By Robert Richards, CPA Australia
Taxpayers are typically entitled to claim a tax deduction for tax advice. But as we explain, a recent case shows that taxpayers need to be careful they don’t abuse this deduction.
Taxpayers are entitled to claim a tax deduction for costs incurred by them in managing their tax affairs (section 25-5 of the Income Tax Assessment Act 1997). However, a deduction is not allowed unless the expenditure is made to a “recognised tax adviser” (being a registered tax agent or a legal practitioner).
I sometimes see advisers who have clients trying to pressure them into providing one invoice for both non-deductible services and deductible services in the hope that they will be entitled to a deduction for the totality of the non-apportioned amount.
On other occasions I have seen advisers whose clients have tried to cause the adviser to apportion to tax deductible services a larger part of a bill than arguably should be.
The question is whether the amount you get billed is fully deductible or not. The decision in Harvey v Federal Commissioner of Taxation (Administrative Appeals Tribunal, 3 June 2008) involved this type of question.
The decision involved a taxpayer who participated in an unsuccessful “controlling shareholder superannuation scheme” arrangement (see, for example, Harris v FC of T, Full Federal Court, 8 August 2002). Harvey had entered into a costs agreement with David Bonnell & Associates (DBA), a firm of solicitors.
That agreement said: “The work that you have instructed us to carry out on your behalf involves establishing an investment and contributions plan involving preparation of a superannuation trust deed and associated minutes, and other additional services required to implement the contribution plan.” It also said: “Our costs in this matter will be $250,000.”
The firm undertook to provide Harvey with two invoices, saying: “The first invoice will be for $450, our usual costs for providing basic superannuation plan documentation and will not be deductible. The balance of our fee will be charged for tax advice and will be wholly deductible.” (Obviously that fee – unless most advisers materially undercharge their clients – is quite an exceptionally high fee for the mere provision of tax advice.)
Presumably, the tax advice said that Harvey would be entitled to a tax deduction if he made a contribution to a “controlling shareholder superannuation scheme” arrangement.
Harvey claimed a deduction for $249,550. The tax office disallowed that claim and Harvey referred the disallowance to the tribunal. The tribunal, while saying there was an “air of contrivance” to the costs agreement, also said that “the favourable, although incorrect, tax advice was integral to Harvey's decision to make a [superannuation] contribution and it was an integral part of what he paid for. It follows that, to some extent at least, the expenditure incurred was for ‘managing (Harvey's)’ tax affairs.”
However, the tribunal felt that Harvey was not just paying for tax advice, as he admitted himself that he was paying for the provision of both a retirement option and tax advice.
This meant it became a question of deciding how much of the entirety of the fee was tax deductible. The tribunal said what was specified in the invoices was a relevant factor, but was not determinative (which means that the tribunal might question an accountant's invoice).
The tribunal said the effect of Bonnell's evidence “is that his firm charged what it thought the market would bear, and he specifically distanced himself from a time-based approach to billing.
“What we are left with is a fee the client was prepared to pay, a fee that we have found was paid for the totality of the services that were provided to him, but no rational basis on which we can attempt an apportionment between those services that can be described as ‘managing his tax affairs’ and those that cannot.”
So it disallowed Harvey a deduction for the entire $249,550 (because Harvey could not show how that fee should be apportioned).
There is a saying that bad facts make bad law. I can see an argument here that the $249,550 should have been deductible. While expensive, it was the taxpayer's choice as to what he paid for the scheme and the purpose of that scheme was to reduce his tax – that is to manage his tax affairs.
I suspect that a court or the tribunal would ever allow a deduction for what is a fee paid to what might be described as the “promoter” of a tax scheme.
This article is from CPA Australia’s monthly magazine, In the Black
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