Private ruling: Financial planning expenses
Published: June 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for your initial financial advice fees? | A1: No. | Q2: Are you entitled to a deduction for all your ongoing financial advice fees? | A2: No. | Q3: Are you entitled to a deduction for the portion of your ongoing financial advice fee that relates to your income protection insurance? | A3: Yes. | Q4: Are you entitled to a deduction for the portion of your ongoing financial advice fees that relate to your salary packaging benefits, superannuation and tax estimates? | A4: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Section 25-5.

Reasons for decision: 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). Taxation Determination TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business? deals with the issue of whether initial fees and ongoing fees paid for investment advice are an allowable deduction. 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. 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. | Detailed Reasoning - 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. 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. Advice received in relation to your income protection insurance is an allowable deduction as the premiums are an allowable deduction and any insurance payments received would be assessable. You are therefore entitled to a deduction for the fee incurred in relation to this advice. However the remaining amounts of your ongoing advice fees do not sufficiently relate to your assessable income and therefore are not an allowable deduction. A salary sacrifice arrangement means an arrangement under which an employee agrees to contractually forego part of the remuneration that they would otherwise receive as salary and wages in the form of money, in return for their employer providing benefits of a similar value. A salary sacrifice arrangement reduces a taxpayer's assessable income and replaces it with non-assessable or exempt benefits. As salary sacrificed amounts are regarded as exempt income, costs incurred in relation to this income are not an allowable deduction under section 8-1 of the ITAA 1997. Accordingly, the fee in relation to your salary packaging is not an expense incurred in earning assessable income and therefore no deduction is allowed. Where an ongoing fee relates to superannuation matters, no deduction is allowable. Such expenses are capital in nature and are incurred at a point too soon. Therefore no deduction is allowed for your ongoing fees relating to the tax advice relating to superannuation concessional contributions and superannuation fund investment advice and management. The advice in relation to the provision of tax estimates for tax planning and instalment purposes is also not deductible. Section 25-5 of the ITAA 1997 specifically denies a deduction for a fee for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser. A recognised tax adviser is defined in subsection 995-1(1) of the ITAA 1997 to be a registered tax agent or BAS agent or a legal practitioner. From the information provided, your financial advisor is not a registered tax agent or BAS agent or a legal practitioner, therefore any advice they provide in relation to taxation is not an allowable deduction. It is noted that regulation of financial advisers who provide tax advice in relation to financial services are being introduced progressively from 1 July 2014. However, it is uncertain whether a deduction for tax advice from a financial planner will be an allowable deduction in the future as a result of these changes.

Relevant facts: You received financial planning advice from entity A. | You paid an amount for your initial financial planning advice. | You paid ongoing advice fees for: | • salary packaging benefits advice and planning | • income protection insurance reviews