Private ruling: Financial advice expenses
Published: October 2014
Ruling period: year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for initial advice fees incurred for the creation of an investment plan, which included advice on Superannuation, income insurance and life insurance? | A1: No. | Q2: Are you entitled to a deduction for ongoing advice service fees in relation to Superannuation investments? | A2: No. | Q3: Are you entitled to a deduction for ongoing advice service fees in relation to income protection insurance? | A3: Yes.

Relevant facts and circumstances: After ceasing your employment you employed the services of a financial advisor to prepare a Statement of Advice. The initial consultation provided advice relating to your superannuation affairs and recommended that you also take out income protection and life insurance. You provided an invoice from 2012-13 financial year from the financial advisor describing the service given as 'Preparation of Statement of Advice'. Documentation provided lists the financial advisor fee structure as follows: Professional Advice Fee A typical cost for an initial advice would range from $X for a simple Statement of Advice, up to $X for a more detailed and sophisticated Statement of Advice. The price will depend on the complexity of your situation and needs.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

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. 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 follows 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. 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 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. Initial advice fee - all advice 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. Ongoing management of Superannuation affairs For ongoing management fees to be deductible they must relate to investments which produce assessable income for you. Where a part of the ongoing management fees relate to non-income producing investments the associated costs are capital in nature and incurred at a point too soon to be considered as incurred in gaining or producing your assessable income. As income from Superannuation is derived directly by the superannuation fund and no income is derived directly by you, the ongoing management fees of your superannuation affairs are not deductible. Ongoing management of income protection insurance Income protection insurance that provides for an indemnity against loss arising from an inability to earn income is deductible in accordance with the ATO ID 2001/405. Therefore, ongoing financial advice in relation to the management of the policy is also deductible under section 8-1 of the ITAA 1997.