Edited version of your private ruling

Authorisation Number: 1012515742279

Ruling

Subject: financial fees

Question 1

Are you entitled to a deduction for all your financial advisor fees?

Answer

No.

Question 2

Are you entitled to a deduction for the portion of your financial advisor fees that relates to your income producing savings such as term deposits and shares?

Answer

Yes.

Question 3

Are you entitled to a deduction for the portion of your financial advisor fees that relates to your annuity?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

Your financial adviser set up and monitors your annuity investment.

The investment was set up a few years ago and you pay a quarterly fee.

Your financial adviser also gives you advice regarding your general savings account if required as part of this fee. For example, advice is provided on what to do with money when a term deposit is ended and whether to purchase further shares.

You meet with your financial adviser at least once a year.

You can ring any time for advice in relation to various share offers made.

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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining

assessable income or, in other words, of an income-producing expense

(Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)),

· there must be a nexus between the outgoing and the assessable income so

that the outgoing is incidental and relevant to the gaining of assessable

income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing

and the operations or activities by which the taxpayer most directly gains or

produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v.

FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

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.

However, an ongoing management fee paid to advisers, or costs of servicing and managing an existing investment portfolio are generally an allowable deduction under section 8-1 of the ITAA 1997 if they relate to income producing investments and are not capital in nature.

In your case, your financial adviser fees relate both to your annuity and to your other general savings you have in term deposits and shares.

An annuity is a financial product which provides you with a series of payments in return for a lump-sum investment. The rate of return is fixed at the outset, regardless of share market movements or interest rate fluctuations. Capital is returned to the investor at certain times. Such an investment is capital in nature and the associated costs in relation to such an investment are not allowable under section 8-1 of the ITAA 1997.

Although some parts of an annuity may be subject to special tax treatment that results in an amount being included in assessable income, this does not change the character of the payment.

You also receive financial advice in relation to your term deposits and shares. As this advice relates directly to the earning of your assessable interest and dividend income, the associated fees paid for advice on these investments are deductible under section 8-1 o the ITAA 1997.

Apportionment of expenses

As your on going financial management fees are not fully deductible, you will need to apportion the expenses using a reasonable basis. Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances.