Is Tax Deductible Financial Advice Coming?

The Australian Taxation Office (ATO) released the TD2023/D4 draft taxation determination which offers guidelines for the ATO’s interpretation and application of the tax advice fees law.

The government plans to make the draft legislation effective on July 1, 2024, and it is available for public comment until March 31, 2024. The draft legislation may have a major impact on advice costs if it is passed because it may improve certain clients’ tax benefits from seeking financial advice.

The draft determination defines tax advice as any service that involves:

– Applying or interpreting tax laws or rulings

– Advising on tax consequences or obligations

– Preparing or lodging tax returns or statements

– Representing taxpayers in dealings with the ATO

– Resolving tax disputes or issues

The draft determination also sets out the criteria for determining whether tax advice fees are deductible. According to the draft, tax advice fees are deductible if:

– They are incurred in gaining or producing assessable income, or

– They are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, or

– They relate to managing tax affairs

The draft determination clarifies that tax advice fees are not deductible if:

– They are of a capital nature, such as those relating to acquiring or disposing of assets

– They are incurred in relation to exempt income or non-assessable non-exempt income

– They are incurred in relation to a hobby or a private matter

– They are incurred before the taxpayer derives any income or commences any business activity

What could the TD2023/D4 mean for the cost of advice?

The TD2023/D4 could have a significant impact on the cost of advice and the demand for professional tax services. If the draft becomes law, it could mean that:

– More taxpayers will be able to claim a deduction for tax advice fees, reducing their effective cost of advice

– More taxpayers will seek professional tax advice, increasing the demand for tax services

– More advisers will need to comply with professional standards and regulations, increasing their costs and liabilities

– More advisers will need to document and substantiate their tax advice, increasing their workload and complexity

The TD2023/D4 could also create some challenges and uncertainties for taxpayers and advisers, such as:

– How to allocate tax advice fees between deductible and non-deductible components

– How to apportion tax advice fees between different income years

– How to deal with changes in tax laws or rulings that affect previous tax advice

– How to handle disputes or audits by the ATO regarding tax advice fees

What do you need to do to prepare for the possible changes?

The TD2023/D4 is still a draft legislation and may change before it becomes final. However, it is important to be aware of the potential implications and prepare accordingly.

The TD2023/D4 is a significant reform that could change the way tax advice is treated in Australia. It could have a positive impact on the cost of advice and the demand for professional tax services. However, it could also create some challenges and uncertainties for taxpayers and advisers due to only some advice becoming tax deductible. It is important to understand what the draft determination means for you and how to prepare for the possible changes.