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Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Tax deductibility review tackles ‘barrier to entry’ for investors seeking advice
Financial planners are excited by the prospect of the federal government allowing investors to tax deduct the cost of setting up a financial plan, with several claiming it would boost the affordability of financial advice as the industry battles on several fronts to keep costs down.
Under an existing tax rule, a fee paid by investors for the creation of a financial plan isn’t tax deductible. However, the Australian Taxation Office (ATO) recently said it was reviewing this rule contained in Tax Determination 95/60.
Financial Planning Association of Australia (FPA) CEO, Sarah Abood, has welcomed the review after lobbying hard for the ATO to reconsider the ruling. One of the quickest and easiest ways to make quality financial advice more affordable for consumers would be to make it “tax-deductible in full”, she said.
“The ATO’s commitment to issue a new Tax Determination – indicating its willingness to modernise its long-standing view on this important issue – will provide more certainty to our members and the broader community of Australians who benefit from comprehensive financial advice,” she said.
While the tax deductibility of the initial fees alone is unlikely to be to be a significant catalyst for un-advised Australians to start rushing through the doors, Scott Keeley, senior financial adviser with Wakefield Partners, believes it certainly would be an incentive and provide much needed cost relief for consumers.
“The tax deductibility of ongoing advice fees, especially given much of the advice we provide has a tax component, should be treated the same as fees to manage tax affairs, and therefore be fully deductible,” Keeley says.
Tax write-off would boost advice seeking
Peter Leggett, executive chairman and chief investment officer of Arrow Private Wealth, says at a time when the affordability of financial advice is a genuine concern, a tax deduction is all it may take to encourage consumers to seek advice, which would be a very good thing. “I do believe the change would be positive in addressing the take-up of advice and advice affordability,” Leggett says.
Jaxon King, a senior financial adviser with Alteris Financial Group, agrees and says allowing deductions would definitely encourage consumers to seek financial advice if around 50 per cent of an upfront fee would be deductible.
“I think that might help anyone who was on the fence about it. In my experience, it hasn’t been a deal breaker for clients but it does come up as a query,” he says.
“I think most advisers would agree that due to ongoing changes to fee disclosure, compliance and the Royal Commission, financial advice has become quite expensive to provide to new clients, especially low and middle income earners. The barrier to entry being the initial advice fee which has to be passed on to the client,” King said.
Glenn Fairbairn, director of Hewison Private Wealth, would strongly endorse any decision by the ATO to allow for the deductibility of financial advice fees. “With an aging population and greater reliance on self-funding for retirement it is imperative that Australians plan early and implement the right strategies to assist with meeting their requirements in retirement.”
“This should increase the affordability of advice and hopefully increase the number of people who receive advice,” Fairburn said.
Tristan Bowman, director of advisory firm Cameron Harrison, says in his experience, the cost to a client of paying for the initial financial advice can often inhibit individuals from engaging an adviser to prepare a financial plan to guide them on their wealth journey.
“That plan is an important step in helping clients take control of their financial future and, over time, that upfront cost is usually outweighed by the benefit a financial plan can generate. If the after-tax cost to the client for the plan is reduced, more Australians will seek financial advice, be financially better off and be in a better position to self-fund their retirement,” he says.
Outdated rule
Marisa Broome, a former chair of the FPA, was involved in liaison with the ATO over tax rules. She says Tax Determination 95/60 is based on a very old concept and was introduced at a time when financial planners were assumed to be investment advisers. “Financial products (investment products, superannuation and insurance) had inbuilt commission structures (only life insurance does now and these are capped). People came to you with nothing and the financial planner helped them build a portfolio.
“Financial planning in 2023 tends to be far more personalised and comprehensive, covering far more than taking money and investing it, and will include setting goals (lifestyle) and matching savings requirements to meet them, establishing cash flow and budgeting, debt management, retirement planning, savings (and possibly investing), estate planning, aged care and more,” she said.
“The tax deductibility of both initial and ongoing financial planning fees will see more people seek advice.”
