Tax Deductibility for Financial, Risk Advice Fees Clarified

Questions over how advisers can articulate the tax deductibility of their fees for financial and life insurance advice were settled this week with the release of a joint industry guidance paper shared by a number of industry organisations, including the FAAA.

The tax deductibility option for clients was highlighted by AIA Australia’s National Manager, Technical Advice & Strategic Partnerships, Ben Martin in March. He told those attending the Riskinfocus 25 Risk Advice CPD events the option was available in certain circumstances, but explained further clarity was needed (see our report: Tax Relief for Risk Advice).

This week that clarity arrived, with the industry working group stating advisers had options in selecting which methodology they could adopt in determining the tax deductible component of their advice fees for which clients could claim, including:

1. Activity
2. Strategy
3. Insurance premium

The paper – Tax Deductibility of Financial Advice Fees – states advisers should use an apportionment basis that is “…fair and reasonable and suits the circumstances of the individual case”.

Authors of the paper state that ‘activity’ is a break down of the fees based on the time spent on tax (financial) advice, and/or products and strategies producing assessable income.

Tax deductibility apportionment under the ‘strategy’ option involves allocating the total initial advice fees by linking the fees back to the actual strategies recommended to the client.

The insurance premium option apportions the initial advice fee based on the total year one premium breakdown outlined in the insurance quotation accompanying the initial advice recommendation.

“A financial adviser will generally be able to identify (via the insurance quote) what amount of the first year total premium is attributable to income protection, life, total and permanent disablement and trauma cover,” states the paper.

Advisers can now support their clients to claim a legitimate tax deduction for financial advice fees with confidence.

“This premium breakdown may be used as a basis to apportion an initial insurance advice fee. This method may be appropriate when providing insurance advice and charging an initial advice fee.”

Super-owned Life/TPD structuring advice will generally involve the application and interpretation of tax and superannuation law, and may include the following tax considerations at inception:

• Ownership, including pros and cons of holding cover inside versus outside super
• Grossing up for super member/death benefit taxes on life/TPD cover
• Super contributions planning to meet annual premiums
• How to optimise tax outcomes related to benefit payments, and
• other relevant taxation law matters

Martin said a lot of advisers, based on the ATO’s TD2024/7 (deductions for financial advice fees), were already tweaking their revenue model to introduce an upfront advice fee.

However, TD 2024/7 does not apply to fees paid from a superannuation fund or to individuals engaged in an investment business. Other exclusions also apply.

In April a Riskinfo reader poll found 54% of advisers were more likely to consider charging a fee for risk advice as a result of the ATO clarification on tax deductibility of advice fees:

See also our report: Advisers Warming to Charging Fees.

FAAA CEO Sarah Abood says: “The implications of the updated ATO guidance are important for both financial advisers and accountants. We have worked together with the accounting associations so that the guidance is practical and consistent for both.

“The ability for taxpayers to legitimately claim a portion of the initial advice fee for financial advice clients is new and is live now.  The guide also provides clarity regarding the claiming of ongoing fees.

“Advisers can now support their clients to claim a legitimate tax deduction for financial advice fees with confidence.”