Private ruling: Financial advice fees
Date of advice: 13 May 2022
Published: August 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 25 May 20XX

Ruling: Q1: Are the advice fees incurred in developing and implementing a financial strategy for your superannuation fund portfolio deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the advice fees incurred in developing and implementing a financial strategy for your income-producing asset portfolio deductible under section 8-1 of the ITAA 1997? | A2: No. | Q3: Are the advice fees incurred in developing and implementing a financial strategy for your income-producing asset portfolio capital expenses which may be included in the cost base of your assets in accordance with subsection 110-25(5) of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: You have an asset portfolio which includes residential property, cash, shares, and a superannuation account held with an APRA-regulated superannuation fund. You have engaged the services of a Financial Advisor to develop a financial plan encompassing your entire asset portfolio including your superannuation fund. You have purchased two advice packages from this firm: The first package includes advice on financial strategies and investment recommendations for your income-producing asset portfolio. The second package explicitly provides advice on your superannuation including review and recommendation of investment options. Your superannuation account balance is currently allocated across a number of investment options. Your financial advisor can adjust your superannuation fund portfolio upon consultation with you. You do not currently derive any income from your superannuation fund. You plan to start accessing your superannuation to derive pension income soon. You have stated that you will not pay tax on drawings from your superannuation fund. You have stated that the majority of the financial advice provided so far has been regarding the development of a financial strategy your non-superannuation asset portfolio.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 110-25(5)

Reasons for decision: Summary: 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, or relate to the earning of exempt income. To determine whether a deduction is allowable for financial advice under section 8-1 of the ITAA 1997, the nature of the expense must be considered. The nature or character of the financial advice fees follow the advantage which is sought to be gained by incurring the expense. If the advantage to be gained is of a capital nature then the expense incurred in gaining the advantage will also be of a capital nature. Also, if the expenses incurred relate to a separate entity, then no deduction is allowable. Fees paid for obtaining financial advice are ordinarily deductible under section 8-1 of the ITAA 1997 only 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. Taxation Determination TD 95/60 explains that fees paid for investment advice to develop an investment strategy are not allowable deductions under section 8-1 of the ITAA 1997. This is because the expenditure is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income, and is therefore a capital outlay. This is exemplified in paragraph 7 of Taxation Determination TD 95/60, which states: "We have been asked what is the position where a taxpayer has existing investments and goes to an investment adviser to draw up an investment plan. For example, a taxpayer nearing retirement may have a number of small investments, is expecting a superannuation payment (eligible termination payment (ETP)) and decides to put in place a long term financial strategy incorporating the investments arising from the ETP. In our view, a fee paid to an investment adviser to draw up an investment plan in these circumstances would be a capital outlay even if some or all of the pre-existing investments were maintained as part of the plan. This is because the fee is for advice that relates to drawing up an investment plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of capital for the same reasons as set out in paragraphs 3 and 4 above." The expense you have incurred in obtaining advice pertaining to your income-producing assets is equivalent to that described in paragraph 7 of Taxation Determination TD 95/60, which is a capital outlay and therefore not deductible under section 8-1 of the ITAA 1997. Instead, the expense may be added to the cost base of the assets as provided for in section 110-25(5) of the ITAA 1997.