tax deductible. These fees are often regarded as personal expenses rather than expenses directly linked to income generation.
Advice Regarding Non-Assessable Pension Income
Fees associated with advice specifically related to non-assessable pension income are typically not tax deductible. Since this income is not subject to tax, expenses incurred in obtaining advice regarding it are not deductible.
For self-education expenses, attending seminars to educate yourself on investment strategies, in general, would not be tax deductible. However, the fee may be tax deductible if the workshop is attended to improve your current investment portfolio and generate income.
Let’s take a look at the table below, which provides a comprehensive overview of different types of expenses, corresponding financial advice fees, their deductibility, and any additional relevant information. By referring to this table, you can gain a clearer understanding of the nature of each financial advice fee and whether it is eligible for tax deductibility.
| Type of Financial Advice Fee | Type of Expense | Deductibility | Additional Information |
| Setting up an investment portfolio or financial plan | Capital expense | Not tax deductible | Considered a capital expense; falls under ATO Tax Determination |
| Management and retainer fees for existing investment portfolio | Ongoing expense | Tax deductible (partially) | Deductibility depends on fees related to earning income and excludes non-income generating items |
| Investment loan arranging fee | Borrowing expense | Tax deductible | Deductible if loan is for income-generating purpose |
| Cash flow management and other issues | General expense | Not tax deductible | Advice fees unrelated to earning assessable income are not deductible |
| Commissions | N/A | Not tax deductible | Commissions incurred indirectly are not deductible |
| Researching investment portfolio | Research expense | Tax deductible | Costs related to researching existing investments may be deductible |
| Tax advice fees | Advisory expense | Tax deductible | Fees associated with tax advice on investments are tax deductible |
| Superannuation fund-related expenses | Administrative expense | Deductible for the fund | Deductibility of expenses incurred by the superannuation fund itself |
| Actuarial costs, accountancy fees, audit fees | Administrative expense | Ordinarily deductible | Deductibility of expenses related to managing the fund |
| Other administrative costs | Administrative expense | Ordinarily deductible | Deductibility of general administrative expenses in managing the fund |
Example scenarios from TD 2023/D4
Initial advice arrangement
Claudio is a financial adviser authorised to provide personal advice to retail clients of a financial services company which holds a financial service licence. Claudio is a recognised tax adviser for the purposes of section 25-5.
Claudio meets with a new client Min-Ji, an Australian resident who earns salary, has savings in an interest bearing account and who is a member of a superannuation fund. Min-Ji is seeking financial advice from Claudio to enable her to increase her regular income by generating higher investment returns.
Claudio and Min-Ji agree that Claudio will provide the financial advice for a fee. Claudio makes relevant enquiries through the completing of a fact-finding process to determine Min-Ji’s needs and objectives.
Claudio assesses Min-Ji’s financial situation by considering her assets and liabilities, income, risk profile and tax profile. Claudio recommends that Min-Ji invest her savings in a managed investment scheme which provides a periodic return. In providing this advice, Claudio interprets and applies the tax laws to Min-Ji’s circumstances and provides advice about liabilities, obligations and entitlements when acquiring, holding and disposing of the investment. It is reasonable to expect that Min-Ji will rely on the advice provided by Claudio.
To the extent that Claudio charges Min-Ji for his work in recommending the investment and acquiring the units in the fund on her behalf, this is not deductible under section 8-1 because it is a fee incurred as part of putting the income earning investment in place and does not have a sufficient connection with earning income from the investment. Further, it is considered to be capital or of a capital nature and may be included in the cost base of the investment for capital gains tax purposes.
Min-Ji will be able to claim a deduction under section 25-5 in relation to the tax (financial) advice provided by Claudio. This is because the advice was provided by a recognised tax adviser and was in relation to managing Min-Ji’s tax affairs. The tax (financial) advice in this situation is the advice relating to the taxation implications of the investment in the specific fund nominated. As the advice is provided for multiple purposes, Min-Ji needs to apportion the total amount of the fee between the different components of the advice on a fair and reasonable basis.
Continuing arrangement
After Min-Ji acquires the investment in the managed fund, she agrees to enter into an ongoing arrangement where Claudio will continue to provide her with advice on the suitability and performance of her investment for a fee. Claudio also agrees to provide Min-Ji with budgeting advice to enable her to increase her savings.
From time to time, Claudio suggests that Min-Ji change her mix of investments in the managed fund in order to achieve her original goals and objectives. When Min-Ji agrees with these changes, Claudio actions Min-Ji’s request to modify the risk profile of her investment in the managed investment scheme. This does not result in Min-Ji acquiring or disposing of her interest in the managed fund.
