Q. When I engage my accountant to do my tax returns I am able to claim a tax deduction for the work provided.  I have been advised that the same is not true for Financial Planning advice.  Can you please explain what I can and cannot claim as a tax deduction in relation to receiving Financial Planning advice?

A. What you can and cannot claim for in relation to Financial Planning advice is dealt with under section 8.1 of the Income Tax Assessment Act (ITAA 1997).  There are strict guidelines surrounding the deductibility of Financial Planning advice and the Australian Taxation Office (ATO) has previously issued a specific Tax Determination on this matter (TD95/60).

Generally speaking, costs

associated with an initial financial plan that establishes new investments or new strategies are not tax deductible.  If the advice relates to establishing an investment that will generate taxable income, then the advice fees will be considered capital costs and will be added to the cost base of the asset.

If you receive advice to alter an existing investment portfolio that generates taxable income and this is part of your ongoing portfolio management, then the costs may be tax deductible.

Once a plan has been established, ongoing advice fees or retainers, where the advice is in relation to generating income associated with the investment portfolio, these costs are generally held to be deductible expenses.

The same principles apply to self-education expenses such as attending seminars.  If you already own an investment property, then attending a property seminar would be deductible, provided that the claim related to gaining assessable income.  If you didn’t already own an investment property, then the expenditure would be considered a capital outlay.  The same applies for sharemarket education courses, information services, journals or software.

If you receive and pay for advice in relation to an investment loan and the purpose of the loan was to generate taxable income, the costs may be deducted over the lesser of 5 years or the life of the loan.  Whichever is shorter.

Where the Financial Planning advice does not relate to assets or investments that generate taxable income, then generally the expense in not tax deductible.  For example, if you receive advice on your personal Superannuation, the fees generally will not be tax deductible as the Superannuation fund does not generate taxable income to you personally.  In the example of a Self Managed Super Fund (SMSF), the initial advice would be considered capital in nature. Ongoing advice in relation to generating taxable income to the fund should be deductible to the SMSF.

The Financial Planning Association (FPA) supports simplifying the rules by making Financial Planning fees deductible, regardless of whether the advice was for initial or ongoing advice.  The FPA believes that the present inability to claim a tax deduction for the fees associated with an initial financial plan acted as a disincentive for consumers to take the first step towards organising their finances on a strategic basis.

In summary, under the current legislation,  if the Financial Planning advice is to establish a plan or the advice does not relate to assets or investments that presently generate taxable income, then the advice fees are not tax deductible. If the advice expense is in relation to ongoing advice for an existing portfolio then the expenses may be deductible.

Before making any claim for Financial Planning advice, please contact your accountant and seek their tax advice.