By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth.

30 September 2024

After considering feedback from the financial planning industry and major accounting bodies, the Australian Taxation Office (ATO) has finally released Taxation Determination (TD) 2024/7.

The ATO’s updated guidance on how individuals can claim deductions for financial advice fees, finalises an issue that’s been hanging around since 2019.

This final determination replaces TD95/60 – first released in December 1995 and withdrawn late last year.

The ATO’s updated guidance allows a deduction for financial advice fees relating to tax (financial) advice where it is provided by an adviser authorised to provide Tax (Financial) Services – confirming its position in draft TD 2023/D4.

However, the ATO did not agree to the deductibility of upfront fees under section 8-1 of the ITAA 1997 for other types of advice, particularly for clients with pre-existing investments.

The ATO has maintained its view that fees relating to initial advice are capital in nature and not deductible, while ongoing financial advice fees related to the management of existing income-producing investments generally qualify for deductions – encompassing continuous advisory services on the suitability or performance of current investments.

The confirmation that initial advice related to tax is deductible when provided by a QTRP, is a significant improvement over the original TD which didn’t allow deductions for upfront advice to any extent.

The ATO emphasizes the need for a reasonable apportionment of fees where only part of the service is deductible.

There are clear boundaries around scenarios where deductions are not typically permissible, including:

• Advice on prospective investments: Fees for advice on investments not yet made, aimed at determining their suitability, are seen as either capital in nature or too preliminary to be linked directly to the generation of assessable income.
• One-off financial advice: Fees for single instances of advice expected to yield long-term benefits, such as estate planning or setting up a self-managed superannuation fund, are classified as capital expenditures.
• Personal financial guidance: Advisory fees connected to personal finance management, like household budgeting, are deemed private and non-deductible.

At least we now have clarity after five years – and with the added clarity surrounding deductions under section 25-5, there’s the likelihood that a large portion of a typical advice fee will be deductible for clients of many advisers and practices.

Increased deductibility of advice fees should help make advice more affordable for many Australians.

The Financial Advice Association Australia (FAAA) is now starting to develop clear guidance for members on the ATO’s view and how to engage with clients and accountants on this.

In early 2025, revised guidance with explanation, interpretation and practical support will be available to FAAA members.

Once the FAAA guidance is available, Fitzpatricks Professional Standards will do a major education push on these changes.