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Ruling

Subject: Deduction-ongoing management fees

Question 1

Are you entitled to a deduction for the initial investment fee for drawing up your investment plan?

Answer: No.

Question 2

Are you entitled to a deduction for the portion of your ongoing advice service fee you incurred relating to the current income producing investments held in your name?

Answer: Yes.

Question 3

Are you entitled to a deduction for your ongoing management adviser fees that relates a superannuation fund?

Answer: No.

Question 4

Are you entitled to a deduction for the ongoing management adviser fees for service provided by a financial advisor which relates to pension, budgeting, setting financial goals, managing tax affairs, retirement planning, insurance, managing debt, planning for unforeseen events and accessing government benefits?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are employed in the health sector.

You have a superannuation account.

You have a superannuation account with a superannuation fund.

You hold a term deposit with a financial institution.

You and your spouse sought financial advice from financial adviser in regards to your personal financial situation. The advice provided was in the areas of:

You paid the following fees to the advisor:

You meet with your financial advisor a number of times a year to review your personal investment plan.

During one of those reviews you changed your investment mix.

At these reviews you also discuss other matters relating to your personal investment plan.

You pay the on-going management fee to the financial advisor.

The initial fee was deducted from your superannuation account.

You do not receive a pension from the superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income. However, a deduction is not allowed where the loss or outgoing is of a capital, private or domestic nature or incurred in relation to gaining exempt income.

To determine whether a deduction is allowable for financial advice under section 8-1 of the ITAA 1997, the nature of the expense must be considered. The nature or character of the financial advice fees follows the advantage which is sought to be gained by incurring the expense. If the advantage to be gained is of a capital nature then the expense incurred in gaining the advantage will also be of a capital nature. Also if the expenses incurred relate to a separate entity, then no deduction is allowable.

Fees paid for obtaining financial advice are ordinarily deductible under section 8-1 of the ITAA 1997 when incurred in servicing an existing investment portfolio. However, to be wholly deductible, all of the fee must relate to gaining or producing of your assessable income. If the advice covers other matters or other entities or relates in part to investments that do not produce assessable income, only a portion of the fee is deductible. Where part of the expense covers other matters or relates to investments that do not produce assessable income, only a portion of the fee is deductible.

However, if the fee is an initial fee for setting up the investment or financial plan, the cost would be considered to be a capital expense and not deductible.

Taxation Determination TD 95/60 deals with the issue of whether fees paid for obtaining investment advice are an allowable deduction for taxpayers who are not carrying on an investment business.

TD 95/60 explains that a fee for drawing up a financial plan is not deductible because it is not expenditure incurred in the course of gaining or producing the assessable income from the investments. It is too early in time to be an expense that is part of the income producing process as it is an expense that is associated with putting the income earning investments in place. Therefore the expense has an insufficient connection with earning income from the investments, and is considered capital in nature.

TD 95/60 also states that where a taxpayer has existing investments and goes to an investment advisor to draw up an investment plan, the fee paid would be a capital outlay even if some or all of the pre-existing investments were maintained as part of the plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of a capital nature.

TD 95/60 also states that on-going management fees or retainers that relate to income producing investments have an intrinsically revenue character and are generally an allowable deduction.

In your case, you incurred expenses for the services provided by a financial advisor. The initial fee charged for drawing up the investment plan which covered various financial matters is not deductible as the expense was not incurred in earning income from your investment; rather, the expenses were associated with putting the investment in place. The expense is considered capital in nature and is not deductible under section 8-1 of the ITAA 1997.

In relation to the on-going management fee which covers various financial matters.

A portion of the fee relates to reviewing your own individual current investments such as the term deposit. Where this investment produces assessable income for you, then the associated fee is an allowable deduction under section 8-1 of the ITAA 1997.

However a portion of your fees also relates to personal financial matters, advice for your spouse and the superannuation fund. As your spouse and superannuation fund are regarded as separate entities for taxation purposes, the portion of the fee that relates to the investments of your spouse and/or superfund do not directly relate to your assessable income and therefore no deduction is allowable for the relevant portion of the fee. That is, the investments relating to your spouse and superfund produce no assessable income to you. The fact that you may earn assessable income from your superannuation in the future does not alter the fact that the expenses relate to the superannuation fund's investments and not yours and therefore are not an allowable deduction for you.

Any on-going management fee paid in relation to your personal financial situation such as planning for retirement, budgeting, insurance, budgeting, setting financial goals, managing tax affairs, managing debt, planning for unforeseen events and assistance for accessing government benefits do not relate to your current assessable income. As such no deduction is allowable under section 8-1 of the ITAA 1997.

Apportionment of ongoing management fee

The general requirement when apportioning expenditure is to assign a percentage to represent the deductible part of a composite expenditure. There is no universally accepted formula that can be applied. As long as the apportionment is reasonable in the circumstances and there is some proof of its determination.

In your case, the ongoing management fee paid to the financial advisor relates to your investments as well as investments for your spouse. Therefore the fee needs to be apportioned when calculating any allowable deduction. After being a portion the ongoing management fee relating to your investments needs to be further apportioned to allow a deduction for the income producing investments only. That is, the portion of the ongoing management fee paid for reviewing your current investment as opposed to the portion of the fee that relates to your personal financial plan which is not an allowable deduction.

If your financial advisor cannot provide a break down of your ongoing management fee paid for reviewing your current investment, then the Commissioner will accept a calculation based on a reasonable basis. For example, if 5% of your financial advisor's time is spent on reviewing your individual current income producing investment, then it would be accepted that 5% of your ongoing management fee would be an allowable deduction.

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