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Ruling

Subject: Investment fees

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 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

During 2011 you invested in a portfolio of income producing investments.

You received an invoice from your financial adviser 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 being:

Investment portfolio & risk management counselling $ X

Loan management Private $ X

Loan management Investment $ X

Your financial adviser has provided details of each item:

The preparation of investment fee is a fee for the application and lodgement of an investment plan.

The loan arrangement fee (investment) is a fee for the establishment of loan facilities for the purpose of acquiring income-producing investments.

The counselling and consulting fee for investment and risk management is for the provision of counselling and consulting services in relation to the client's investment plan and investment risk positions.

The ongoing investment portfolio and risk management fee is charged for the monitoring of existing investments for the twelve month period. The fee relates to the management of income-producing assets and identification of avenues to increase income. Your financial adviser offer clients a full hands-on approach to their investment plan which necessitates frequent and detailed monitoring of their plans and regular direct communication with clients.

The ongoing loan management fee is for monitoring loan accounts to ensure that loan limits are adhered to and that borrowed funds from the accounts are used appropriately.

The list of services provided by your financial adviser during co-ordination, implementation and the first twelve month's management of 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 cashflow 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 (cashflow) 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 cashflow management, 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).

· Co-ordinating the collection and collation of information for preparation of your Tax Returns where appropriate for you and your partner, including liaising with the tax accountant.

· 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

Private loan fees 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.

The 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 so 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 invested with a financial adviser. 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 fees. 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.

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.

The loan management fees relating to the investments are deductible under section 8-1 of the ITAA 1997.

A portion of the ongoing investment portfolio and risk management 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 cashflow 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 adviser can not provide a break up 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 adviser'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.