If you’re working with a financial advisor—whether through William Buck or another firm—you may already know that some of the fees you pay can be deducted in your tax return to lower your taxable income. However, it’s not always that simple—some fees aren’t deductible. Knowing which ones qualify and how to handle them correctly is key.
Following reforms to the financial services industry, the Australian Taxation Office (ATO) has recently issued new guidance which seeks to clarify which advisory fees it considers to be deductible and which you will need to separate out as not being deductible, or are not considered a cost of managing your ‘tax affairs’ under the tax legislation.
Why is this important?
You can only deduct advisory fees incurred in earning assessable income, or for managing your tax affairs. While not changing the fundamental principles this guidance highlights examples where it might be unclear whether a deduction is allowed.
Types of fees that are deductible include:
- Fees incurred on an existing or ongoing investment – generally, these will recur annually.
- Fees charged by your existing advisor to provide advice on whether your current portfolio is still appropriate for your needs.
- Fees incurred specifically for managing your tax affairs. They might be in relation to you entering salary sacrifice arrangements for example, or the application of the taxation laws to your investments.
Fees where a deduction is not available include:
- Fees incurred for advice on a new investment prior to the acquisition to establish if you should buy it.
- Fees for advice provided on how to invest additional funds to grow an existing portfolio.
- Fees incurred when engaging a new advisor in relation to an existing portfolio.
The non-deductible fees are generally capital in nature, but those related to managing tax affairs can still be deductible even if they deal with capital issues.
What should you do if your fee includes both deductible and non-deductible charges?
Often, the fee you incur is charged annually and includes a combination of the above fees. Such fees are not fully deductible and must be apportioned using a ‘fair and reasonable’ method, ensuring that the apportionment is justifiable. The method should be logical, based on the actual services provided and supported by evidence. Determining what is fair and reasonable depends on the specific facts and circumstances.
Evidence such as itemised invoices that detail and explain the advice provided will be considered sufficient.
For example:
Alex, a financial advisor, helps Maria, a nurse, with her retirement and estate planning. He suggests that Maria set up a self-managed superannuation fund, increase contributions via salary sacrifice and update her will. Part of Alex’s fee for setting up the super fund is not tax-deductible because it’s related to her financial structure. However, the fee for advice on tax implications is deductible. Maria must divide the fee between deductible and non-deductible parts in a fair and reasonable way.
This determination emphasises the importance of understanding what is deductible and what might need to be apportioned. It also highlights the importance of keeping proper records to support any deductions you claim with the ATO.
If you have queries about the deductibility of your fees, you should contact your William Buck advisor directly. Our advisors can provide personalised advice, clarify any uncertainties and help ensure that the fee apportionment is both fair and reasonable. William Buck’s experts can also guide you on the appropriate documentation required to support any deductions claimed, ensuring compliance with tax regulations.
