Edited version of your private ruling

Authorisation Number: 1012457013864

Ruling

Subject: Deduction for expenses incurred in relation to an investment plan

Question 1

Are you entitled to a deduction for:

· Investment fee - preparation of investment plan

· Loan arranging fees

· Counselling and consulting fee for investment and risk management?

Answer

No

Question 2

Are you entitled to a deduction for the portion of the Investment portfolio and risk management counselling fees and loan management fees you incurred relating to your current income producing investments?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You received investment advice from a financial advisor.

The services provided by the financial advisor during co-ordination, implementation and the first twelve month's management of the investment strategy are:

· Further analysis of your current financial position and preparation of a strategic financial plan.

· Reviews of existing financial facilities with restructure and or establishment of new facilities where appropriate.

· Review of your current life and disability insurance and a comprehensive insurance needs analysis.

· Review of your current superannuation investments and, if necessary, recommendations on consolidation of superannuation.

· Lodgement of any new investments.

· Post loan and investment implementations meeting with your Client Services Manager to ensure the establishment of your facilities are as per plan.

· Monthly cash flow monitoring and management comparing actual outcomes to forecast.

· A review at 3 months from plan implementation with your Client Service Manager to check income and expenses (cash flow) against plan forecast, confirm implementation of investments and settlement of the margin loan along with confirming bank transfers, including salary and interest payments are all correct.

· Monthly cash flow reporting and training on your investment and finance facilities with your Client Service Manager.

· Full plan review with your Financial Adviser at 6 and 12 months after plan settlement.

· Access to ongoing telephone support (from your Adviser and other supporting team members).

· Assistance in co-ordinating the collection and collation of information for preparation of your Tax Return, including liaising with the tax accountant.

· Regular newsletters and updates.

You received an invoice from your financial advisor outlining the following fees:

Investment fee - preparation of Investment Plan $ X

Investment loan arranging fee $ X

Private loan arranging fee $ X

Counselling and Consulting Fee for investment and risk

management $ X

You received another invoice from your financial adviser outlining the following fees:

Ongoing investment portfolio and loan management service, for a set period being:

Investment portfolio & risk management counselling $ X

Loan management Private $ X

Loan management Investment $ X

You invested an amount of money in managed funds.

After the initial year you will pay an ongoing portfolio management service fee. This fee will be charged to your investment line of credit and debited on a monthly basis. The services to be provided include:

· Ongoing cashflow, investment and risk management advice

· Annual goals, cashflow, loan and investment portfolio review with your financial advisor

· Monthly cashflow monitoring (actual to plan forecast) with quarterly reporting provided

· Access (either by phone or face to face) to your advisor and/or any other supporting team member/s as you may require

· Regular newsletters and updates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-25

Reasons for decision

Summary

Fees for loans to be used for private purposes are private in nature and are therefore not deductible. Fees for the preparation of the investment plan and the counselling and consulting fee are incurred at a point too soon to be incurred in producing assessable income and are capital in nature.

A portion of the ongoing advice service fee paid for reviewing your current income producing investments is an allowable deduction. However, as the fee paid relates to your investments as well as other services such as a review of your current insurances, superannuation investments and cash flow management, the fee needs to be apportioned in calculating your allowable deduction.

Detailed reasoning

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 assessable income, except where the outgoings are of a capital, private or domestic nature, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.

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 proportion of the fee is deductible. Similarly, 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 gives the Commissioner's views on when the provision of investment advice is deductible under section 8-1 of the ITAA 1997.

Paragraphs 3 and 4 of TD 95/60 explain that the fee for drawing up the plan is not deductible for income tax purposes. 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. It is an expense that is associated with putting the income earning investments in place and therefore has an insufficient connection with earning income from the investments.

Expenditure on drawing up the plan is incidental and relevant to outlaying the price of acquiring the investments and is associated with the making of the investments as to warrant the conclusion that it is capital or capital in nature.

Paragraph 5 of TD 95/60 explains that ongoing management fees or retainers in respect of existing investments are deductible. However, if the advice covers non-investment matters or investments that do not produce assessable income, only a portion of the fee is deductible.

Paragraph 6 of TD 95/60 explains that over a period of an investment plan advice may be received to change the mix of the investment held. This would normally be part and parcel of managing the investment in accordance with the plan. Provided the advice is not in relation to drawing up an investment plan it will be an allowable deduction as set out in paragraph 5 of TD 95/60.

In your case you have received investment advice from a financial advisor. You have paid a number of service fees covering various financial matters. A detailed list of services is provided to show what is included in the total fee. However, some of these services are capital or private in nature and therefore not deductible under section 8-1 of the ITAA 1997. Private loan arrangement and loan management fees are private in nature and therefore are not deductible.

The fees for the preparation of the investment plan and the counselling and consulting fee for investment and risk management are both invoiced prior to the initial investment. Therefore these fees are incurred at a point too soon to be considered as incurred in gaining or producing assessable income and are therefore capital in nature and not deductible under section 8-1 of the ITAA 1997.

The investment loan arranging fee is a borrowing expense and is therefore deductible over the lesser of the term of the loan or five years under section 25-25 of the ITAA 1997.

A portion of the ongoing investment portfolio and risk management counselling fee and the ongoing loan management fee relate to reviewing your current investments. Where these investments produce assessable income for you, then the associated fees are an allowable deduction under section 8-1 of the ITAA 1997.

Furthermore, where a part of the ongoing advice service fee relates to drawing up an investment plan in relation to further investments, then the associated costs are capital in nature and incurred at a point too soon to be considered as incurred in gaining or producing your assessable income. Any costs paid in relation to cash flow management of your personal finances, your insurances and superannuation investments do not relate to your current assessable income. As such no deduction is allowable.

Additional information

If your financial advisor can not provide a breakdown of your ongoing advice service fee, then the Commissioner will accept a calculation based on a reasonable estimate. For example, if 15% of your financial advisor's time is spent on reviewing your individual current income producing investments, then it would be accepted that 15% of your ongoing advice service fee would be an allowable deduction.

It is also noted that an ongoing fee will be charged annually after the first year. This fee is for ongoing portfolio management. In relation to these ongoing fees any costs to be paid in relation to cash flow management of your personal finances, your insurances and superannuation investments do not relate to your assessable income and will need to be apportioned.

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