Edited version of your written advice

Authorisation Number: 1013034591220

Date of advice: 15 June 2016

Ruling

Subject: Deduction - financial advice fees

Question 1

Are you entitled to a deduction for your initial financial advice fees?

Answer

No.

Question 2

Are you entitled to a deduction for the portion of your ongoing financial advice fees that relates to your investment retirement account?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You received financial planning advice from your Bank financial advisor.

You paid $X for your initial financial planning advice in 20XX.

You have sought financial advice in relation to setting up and obtaining a transition to retirement account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 25-5.

Reasons for decision

Summary

Your initial fee of $X is capital in nature and no deduction is allowed.

The portion of ongoing fees that relates to your investment retirement account is an allowable deduction.

Detailed reasoning

Initial financial planning fee

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).

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.

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.

Therefore where financial advice is sought in drawing up a financial plan for retirement and/or superannuation matters, such expenses are incurred at a point too soon to be considered as incurred in gaining or producing your assessable income. The expense is also considered to be capital in nature.

In your case, the fees paid for your initial financial planning advice are not deductible under section 8-1 of the ITAA 1997 as they are regarded as capital in nature and incurred at a point too soon.

Ongoing management fee

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 (Taxation Ruling IT 39).

That is, a taxpayer who derives assessable income from investments may deduct certain expenditure incurred if there is a direct connection with the derivation of that income. To be wholly deductible, all of a management fee must relate to gaining or producing assessable income.

Additional information

If your financial advisor cannot 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 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.