Time to make financial planning tax deductable?

There has been a recent push in the planning fraternity to renew calls for upfront financial planning advice to be made tax deductible (as opposed to ongoing investment management fees etc).

Tax deductibility is an interesting beast. From my experience meeting with hundreds of clients in various roles over the years, it sits at the forefront of most taxpayer’s minds.

Most people can give you a firmer answer on the chances of discretionary purchases being tax deductible (think sunglasses, fancy printer at home, mobile phone, ceremonial swords?) than when their spouse’s birthday is.

Simply put, if a cost is incurred that can be reasonably applied against taxable income derived from this cost, it should be tax deductible. This rationality extends to most investments, and seems to over-extend for investment properties, but we will leave that fight for another day.

It’s a fantastic guiding tool for government. An effective public subsidisation for the types of behaviour (donations come to mind) and spending that is deemed to need encouraging.

So where does financial advice fit in the current edict of government and what are the chances that our sovereign overseers might come around on the value of long term advice?

On one hand, it can be argued that financial advice, unlike say tax return preparation from an accountant (remembering that most accountants don’t generally provide personal advice), is a means to the creation of a gain of some sort, and if that gain is taxable, then shouldn’t it make this cost deductible?

This gain can, of course, be quantified in a financial sense, however as a value proposition can extend much further, including ensuring a better quality of life, financial protection and subsequent reduced reliance on the public purse both now and retirement.

Given the somewhat dubious track record of advice, you can understand the hesitation in providing public subsidy. Can’t blame them.

But it’s fair to say the scenario is changing now. Education and professional standards have been lifted (and enforced) and traditional (questionable?) remuneration methods have evaporated from most products since the beginning of the Future of Financial Advice reforms in 2012.

This is where a face to face experience is going to stand the highest chance of a great outcome, and it’s hard to cut costs from physical offices, staff and pot plants. For quality advice to be feasible for those who potentially need it the most, it seems fair that support is given through such a traditional lever as a tax break.

Brass tacks? If the government is comfortable with the response to legislation and the new direction of the advice industry (and the 22,000 advisers within it) then it should, in turn, respond with one of the most confirmatory public gestures – the tax deduction.

Tim Fuller

Head of Operations at Nucleus Wealth
Financial adviser seeking to make quality investment solutions more accessible to everyday Australians.
Tim Fuller

Comments

  1. Tassie TomMEMBER

    “For quality advice to be feasible for those who potentially need it the most, it seems fair that support is given through such a traditional lever as a tax break.”

    The people who actually need financial advice most are the people who pay very little tax because they either don’t have a job, or don’t earn much money, so tax deductibility isn’t going to help them much. Unfortunately, these are the people who are least likely to access financial advice, and financial advisers generally aren’t all that interested in them anyway because they’re not in the market to buy an investment product.

    They’ve often grown up in a financially illiterate house, and are still financially illiterate. What they really need is someone who can go through what they’re earning and what they’re spending, work out with them how to (potentially) earn more money, and certainly how to spend less. Simple stuff, like how much smokes, booze, and gambling costs them and how this affects everything else, how to save on food, do they really need Foxtel, are there better phone or internet plans, how to get rid of their credit card debt, and how they can be ready for bills like electricity or servicing their car when they come up.

    • Stewie GriffinMEMBER

      The other half of your argument is that those who will be claiming the tax deduction for financial advice, are generally those who are already in most cases fairly wealthy and for whom Financial Planning as a tax deduction will simply fall into a long list of other tax deductions available to them.

      Who are the main lobbyists behind this agenda? The financial planning industry themselves. Why? The opportunity for their clients to claim a tax deduction simply means that there is now a bigger opportunity for them to charge larger financial planning fees. #RentSeeking through the Australian tax base is one industry Australians have perfected.

      • I guess that’s right. The funny thing about tax deductions is that the more your income is, the more valuable the status of something as tax deductible is. And the people who really need a good financial planner are the poorer people to whom tax deductibility won’t be much help anyway (yes, I’ve switched between “income” and “wealth”). But that’s not really how financial planning works.

    • Yes and no. From my experience, financial literacy is a big problem and you are correct that people who benefits most from financial planning are the ones who can’t afford it. However, financial planners aren’t refusing to help these people because they aren’t purchasing financial products (this has became a non-issue since FOFA). The main problem is that the compliance costs of providing advice is so high that charging advice fees just for cost recovery basis would still price most people out of the market.

      • Tim FullerMEMBER

        Agreed. Tax deductibility is not an incentive for those on very low or no incomes, and they probably need advice the most but there are opportunities to source this in a general nature as a start from places like Money Smart and Scott Pape et al.

        I am sure you have seen the hump in property investor figures in the 40-90k earners enough on this site now to realise that negative gearing is a remarkable incentive covering a typically speculative and highly geared investment situation. It works!
        The simple fact is independent financial advice, unsupported by product ‘back end’ and licencee discounting on volume is not cheap.
        If the government wants to support advisers who are trying to build a business through providing sound advice that benefits their clients, then this seems like an obvious way to do it.

  2. yeah, it’s not enough that rich people can use tax preparation to reduce or eliminate their taxes, so give them another vehicle do make sure they don’t pay any tax

  3. They also need to cap it, heard an example yesterday of a top 4 accounting firm, charging a guy $80k to get around a tax bill, and yes to do so looked grey grey black grey.

    • Tax advice is already specifically deductible.

      We are talking about investment advice here – the purpose of which is generally (not not entirely) to earn more income on which you would be taxed.

  4. Plenty of office workers have to maintain entire closets of shirts, slacks and ties that they will never use in their private life, and don’t get to deduct. Those same workers have to drive to work (due to lack of public transport) and then pay for parking, so that they can earn their dough for the day. Again, not deductible. They will pay taxes at multiple tiers of government, and those taxes/fees etc will not be deductible.

    I’d have to say that given I’m in that group, I’d find it very hard to worry about whether financial planning advice is tax deductible. The way I see it, people earning income via an employer/employee relationship already get screwed a lot of ways, meanwhile those who go off and work for themselves get all kinds of perks. Before you freak out, yes I’m fully aware that people taking on risk deserve many buffers but my concern is that going into business for yourself is more easily done by those with lots of starting capital or connections to those who do. There is a reason so many successful dotcoms came out of the same group of colleges in the US. Its not that all the brains ended up there, its because a programmer coming up from the lower/middle classes will basically have to sign away any hope of profit to a VC, bank etc if they want to make something. So I’m wary of giving even more advantages to those who’ve got a headstart, because it means yet more burden on the salaried employee. Its not like we live risk-free these days. Anyone who had a job during the GFC will know how quickly we can all be sacked to turn a red line black.

  5. What – you mean it’s not?

    I always figured that it just gets lumped as “investment advice”, and is therefore deductable against investment earnings.

  6. Like anything else, making financial advice tax deductible will push up the cost as financial advisers will charge extra accordingly.

    As Tim Fuller is himself a financial advisor, shouldn’t he add his usual “talking my own book here” spiel at the end?

    • Tim FullerMEMBER

      Fair point, although as a ‘new age’ (post FOFA) entrant to advice, I feel this falls more as a public service announcement.

      With under a 100 independent advisers servicing the nation, it’s pretty clear that some work needs to be done closing the gap between the affordability of advice and cost of service.
      Running your own licence, being fully independent and targeting lesser means clients are tough waters to stay afloat in, given the costs of compliance these days. The way I see it is if the market sets a price for advice, then discounting it with a tax deduction will incentivise more people to seek it.

      Surprisingly to most, there are actually more than a few advisers out there that like the idea of giving advice that serves a client’s best interests!