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Edited version of your written advice
Authorisation Number: 1012735184882
Ruling
Subject: Financial advice fees
Question 1
Are you entitled to a deduction for initial advice fees incurred for the creation of an investment plan, which included advice on managing your existing investments (including loans to purchase the investments), salary sacrifice arrangements and transition to retirement?
Answer
No.
Question 2
Are you entitled to a deduction for ongoing advice service fees in relation to your salary sacrifice arrangements and transition to retirement?
Answer
No.
Question 3
Are you entitled to a deduction for ongoing advice service fees in relation to managing your existing investment portfolio?
Answer
Yes.
This ruling applies for the following periods:
year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You are currently employed and are nearing retirement.
You are not carrying on an investment business.
You employed the services of a financial advisor to prepare a Statement of Advice in relation to existing investments, salary sacrifice arrangements and your transition to retirement.
You have employed the services of the same financial advisor for ongoing management of your finances.
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 assessable income except where the outgoings are of a capital, private or domestic nature.
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.
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 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.
Initial advice fee
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.
On-going advice management fee
On-going management fees or retainers in relation to investment that directly gain or produce your assessable income are deductible under section 8-1 of the ITAA 1997.
Advice relating to Salary Sacrifice
A salary sacrifice arrangement reduces your assessable income and replaces it with non-assessable or exempt benefits. Accordingly, the portion of fees paid that relate to salary packaging is not an expense incurred in earning assessable income and therefore no deduction is allowed.
Advice relating to your transition to retirement
Similarly any costs paid in relation to your retirement income and estate planning do not relate to your current assessable income. As such no deduction is allowable.
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