ATO issues new guidance on tax deductibility of advice fees

Last year, the ATO said it is due to review its position on the tax deductibility of financial advice fees and update its position, which was set in 1995.

In line with this, the Tax Office has now published a broadened draft taxation determination (TD) to replace TD 95/60.

“This determination replaces TD 95/60 as a result of regulatory reforms to the financial services industry in recent years. However, it does not represent a change in the Commissioner's view on the deductibility of financial advice fees as outlined in TD 95/60,” the ATO said.

It also clarified that this determination does not apply to individuals carrying on a business, and does not consider circumstances where fees for financial advice are paid from a superannuation fund.

Ultimately, what the draft revised guidance states is that upfront fees are deductible to the extent that they relate to tax advice, and there is far greater clarity on the deductibility of ongoing fees.

Welcoming the announcement, Sarah Abood, CEO of the Financial Advice Association Australia (FAAA), said the group is “broadly pleased” with the revised guidance, and will provide further feedback as part of the public consultation process.

“This revised guidance is sensible and welcome. The existing Tax Determination is almost 30 years old, and a substantial amount of regulatory change has occurred since 1995,” said Ms Abood.

In addition, financial advisers are now recognised as Qualified Tax Relevant Providers (QTRPs) and are regularly providing tax advice to clients.

The revised guidance is open to feedback until 2 February 2024.

Examples

The ATO also provided several real-world examples of how the new rules would apply.

This one in particular touches on SMSFs:

Nate is a financial adviser authorised to provide a comprehensive range of personal advice to retail clients as a representative of a company that 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 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 that outlines how Juanita can establish an SMSF, 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 circumstances.
• Gives advice about liabilities, obligations, entitlements and tax implications resulting from the establishment of an SMSF.
• 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 SMSF 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 SMSF 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 concerns managing Juanita's tax affairs and 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.