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In a case which has wide ranging ramifications for financial planners and their clients, the High Court at Auckland has ruled against the Inland Revenue Department (IRD) on the question of deductibility of financial planning fees.
The case centres on a client of financial planning firm IPD and whether the $8282 it charged in fees was deductible.
The ruling has ramifications for about 200 IPD clients who are under scrutiny by the IRD.
In the case which came before the High Court the IRD had in mid 1996 disallowed a claim by the investors, Mr and Mrs North, that IPD's establishment fee was tax deductible. This is after the department had twice told the Norths that any fees paid to IPD would be deductible.
The Norths took the matter to the Taxation Review Authority (TRA) and won, then won again when IRD appealed the TRA decision in the High Court.
But while the Norths were successful in their appeal there's a twist to the case. Another IPD client earlier appealed a ruling against their claim and lost.
The central arguments in favour of deductibility were that the North's portfolio had existed for six years before professional advice was taken, and that Mr North had actively managed the couple's investment portfolio prior to seeking advice. That active management included rolling over term deposits and buying shares following the 1987 crash.
In the previous IPD case there was deemed to be a fundamental change in the investment objective of the funds involved from providing employment to an investment portfolio.
Consequently, the North's fee was deductible as it was considered to be on the revenue account as an expense incurred in the production of assessable income. In the other case the fee was considered to be associated with establishing a capital structure and consequently non-deductible.
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