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Incidentally, advisers may offer advice that strays into the taxation area. This is likely and at times unavoidable since dealing with money matters. However, the cost of financial advice as a tax deduction is not so black and white. There are no specific rules on the deductibility of financial advice fees, which mean it falls under the standard deductibility rules.
Mark Chapman, Director of Tax Communications at H&R Block, is an expert in this field, with 20 years’ experience as a tax adviser in Australia and the UK, and seven years as a Senior Director at the Australian Taxation Office (ATO) under his belt.
According to Chapman, “a tax deduction is only allowed when you’re incurring an expense that relates to earning assessable income” – that is – income that is subject to tax.
Generally speaking, you can claim a tax deduction on expenses charged for investment advice - provided that the costs are related to advice given which leads to, or is directly associated with, a specific investment which produces assessable income. Equally, if the fees are not related to a specific investment producing assessable income, then it is not deductible.
Here’s a breakdown of which fees may be tax deductible:
Drafting a loan
Tax deductibility on fees for arranging a loan are dependent on what the loan is for.
Chapman uses the example, “if you’re arranging a loan on your private residence – the house you live in – then the fees will not be tax deductible because you’re not earning any income from the property. You can, however, can claim a deduction for arranging a loan, if the loan is for an investment property”.
In most cases, the deduction is spread over the period of the loan or five years, whichever is the shorter. However, in certain circumstances where the total borrowing expenses incurred in an income year are $100 or less, the total amount is deductible in that year.
Setting up a financial plan or investment portfolio
While the initial fees for establishing a financial plan or investment portfolio are considered a capital expense and not tax deductible, any recurring fees or retainers you might pay for your financial adviser to maintain them, may be.
Similarly, fees for managing your existing investment portfolio are available as a tax deduction, but the fees must relate to earning income. If the fee includes advice on insurance premiums or management of private loans, then only a portion of the fee is deductible.
“By setting up a financial plan in the first place, you’re putting yourself in a position where you will earn assessable income, but at that point you haven’t earned any. So that’s regarded by the ATO, in tax terms, as a capital expense – and they’re not tax deductible. But the ongoing fees once you’ve started managing your investments are tax deductible,” explains Chapman.
Chapman also states, “any fees in relation to tax advice on your investments would be tax deductible as well.”
Researching your investment portfolio
It turns out that any costs related to researching your investments may also be tax deductible, as long as they directly relate to an existing investment portfolio or property.
“This includes attending seminars, doing courses, or buying any books or magazines that you’ve used to educate yourself,” says Chapman.
Better still, there’s no minimum or maximum you can spend before it becomes or stops being tax deductible, “it just is, or isn’t”.
Cash flow management and other expenses
Advice on cash flow management and other expenses, such as insurance or superannuation, do not relate to earning income for tax purposes, and therefore are not tax deductible. This is because the above fees are not seen as a cost incurred in the course of producing assessable income as the investment has not yet produced any assessable income. The ATO covers this issue in a Tax Determination (TD95/60), which has useful information in relation to tax deductions for obtaining investment advice.
Furthermore, fees for advice in relation to investments for a superfund are only deductible to the super fund itself, and only if the fund has paid for the advice and if it is an allowable deduction.
Ideally, your financial adviser should be able to break down their costs so you have some documentation to help you prepare your tax return.
For more information of what you can and cannot claim for in relation to financial advice, visit the ATO website.