In this case, the component of Claudio’s fee that relates to the ongoing advice on the suitability of Min-Ji’s investments is deductible under section 8-1. This is because the expenditure is incurred in the course of gaining or producing assessable income from the managed investment scheme. In this case there is a sufficient connection between the fee for the ongoing advice and the investment in the scheme which produces Min-Ji’s assessable income.
The fee for the advice provided on the budgeting matters is not deductible under section 8-1 as it is not incurred in gaining or producing Min-Ji’s assessable income. It is considered to be a private or domestic expense. The fee is also not deductible under section 25-5 as it is not a fee incurred in managing Min-Ji’s tax affairs. As the advice is provided for multiple purposes, Min-Ji needs to apportion the total amount of the fee between the different components of the advice on a fair and reasonable basis.
Advice in relation to insurance policies
Lara is a financial adviser and authorised to provide a comprehensive range of personal advice to retail clients as a representative of a company which holds a financial services licence. Lara is a recognised tax adviser for the purposes of section 25-5.
Lara meets with Ollie who is seeking advice on his insurance needs to protect his lifestyle and family. Ollie already has income protection insurance but now would like advice from Lara about any other insurance policies that he should take out.
Lara makes relevant enquiries about Ollie’s personal circumstances. Lara assesses Ollie’s financial situation by considering his assets and liabilities, income, risk profile and tax profile. In doing so, Lara considers the costs and benefits of holding life insurance policies both inside and outside of superannuation before making any recommendations.
Lara provides advice to Ollie about how much insurance cover Ollie needs to protect his lifestyle and family. Lara advises Ollie about the tax implications of making payments for life, total and permanent disability and trauma insurance policies. She also advises Ollie about the income tax treatment of any lump sum payments received under the policies. It is reasonable to assume that Ollie will rely on Lara’s advice for tax purposes.
Lara advises Ollie to apply for a number of policies provided by an insurance company and that these policies should be held outside of the superannuation system. Lara charges Ollie a fee for providing this advice.
The component of the fee that relates to the provision of advice on the life, total and permanent disability and trauma insurance policies will not be deductible under section 8-1. This is because the expenditure is considered to be capital or of a capital nature.
Ollie will be able to claim a deduction under section 25-5 in relation to the tax (financial) advice provided by Lara. This is because the advice was provided in relation to managing Ollie’s tax affairs and it was provided by a recognised tax adviser. In this situation, the tax (financial) advice is the advice relating to the taxation implications of the insurance policies he has chosen to take out. As the advice is provided for multiple purposes, Ollie needs to apportion the total amount of the fee between the different components of the advice on a fair and reasonable basis.
Superannuation, welfare benefits advice and estate planning
Nate is a financial adviser authorised to provide a comprehensive range of personal advice to retail clients as a representative of a company which holds a financial services licence. Nate is also a recognised tax adviser for the purposes of section 25-5.
Nate meets Juanita who is seeking advice on maximising her income in retirement and transferring wealth to her children when appropriate. Juanita is employed as a teacher earning $115,000 per annum and she has $450,000 in superannuation.
Nate agrees to provide Juanita with advice for a fee. Nate makes relevant enquiries through the completion of a thorough fact finding process to ascertain Juanita’s needs and objectives. Nate assesses Juanita’s financial situation by considering her assets, liabilities, income, risk profile and tax profile.
Nate then delivers comprehensive financial advice which outlines how Juanita can establish a self managed superannuation fund, increase contributions to the new superannuation fund by entering into a salary sacrifice arrangement with her employer and suggests that she will need to arrange for her solicitor to update her will and power of attorney.
In particular, Nate:
- Interprets and applies the income tax laws to Juanita’s circumstance
- Gives advice about liabilities, obligations and entitlements and tax implications resulting from the establishment of a self managed superannuation fun
- Provides advice on the tax implications of entering into a salary sacrifice arrangement with Juanita’s employer.
The component of the fee that relates to the establishment of the self managed superannuation fund will not be deductible under section 8-1 as it is capital or of a capital nature. However, the component of the fee that relates to advising on the tax implications of establishing the self managed superannuation fund will be deductible under section 25-5.
The component of the fee that relates to advice on the salary sacrifice arrangement will be deductible under section 8-1. However, this would not include the amount deducted under section 25-5 in relation to the tax (financial) advice provided.
The component of the fee that relates to providing advice on interpreting and applying the income tax laws to Juanita’s circumstances (including entering into the salary sacrifice arrangement) will be deductible under section 25-5. This is because the advice is in relation to managing Juanita’s tax affairs and it was provided by a recognised tax adviser. As the advice is provided for multiple purposes, Juanita needs to apportion the total amount of the fee between the different components of the advice on a fair and reasonable basis.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.