Edited version of your written advice

Authorisation Number: 1051304432952

Date of advice: 13 December 2017

Ruling

Subject: Investment advocacy

Question 1

Are management fees paid to engage a personal advisor relating to the ongoing management of the taxpayer’s investment property portfolio income and expenditure an allowance deduction under s 8-1 Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 201Y

Year ended 30 June 201Z

The scheme commences on:

1/07/201X

Relevant facts and circumstances

You were issued with an invoice for fees Associated with the scheme.

You were issued a tax receipt for payment.

The Lease-back agreement signed with the builder was signed a lease. The terms of the lease were for $XXXX per month in advance for many months.

201Y Financial Year personal advisor assisted the taxpayer to acquire the land by way of a fee free referral.

Management fees associated with the ongoing management of the investment property were delayed due to the individuals banking conditions.

After the fees were initiated the personal advisor oversaw the client’s relationship with the builder in terms of income continuity and future income generation.

The personal advisor consulted with the taxpayer regarding timing of their interest payments provided advocacy on the leaseback, and further ongoing management of the builder relationship.

The personal advisor analyses the Client’s bank statements to record the percentage split of loan usage and still maintains a management/advocacy responsibility, also fees cover applications to the ATO.

The personal advisor role continues for the contract period, but will continue to assist the taxpayer at their discretion. The personal advisor claims 100% in year one.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

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.

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 setting up an investment portfolio, 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.

I acknowledge that you have advised the service provided by the personal advisor included on-going management of the lease back arrangement including insuring payment by the builder and managing the account. Where advice is provided, this would suggest significant action taken and an invoice or invoices that reflect a break-up and timing aligned when the service was provided on the ongoing management of your investment.

Based on the current invoice which does not clearly indicate the portion/s of the fee attributable to the latter service provided and portfolio management suggest significant action taken for a fee for service arrangement that goes beyond incidental monitoring of accounts.

ATO view documents

Tax Ruling IT 39

Tax Determination 95/60

Other references (non ATO view)

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

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

(Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184)