It’s tax season once more, but knowing what you may deduct can be difficult, especially when it comes to expenses for financial advice.
Financial advisors may also recommend tax-related advice to their clients. This is likely the case and occasionally inevitable given that we are dealing with financial problems.
Whether the price of financial advice is tax-deductible, however, is not that clear-cut. Financial advising costs are subject to the general deductibility rules.
This is because there are no special rules governing their deductibility. Which can make filing your tax returns a bit of a headache.
So, are financial advisors fees tax deductible? In this article, we are going to discuss which financial advisor fees are deductible and which fees aren’t.
How Do You Know When A Financial Advisor Fee Is Tax Deductible?
Advice fees are not subject to any special regulations regarding their deductibility. Thus, they are covered by the standard deductibility rules for other expenses.
According to these regulations, you are entitled to a tax deduction for any costs incurred in acquiring or producing income that is subject to taxation (officially referred to as “assessable income”).
With the exception of expenses that are made for capital, private, or domestic purposes.
In general, you can deduct the costs connected with investment advice from your taxes. As long as the advice you receive results in an investment that generates assessable income or is closely linked to one.
Additionally, fees that are not connected to a specific investment that generates assessable income are not deductible.
For example, the cost of a conference you attended to learn how to invest would not qualify as a tax deduction.
However, it is tax-deductible if you go to the conference to enhance your present investing portfolio.
Which Fees Are Not Tax Deductible?
The advisor fees are not tax-deductible if the goal of the financial advice is to create a plan, or if the advice is unrelated to assets or investments that currently provide taxable income.
Due to their lack of connection to the production of assessable revenue, the following fees are not tax-deductible:
- Upfront Fees
- Financial Plan Preparation
- General Financial Advice
- Non-Assemble Pension
- Income Advice
- Initial Investment Advice
This is due to the fact that the aforementioned costs have not yet increased your taxable income (annual taxable income).
These charges may be exempt from tax, if you obtain advice to modify an established investment portfolio that produces taxable income as a portion of your continuous portfolio management.
Common Financial Advisor Fees
Below are some of the more common financial advisor fees you may come across, and whether these fees are tax-deductible or not.
Investment Loan Arranging Fees
This is regarded as a borrowing expense, thus it is deductible from income tax over the course of 5 years or of the loan’s term.
The goal of this loan must, however, be to generate income, which would then be taxable.
Advice On Managing An Existing Investment Portfolio
Tax deductions are available for the cost of financial advice related to managing an existing investment portfolio.
The fees must, however, be connected to generating income in order to be fully deductible.
This means that only a portion of the costs will be deductible if the advice also refers to some goods that don’t generate an income.
This includes insurance premiums, managing pension funds, or private loans.
You could occasionally get suggestions to change the combination of investments you own.
These expenses will be deducted if managing your investments includes them as a necessary component.
However, if the expenses are related to creating an investment plan, they are not deductible.
Establishing An Financial Plan/Investment Portfolio
As a capital expense, this cannot be deducted from taxes. The Australian Taxation Office (ATO) issued a Tax Determination (TD 95/60) on this topic back in 1995, however this topic is currently under review so may be changed soon.
It claimed that there is insufficient correlation between making investments and profiting from such investments.
The expenses related to creating a financial plan also comes under this topic as well.
Advice On Cash Flow And Other Areas
Any advisor costs that have to do with management of cash flow or other matters, for example, like the need for insurance.
These are not related to producing assessable income for tax purposes and cannot be deducted as a business expense.
Financial Advisor Fees
Your financial advisor should ideally break down their fees.
This is so you have some supporting documentation for what may and cannot be declared as a tax deduction.
The ATO will approve a reasonable approximation, if your financial advisor isn’t able to offer you a complete breakdown.
For instance, 15% of your advisor’s fees would be tax-deductible, if they spent 15% of their time analysing your present income-producing investments.
The financial advising sector has been advocating for tax deductibility of all advice fees, including commissions, for over 30 years.
All of this appeal has so far gone unanswered by the government. Although, as mentioned above, the ATO is currently reviewing some of its regulations, so changes may be coming.
Are Financial Advisors Fees Tax Deductible - Final Thoughts
Unfortunately, it isn’t clear which fees are and aren’t exempt from tax. However, we have mentioned some of the most common financial advisor fees above, and discussed whether they are tax-deductible.
At the end of the day, if your financial advisor fee is related to ongoing advice for an existing portfolio or for an investment that is generating assessable income, then it is tax-deductible.
It is important that you have a clear breakdown of all the fees of all the work your financial advisor has completed.
This will help you to understand how much tax you may be able to deduct. Otherwise, you are allowed to provide a rough yet reasonable estimate.
We hope this article has been informative. Hopefully, you now have a clear understanding and can answer the question: are financial advisors fees tax-deductible?
