Financial advice: What’s deductible, what’s not

The cherry on top of your sensible decision to obtain quality tax planning or investment advice is to find that some of the costs involved are tax deductible. But while the tax law allows specific deductions for certain expenditures regarding your tax affairs, not all costs involved with seeking investment advice are deductible. Working out whether a claim can be made for such outgoings involves a close examination of the nature of the expense.

The taxman’s view on claiming a deduction

Guidance on the Tax Office’s stance on these matters can be drawn from certain announcements that have been made by the Tax Commissioner — in this case, a “tax determination” specifically applying to individuals who are not running an investment business (this latter situation is an area of the tax law that is well covered).

The determination covers two types of expenses: (i) drawing up an investment plan, and (ii) ongoing fees or retainers in relation to the investment portfolio.

Generally speaking, the cost of drawing up an investment plan is not deductible, however ongoing fees in relation to an investment portfolio are.

Investment plan costs

The Tax Office does not consider the costs for creating an investment plan as deductible expenses because of three main reasons:

• these costs are incurred too early in time to be directly relatable to gaining or producing assessable income from the investment
• they are an expense associated with putting a possible income-earning investment in place,and therefore has insufficient connection to that income (if there is any at all), and
• the costs are an incidental expense and are an outlay to acquire the investment, and so warrant a conclusion that this is an outlay that is capital in nature.

Ongoing fees

The Tax Commissioner concluded that once in place,the ongoing fees or retainers made in relation to an investment portfolio are typically deductible. This is consistent with the Tax Office’s position adopted in a taxation ruling which concluded that costs relating to the “servicing” of an investment portfolio should be viewed as being of a “revenue character” (although the ruling states that to remain wholly deductible, the entire fee should relate to producing income).

Further,the ruling stated that should advice be obtained over the life of an investment portfolio that suggested changes be made to the make-up of the investments therein, that this would be part and parcel of managing the portfolio, not the drawing up of a new investment plan. As such,the cost of this advice would therefore retain its “allowable deduction” status.

However where a taxpayer with existing investments approaches a planner to advise on a new investment plan, the expenditure would be deemed to be a capital outlay (that is, it would lose its deduction status), even though existing investments are incorporated.

Other deductions that would typically be deductible in relation to financial planning include the costs of attending a property investment seminar. To claim,the taxpayer must own an existing rental property, and expenses claimed must relate to the gaining of assessable income. Also, subscriptions to share market information, investment journals and analysis reports of listed companies may qualify, but again must relate to earning assessable income from such investments.