As retirement approaches, many people turn to financial advisors to help them make the most of their wealth and plan for the future. However, seeking financial advice is not limited to just those nearing retirement, many people of all ages seek expert guidance for various reasons such as saving for a major purchase, improving investment strategies, or simply planning for unexpected expenses. 

A common question when paying for financial advice is whether these fees are tax-deductible. This issue is specifically addressed in Tax Determination TD 2024/7, which was issued by the Australian Taxation Office (ATO) on 25 September 2024. This determination provides important information on the eligibility for claiming tax deductions on financial advice services, helping individuals understand how they may benefit from reduced tax liabilities. 

It’s important to understand that this Tax Determination (TD) applies only to individuals. For example, it cannot be used for investment advice purchased by a superannuation fund. Additionally, the ruling applies only if the individual is not operating an investment business. 

The TD reaffirms some of the Australian Taxation Office’s (ATO) long-standing views on whether financial advice fees can be deducted. This determination has been issued in response to changes in non-tax laws, which have prompted the need for clarification on the deductibility of such fees. 

You can only claim a deduction for an expense if it is directly related to earning your income. However, even if the expense is connected to earning income, it won’t be deductible if it’s considered a “capital” expense (something that adds to the value of an asset) or a “private” or “domestic” expense (something unrelated to your work or business). These rules depend on the situation in which you seek financial advice. 

The ATO explains that if you seek financial advice about a potential investment, the connection between the advice and any income that might come from the investment is not strong enough to make the expense deductible. The advice is seen as a preliminary step in deciding whether to invest, not directly linked to earning income from that investment. 

Additionally, the ATO also states that fees paid to set up an investment for the first time are not deductible. This means that costs associated with getting an investment off the ground are considered part of the process of making the investment, rather than an expense that can be claimed as a tax deduction. 

The TD also explains that you cannot claim a deduction in cases where you already have an advisor and existing investments, but you seek advice on how to invest additional funds into your portfolio. Similarly, if you consult a new advisor for a new investment strategy while you already have investments in place, the cost of this advice is also not deductible. 

If you get financial advice related to your personal budgeting for your home, the fees for this are not deductible either. The ATO views this type of expense as being of a private or domestic nature, rather than related to earning income. 

So, what can be deducted? 

If you pay fees for ongoing financial advice related to an existing investment portfolio on a regular basis, these fees are deductible. This is because such fees are not considered to be a capital expense. It’s not about setting up the investment structure; it’s about managing and adjusting the investments over time. This also includes advice on whether to keep or sell existing investments. 

If the financial advice includes tax-related guidance, that portion of the fees will be deductible. This is because specific provisions in tax law allow for a deduction for tax advice. 

If you seek advice about an insurance product, whether the advice is deductible depends on the type of insurance. Advice about life insurance, home and contents insurance, or general insurance is not deductible because the amounts you pay for these policies don’t contribute to your assessable income. However, advice regarding income protection insurance is deductible, as any claim made in the future will be considered part of your assessable income. 

Sometimes, the advice you receive may cover both deductible and non-deductible topics. In this case, you’ll need to divide the expense between the deductible and non-deductible portions when claiming it on your tax return. It can be helpful if your financial advisor breaks this down for you on their invoice, but this doesn’t always happen. 

There are certain aspects of the ATO’s views in TD 2024/7 that can be debated from a technical tax perspective. However, if you want to avoid issues with the ATO, it’s best to follow the guidelines outlined in the TD. If you need more advice, Allied Business Accountants is here to support you.