47 – Tax efficient fee notes

Regular readers, and that should be every Dover adviser, know we focus on financial strategies rather than financial products. This is because ultimately financial planning is all about strategies. The best financial product in the world is useless without a financial strategy.

Clients must have financial strategies. A strategy based financial planning practice is far more viable and valuable than a sales based practice.

The client time frame should be thirty years, not thirty days, and, what is best for your clients is also best for you: it’s a beautiful collision of interests. Everyone wins.

Long term relationships are what it is all about, for both clients and advisers.

Strategy based practices have more fee notes

One advantage of a strategy based practice is that there are more fee notes. 

This is great for clients: your advice costs less on after tax basis. Its also great for advisers. First, what’s good for clients is good for advisers, but more specifically it means your clients can afford to pay more for your advice, or to pay for more advice. Either way gives you a competitive advantage over competitor practices where the fee notes are not tax deductible.

Strategy based practices’ fee notes are more deductible

Another advantage of a strategy based practice is your fee is likely to be tax deductible for your client.  (We have to say “likely” because, ultimately, deductibility depends on the facts of the case.) The fee notes tend to be for lesser amounts, and paid more frequently, say once a quarter, for monitoring and reviewing the strategy, rather than large up-front, once off, fee notes. This means they tend to be more tax deductible assuming, of course, that they relate to assessable income producing investments.

If a client is paying tax at 45% a deductible fee note costs much less than a non-deductible fee note. So, 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.

Strategy based practices have a tax based comparative advantage

This fee note tax deductibility gives your practice a big advantage over your competitors. Your fee notes will be tax deductible, because they relate to on-going assessable income. And their fee notes aren’t. Your clients win.

How can you exploit this advantage?

Obviously you should be aware of the issues and, within the parameters of professional propriety, ensure your fees are as genuinely as deductible as possible in your clients’ hands.

Pointing this out to clients in the first meeting helps reduce fee resistance and helps make sure your clients get the on-going service and attention they deserve.

How do you maximise the deductibility of your fee notes?

Fee note deductibility is maximised by:

  1. 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
  2. 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
  3. 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
  4. addressing tax invoices to a business entity where the work relates to that entity
  5. 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
  6. 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 related to the non-deductible work. You then send two separate fee notes. One for the deductible work and one for the non-deductible work. 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.

Are commissions tax deductible to clients?

Commissions are not tax deductible to clients because clients do not pay commissions. The insurer, or other financial institution, pay the commissions.

So you can see tax deductible fee for service fee practices have a big advantage over commission based practices.

The Dover Group