Are financial planning fees tax deductible? Yes? No? Maybe?
When you visit your accountant to prepare the annual income tax return, the fee you pay to your accountant or tax agent is tax deductible. This is because the service covers assistance with your annual income earned and tax affairs you’ve had in place for the year.
But what about the fee you pay to a financial planner for the advice in relation to improvement of your overall financial set up and maximising all the benefits that you might not even be aware of that has been provided to you? Is that also tax deductible?
Financial planning in most cases has two main fee components of fees for advice:
1. Fee payable for the preparation of the Statement of Advice, which is the strategy paper that provides you with options of setting up your financial affairs going forward, and
2. Ongoing service fee – if you decide to proceed with the recommended strategy and you wish for the planner to ongoingly assist you with the process in placing the recommended strategy, as well as ongoing reviews and whatever is included in the ongoing service.
So is the fee you pay for the advice provided to you by a financial planner or adviser tax deductible for you? And which part? First charge paid for preparation of the plan. The second for the ongoing service? Both or none?
This appears to be a gray area and even today if you ask an accountant, you might get different answers from different specialists. So, our topic for today is: Are the fees you pay for the financial planning service tax deductible or not?
Advice and services provided by your accountant cover tax events and outcome of all the transactions made by you, or your business during the past year.
The advice of a financial planner (or at least my advice to my clients) includes:
- Income tax planning, often many years into the future
- Capital gains tax issues – often when selling major family assets such as investment properties or share portfolios.
- Tax issues when selling the business when preparing for retirement.
- Setting up investments for income purposes, therefore dealing with your assessable income and tax consequences year after year.
- Organising your money for your retirement to build the most efficient and beneficial for you retirement income.
As you can see, today’s work of a financial planner includes lots of information and calculations around tax issues, and yet the fee payable for the service is generally NOT tax deductible for the client.
As a general rule, there is no tax-deduction available for the preparation of advice documents, and there is no allowance for the tax deduction for the ongoing service.
Sometimes however, there are exceptions. If the advice includes the income producing assets and your planner breaks down advice costs to list on the invoice the amount of work dedicated to the issue of those income producing assets, then that portion could be tax-deductible, but as you can appreciate, this is lots of hard work. It should not be that difficult and the fee treatment should really get a uniformed treatment, and not be subject to interpretation of possible manipulation of figures.
When you are retired, that is really not a big drama, as in most cases I will set up client’s money in the way where no tax liability will ever arise during your retirement, therefore you are not required to ever do your tax return in retirement. This is a far better outcome, then trying to get tax deduction for any fees you have to pay, because it means you are still in the situation of actually having to pay tax. Who wants to pay tax in retirement, if there are legal ways not to have to deal with the income tax issues ever again in your life?
So the issue of the tax-deduction is not really of any concern to you if you have already retired.
However, if you continue working, if you continue to have some tax liability, if you run a business those are clients that should be able to have the ability to claim tax-deduction for this service, as majority of today’s advice received from a reputable financial planner will include lots of strategies and data relating to your tax.
So why is it that such a service, that includes advice that relates to your income tax, CGT or business tax is not tax deductible?
This is really due to the hangover from the past. Years and years ago, financial advice was really only investment portfolio advice or personal insurance advice. Even today there are firms that just want to look after your money from the investing standpoint, but not provide the full financial planning advice spectrum. So you need to be very careful with your choices what type of the service you are looking for.
But hopefully soon we might have some good news, as after 30 years of the financial advice industry pushing to make all advice fees tax deductible in all instances, after many years of Association of CPA (Certified Public Accountants) and FPA (Financial Planning Association) discussing this issue with the government.
Federal government is now investigating the rule contained in Tax Determination 95/60. By introducing the possibility of the full tax deduction of all advice fees for financial planning, it would make the service so much more affordable to many clients, especially when speaking of the ongoing service fees, which should be treated the same as fees to manage tax affairs, therefore fully tax-deductible.
Marisa Broome, a former chair of the FPA said:
“Financial planning in 2023 tends to be far more personalised and comprehensive covering far more than taking money and investing it and will include setting goals (lifestyle) and matching savings requirements to meet them, establishing cash flow and budgeting, debt management, retirement planning, savings (and possibly investing), estate planning, aged care and more. The tax deductibility of both initial and ongoing financial planning fees will see more people seek advice”.
Some of the listed services are absolutely essential for every person. Often, having received a good quality advice can mean the difference between being able to afford or not the lifestyle or the service you are seeking. Or it can mean being able to have a high quality and enjoyable lifestyle in retirement or living just from day to day and being able to pay the bills and cover the costs of the very basic lifestyle.
I believe this is the service that should be highly regarded by the government as well as the tax office. Therefore, I passionately support the idea of the tax deductibility of financial advice fees as well as ongoing advice fees.
And now I am curious what is your opinion on this subject. Are you in favour of introducing the tax deductibility of fees you would need to pay for preparation of a financial plan to a financial adviser or fees paid for an investment advice to an investment adviser? Should such a fee be an allowable deduction?
If the tax deduction was available to you, is it more likely you would consider a financial planning service?
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
