If you’re nearing retirement or looking for professional financial advice, you are likely to encounter fees that can range from $5,000 to $15,000 or more. For those considering financial advice, a key question is whether these fees are tax-deductible. Recent changes in Australian tax laws have shed new light on this topic, offering potential relief to individuals seeking financial guidance. Additionally, we are constantly looking at ways to make this more cost-effective for clients. Here’s what you need to know about the tax-deductibility of financial advice fees.
A New ATO Ruling Brings Positive Changes
The Australian Taxation Office (ATO) recently broadened the tax-deductibility of certain financial advice fees. Phil Anderson, general manager of policy at the Financial Advice Association of Australia (FAAA), views this as a significant step forward. According to the ATO’s new determination, financial advisers who are classified as qualified tax relevant providers (QTRPs) can now offer tax-deductible advice for fees related to tax matters.
Previously, initial financial advice fees—those incurred when first consulting a financial adviser—were not tax-deductible. However, with this new ruling, any upfront financial advice fees related to tax advice can now be deducted. This means that for many clients, a significant portion of their financial advice fees could qualify for tax deductions.
While the ATO has not made all upfront financial advice fees tax-deductible, this update represents a meaningful improvement, particularly for those seeking advice on tax-related financial planning.
Understanding the Difference Between Initial and Ongoing Advice
It’s important to note that not all financial advice fees are treated equally when it comes to tax deductions. Bill Matley, a business services partner at BDO, explains that there is a key distinction between initial and ongoing advice:
- Non-deductible fees: Initial advice fees covering items such as reviewing your financial situation, risk profile, or investment recommendations are generally not deductible unless they specifically relate to tax matters.
- Deductible fees: Initial advice related to tax issues, such as the tax implications of specific investments or salary sacrifice arrangements, can be deducted. Additionally, ongoing fees for reviewing the performance of investments and making periodic recommendations are also tax-deductible.
For those seeking advice on income protection insurance, it’s worth noting that not only is the advice itself tax-deductible, but the premiums for income protection insurance are also tax-deductible.
The Cost of Financial Advice
The high cost of financial advice is partly due to the regulatory environment surrounding the profession. Anderson notes that these regulatory costs are significant, and the FAAA is working to reduce them. However, despite the fees, Australians who receive financial advice often consider themselves better off financially, with the value of the advice outweighing the cost.
A report from Generation Life found that the expense of financial advice is a barrier for 30 percent of unadvised Australians. If full-scale financial advice is beyond your budget, there are alternatives to consider.
Low-Cost and Free Financial Advice Options
For those in financial difficulty, Financial Counselling Australia offers free financial counselling services. Additionally, low-cost digital platforms like Otivo and Naked Wealth are emerging as alternatives to traditional financial advisers.
Your superannuation fund may also offer advice on super-related matters, which can be a valuable resource as you prepare for retirement. Furthermore, the government is expected to introduce a new class of financial advisers, known as qualified advisers, who will offer services at a lower cost.
Conclusion: Weighing the Value of Financial Advice
While the cost of financial advice can be substantial, recent changes to the tax-deductibility rules offer some relief for those seeking guidance, especially in tax-related matters. Whether you choose a full-service financial adviser or explore low-cost alternatives, it’s essential to consider the long-term benefits of professional advice as you plan for retirement.
