Financial planning is really about… tax deductible fees

If fees are tax deductible they cost clients less. This cost saving is one of the big advantages time-based fees have over commissions, although this is barely mentioned in the financial planning press.

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:
    1. emphasise/affirm the genuine connection with existing income sources and business and investment activity;
    2. emphasise the “review of existing investments” aspect of your advice; and
    3. de-emphasise any non-deductible work completed for your client;
  4. addressing tax invoices to a business entity where the work relates to that business 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 send two fee notes. For example, if 80% of your costs related to deductible on-going/continuing advice about assessable and the other 20% related to non-deductible one off advice about wills then send two fee notes. One for the deductible work and another for the non-deductible work.

Make sure you can substantiate each fee note if asked to do so by the ATO.

To read more about tax deductible fee notes, please visit this Friday reflection from August 2015.

The Dover Group