Daniel Butler, director of DBA Lawyers, said TD 2024/7 confirms that individuals seeking advice in respect of SISA might be able to claim a deduction, either under s8-1 if the advice relates to producing assessable income, or as tax advice under s25-5 if it is provided by a “qualified tax relevant provider”, tax agent or financial adviser who can provide tax (financial) advice services.
“Subject to satisfying the relevant legislative requirements, individuals may be entitled to deduct financial advice fees from their assessable income under sections 8-1 or 25-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997),” Butler said.
“TD 2024/7 sets out the ATO’s views on how these provisions apply to financial advice fees but it does not apply to individuals carrying on an investment business nor does it apply to fees paid by an SMSF.”
Butler said the deductibility of financial advice fees is covered by two key sections of the ITAA 1997 – s8-1, which provides guidance on general expenses, and s25-5, which provides guidance on tax-related expenses.
“It’s important to note that if financial advice fees are deductible under both s8-1 and s25-5, they must be claimed only once under the most appropriate section. There must also be sufficient evidence of the expenditure to claim the expense as a deduction, such as an itemised invoice or fee disclosure statement,” he said.
He continued that under s8-1(1) an individual can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
“Relevantly, an individual is entitled to a deduction for financial advice fees under s8-1 to the extent that the loss or outgoing is incurred in ‘gaining or producing assessable income’. This is subject to certain qualifications discussed below,” Butler said.
“Additionally, ‘gaining or producing assessable income’ requires there to be a sufficient connection between the expense and the activities that gain or produce the assessable income. This requires consideration of whether the expense was entirely preliminary to the income-producing activity; and there is a delay between incurring the expense and the commencement of that activity.
“For example, fees for financial advice incurred regularly and on a recurrent basis for an existing and ongoing income producing investment should be deductible.”
Butler said that for non-deductible expenses, TD 2024/7 also outlines several circumstances in which a deduction is not available under s8-1.
“Specifically, an individual cannot claim a deduction to the extent that the expense is of a capital or capital nature and requires consideration of the advantage sought from the expense, how the advantage will be used, and whether the expense represents a once-and-for-all expense for acquiring something of enduring advantage or a periodical outlay for the use and enjoyment of something over time,” he said.
“As well, the expense is of a private or domestic nature – these terms are not defined in the ITAA 1997, but they take their ordinary meanings: ‘private’ refers to personal matters, and ‘domestic’ refers to the home, household, or household affairs. Further, the expense is incurred in gaining or producing exempt or non-assessable, non-exempt income and finally a specific provision of the ITAA 1997 prevents the expense from being deducted.”
He continued that a deduction can also not be claimed for advice on a proposed investment plan prior to acquiring an asset, but fees can be deducted on a regular or recurring basis to maintain existing income producing investments.
“Therefore, initial advice to establish an investment portfolio may not be deductible but ongoing fees for financial advice to manage the portfolio should be deductible,” he explained.
Butler continued that in regard to tax-related expenses under s25-5 an individual is entitled to a deduction to the extent the advice relates to managing their “tax affairs”.
“Tax-affairs is defined in s 995-1(1) ITAA 1997 and has been determined to include ‘tax (financial) advice’ as set out in s 90-15 of the Tax Agent Services Act 2009 (Cth),” he said.
“From 1 January 2022, entities that provide tax (financial) advice services for a fee or other reward must either be a ‘qualified tax relevant provider’ registered with ASIC or be a tax agent registered with the Tax Practitioners Board and meet the eligibility requirements to provide tax (financial) advice services.”
He added that it is important to note that not all financial advice will be considered tax advice, and there must be an application or interpretation of the taxation laws to the individuals’ circumstances for the expense to qualify as deductible.
“Superannuation-related advice may be considered tax (financial) advice if it relates to strategies involving super contributions, superannuation pensions, SMSF establishment, maintenance or related tax planning advice,” he said
“Further, ‘taxation law’ includes legislation which the Commissioner of Taxation has the general administration, which includes parts of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) that the Commissioner has general administration of. The Commissioner of Taxation regulates SMSFs and therefore advice in respect of SISA can be tax deductible to the extent that the advice qualifies for a tax deduction under s 8-1 or s 25-5.”
He concluded that under s8-1, a deduction is not available to the extent that the expense is capital and a similar preclusion is in s25-5(4).