40 – Tax deductible fee notes
Being able to claim a tax deduction can be a big benefit to a client. If a client is paying tax at 45% a deductible fee note costs much less than a non-deductible fee note. If a tax deductible fee note is $1,000, it’s after tax cost becomes just $550.
That’s a 45% discount, and that’s great.
Often, a fee note is at least partly tax deductible. Fee note deductibility is maximised by:
- allocating time appropriately over different tasks and, in particular, making sure the time allocated to deductible tasks is accurately recorded and able to be verified if the ATO calls
- charging smaller multiple recurring fees over a period rather than larger once off up-front fees, and connecting the smaller multiple recurring fees to on-going advice and services over time that produce assessable income, rather than a large up-front job
- careful wording of tax invoices to:
- emphasise/affirm the genuine connection with existing income sources and business and investment activity
- emphasise the “review of existing investments” aspect of your advice and
- de-emphasise any non-deductible work completed for your client
- addressing tax invoices to a business entity where the work relates to that entity
- ensuring your SOA content genuinely emphasises deductible matters such as tax advice, business advice, employee remuneration issues, employer super, existing sources of assessable income, business issues, investments generating recurring assessable income, business succession planning and
- ensuring SOA content genuinely de-emphasises non-deductible matters such as wills.
The tax law includes apportionment rules for dual purpose expenditure. This means your fee note may be partly deductible and partly non-deductible, with the apportionment completed on the amount of time you spend on each purpose, or some other sensible basis.
One simple strategy is to have two SOAs. The first relates to the tax deductible work and the second relates to the non-deductible work. You then send two separate fee notes. Make sure you can substantiate each fee note if asked to do so by the ATO.
Back in 2013 we prepared some detailed notes on when financial planning fee notes are tax deductible and you can read these here: Friday Reflections: Deductible Financial Planning.