Tax schemes back to haunt financial planners

Financial planners could be faced with a wave of legal claims from investors over the promotion of mass marketed tax schemes.

That is the very real fear that is sweeping through some sections of the financial planning community as the deadline for investors to accept the Australian Taxation Office’s (ATO’s) settlement offer over the tax schemes ends this week.

The fear is being fuelled by speculation that the ATO is actively encouraging investors to take action against advisers and others who recommended the schemes. The ATO has steadfastly denied this is so.

“This is a discussion for investors to have with their advisers, it is not a matter for the Commissioner [of taxation],” ATO assistant commissioner Des Maloney says.

But that will do little to settle some financial planners who now see legal action against them by investors as inevitable, particularly as many investors come to terms over the coming weeks with the fact they have had to accept the ATO’s settlement offer.

The settlement offer, announced in February, will mean investors in the schemes will have to pay back the billions of dollars in tax deductions they received as a result of investing in the schemes — deductions that have since been retrospectively disallowed by the ATO.

In return, investors will not be charged penalties or interest on the tax debts they now owe the ATO.

But inherent in the acceptance of the ATO’s settlement offer is what many see as an admission of guilt on the part of investors, a fact that does not sit well with those who invested in the schemes on the advice of financial intermediaries.

Not all investors will be accepting the ATO’s settlement offer.

There are a number of cases currently before the Federal Court where groups of investors are trying to overturn the ATO’s adverse ruling against their particular scheme.

The decision on at least one of these cases, the Vincent casein Western Australia, was expected before this week’s deadline for investors to accept the ATO’s settlement.

If the outcome in this case is a positive one for investors, then the door may be opened for a flood of schemes to challenge the ATO.

The willingness of some investors to take on the ATO comes despite what has been widely seen as a comprehensive victory by the ATO in the Budplan case, a court case funded by the ATO as a legal test on the tax schemes issue.

Of the 40,000 investors caught up in mass marketed tax schemes, 9,000 were investors in Budplan, making the victory a significant one for the ATO.

The judge in the Budplan case ruled that tax deduction from the Budplan scheme should be disallowed because the scheme itself made little sense except as a vehicle to generate the deductions.

However, the judge was not required to go as far as to rule that the scheme was in breach of the strict Part IVA anti-tax avoidance provisions of theIncomeTax Assessment Act.

Ironically, it is this fact that could leave financial planners open to massive legal claims from investors.

The professional indemnity insurance of most financial planners does not cover them for any advice they give which breaches the Part IVA provisions.

Some in the legal profession now believe the fact that, technically at least, there has been no breach of Part IVA, which will encourage investors to take action against advisers knowing full well they may be able to access sizeable payouts from insurers.

The whole situation could be a double hit for many advisers who also invested their own money into the schemes.

The ATO’s formal position is that it will consider on a case-by-case basis those financial planners who invested in the schemes and now want access to the settlement offer.

However, all indications are that the ATO will exclude from the offer all advisers who invested in the schemes themselves, but also profited by recommending the tax schemes to their clients.

The exclusion has prompted the Financial Planning Association (FPA) to accuse the ATO of bias.

In a letter to the tax office earlier this month, the FPA said the omission of financial planners from the settlement proposal amounted to discrimination.

According to the FPA, other professionals, who may have been in a position to promote the schemes, have received far more favourable treatment from the ATO.

“If [a financial planner] has not been charged with any wrong doing by the licensing authority and has acted in good faith on behalf of their clients, they should then be entitled to access to the settlement offer as accountants and lawyers are free to do,” FPA chief executive Ken Breakspear says.

The FPA had been meeting with the ATO in an attempt to resolve the issue before this week’s cut-off date for investors to accept the ATO’s settlement offer.

But the FPA’s claims appear to have fallen on deaf ears.

“[The] suggestion that the settlement terms for a particular taxpayer should be determined by whether or not the taxpayer has or has not been charged with any wrong doing ... is, with respect, misplaced,” Maloney says.