David Barrett, independent consultant and technical advice specialist, said the tax determination released on 25 September may allow SMSF clients to claim a larger tax deduction on fees for personal advice provided to them, but advisers may need to issue new, itemised tax invoices to allow the larger deduction to be claimed.
More importantly, as the tax determination does not apply to advice fees paid from superannuation funds generally, the potentially larger tax deductions available for fees on financial advice provided to individuals may cause SMSF advisers to re-think how (and to whom) they provide their advice: the SMSF trustee or the individual.
Barrett said TD2024/7 replaced TD95/60, which was last revised in 2012 and considered the application of section 8-1 of the Income Tax Assessment Act 1997 in relation to investment advice fees only.
“Section 8-1 is the general deduction provision, providing a deduction for losses or outgoings incurred in gaining or producing assessable income,” he said.
“The new TD is broader and considers the application of section 8-1 to financial advice fees – including investment advice – in general, as well as the application of section 25-5, which provides deductibility for tax-related expenses. For many clients, this could lead to greater deductions.”
He continued that under the previous TD, it was generally accepted that upfront financial advice fees were not deductible as they were either too early in the process to be sufficiently connected to the derivation of assessable income or were carved out from deductibility by being a loss or outgoing which is capital, or of a capital nature.
“Furthermore, financial advice fees related to household budgeting (that is, a loss or outgoing that is private or domestic in nature) and those related to generating non-assessable non-exempt income like certain superannuation benefit payments paid after age 60, were treated as non-deductible.”
“Although financial advice provided about existing income-producing assets was typically treated as tax deductible, the new TD confirms advice fees regarding how a client invests additional funds to grow their investment portfolio are non-deductible, as are those relating to initial advice on existing investments in a new adviser engagement.”
He added that before the latest TD, only a small portion of upfront financial advice fees had been treated as tax deductible.
Barrett continued that the ATO states in the new TD that under section 25-5 “tax (financial) advice” fees may be included as a deduction if the advice is provided by a “recognised tax adviser”.
“Since 1 January 2022, tax (financial) advice provided for a fee must be provided by either a ‘qualified tax relevant provider’ (QTRP), registered with ASIC, or a tax agent, registered with the TPB,” he said.
“It’s implicit in the new TD that the ATO considers both QTRPs and tax agents as recognised tax advisers and therefore it follows that certain upfront financial advice fees that are not deductible under section 8-1 may be deductible under section 25-5.”
With these changes, Barrett said it is important advisers understand what is considered tax (financial) advice to determine how much of their fees may be deducted.
“The new TD provides examples that give some clues about what tax (financial) advice is,” he said.
“These include advice relating to the taxation implications of investments in managed investment funds, insurance policies chosen, establishing an SMSF, a salary sacrifice arrangement.”
But further guidance on what tax (financial) advice is would help financial advisers significantly.
Barrett said to claim deductibility under section 25-5 “financial advice fees must be apportioned on a reasonable basis”. An adviser should provide an itemised invoice that includes the adviser’s name, the expense amount, an explanation of the advice provided, the date the expense was incurred, and the date of the invoice.
“Although the new TD was published on 25 September 2024, it is a statement of the current law at that time and may be applied to expenses incurred before the date of publishing,” he said.
