Taxing times for planners

It’s an issue that has been quietly simmering away, but now could explode at any time: who gives tax advice?

Traditionally it has been accountants and taxation lawyers, but the arrival of financial planning was seen as an encroachment onto this patch.

The whole issue has also been confused by a draft Australian Taxation Office (ATO) determination (TD2004/D22) released late last year that discusses who has the right to give advice about tax.

Regulatory confusion

The Income Tax Assessment Act 1936, paragraph 251L prohibits “persons other than registered tax agents from charging a fee for giving advice about taxation law on behalf of a taxpayer”.

However, this contentious paragraph also states that the act “does not prevent a person in a non-representational capacity from giving tax advice that is part of, or incidental to, another service”.

The ATO draft determination issued last year says “a financial services provider can provide tax advice about a financial transaction, arrangement or plan in accordance with the relevant requirements of the Corporations Act 2001”.

As such, the draft determination seems to allow a financial planner to give tax advice up to the point of preparing a tax return.

Everyone Money Management spoke to admitted the legality of who provides tax advice is now a grey area.

Thomson Playford partner Stephen Heath says the question is really about personal tax advice provided by someone who is not a registered tax agent.

“The tax agent was always the one giving advice and making returns, while barristers came up with [tax] solutions,” he says. “But the tax commissioner is trying to be seen as fair by allowing tax advice to be given by all.”

CPA Australia senior tax adviser Garry Addison says only tax agents can lodge a tax return for payment of a fee, but the rule about providing advice is unclear.

“Under FSR [financial services reform], an adviser can give advice if they are competent to do so,” he says. “They can’t lodge a tax return for a fee, but then it gets confusing because they can lodge a return without charging a fee.”

Addison says the interpretation of this is to allow the adviser to do a tax return for a family member, but legally there is nothing to stop them doing a return for a client, as long as money doesn’t change hands. Advisers are not, however, allowed to lodge a BAS return under the GST legislation.

“The obligation to cover off the tax issues for a client is now a requirement of the new (FSR) legislation,” Addison says. “The problem is what should a financial planner do and not do.”

Generic versus specific advice

Heath says there is also the issue of giving generic advice and specific advice, although the latest draft ruling doesn’t seem to distinguish between the two.

“Tax advice is governed by legislation, but what is the demarcation of that advice?” he says.

“The flip side is the question of who is the tax adviser, what is legal advice and what part of the advice is tax advice.”

The ATO in its draft determination gives examples of what is legal tax advice and what isn’t.

One example cites a risk adviser, on a fee-for-service billing structure, who gives a doctor detailed advice on income protection and trauma risk products. The ATO says the tax advice given with these products does not breach section 251L of the tax act.

Another example cites a financial planner giving advice on a product-based savings plan and salary sacrifice on an up-front fee basis. Again, the adviser is not breaching the law. The responsibility for the tax return rests with the client, so the adviser can give tax advice up to this point.

However, a real estate agent selling an investment property on behalf of a client can advise that capital gains tax is payable, but when they offer to calculate the amount for a fee they are in breach of section 251L.

Addison says this illustrates the grey area of planners giving tax advice and raises questions about how to regulate it.

“The problem is what financial planning is doing and how you control that and how that can be enforced,” he says.

Heath says the current situation is that the tax advice is non-regulated for the taxpayer, but once they start their tax return, then the advice is regulated.

“The provisions of the FSR regime haven’t caught up with providing tax advice,” he says.

Guidelines from ASIC

ASIC has provided some guidelines for planners in the question and answer section of its web site. In regards to the need to hold an FSR licence to provide tax advice, ASIC says a licence is required to give advice on products and that can include tax advice.

In further guidance on providing tax advice, ASIC refers to the requirements of PS 146, which says a planner should have specialist knowledge in Australian tax and social security systems, relevant tax laws and regulations, and the effects of tax on particular products. PS 146 also states that the effects of tax on particular financial strategies of individuals and entities should be understood by the planner.

“The competency requirements do not require the financial planner to have an expert knowledge of every aspect of tax law, however, they do require the planner to have adequate knowledge of the tax implications normally applicable to the products on which they advise,” ASIC says in its statement on planners providing tax advice.

“The adviser must also have a general knowledge of tax law and practise sufficiently to enable you to identify any other material tax issues on which your client may require further advice.

“This is so that you avoid making a recommendation about financial products that is not based on the advice of a person competent to provide advice on those issues.”

Professional indemnity

Taxpayers Australia taxation consultant Tony Greco says the association is not comfortable with financial planners providing tax advice.

“Tax is a specialist area that should be left to the specialists who have specialist training,” he says.

“In the past, the situation was black and white, but with financial planners flogging products, how can they not talk about the features? However, when it comes to the tax advice, they should stop.”

Greco also raises concerns for the taxpayer who is protected when making a return, but has no legal protection prior to that point.

CPA Australia, together with various other financial services associations, has been lobbying the Government to define the situation, but Addison admits there hasn’t been much response because of a belief that legislating who can give tax advice goes into the “too-hard basket”.

Tax consultant Tony Jacobs says the uncertainty over who can give tax advice raises problems involving professional indemnity (PI) cover for planners.

“One solution for tax-driven products is for the supplier to obtain a product ruling to cover the tax advice associated with a product,” he says.

“As a way for an intermediary to provide some tax advice, it seems to be the way to go.”

Jacobs says because the ATO commissioner provides binding tax determinations through the product ruling, it would offer the intermediary some protection for indemnity cover.

“The adviser could just hand the product ruling to the client, as it has to be added to the PDS of a product,” he says.

“We have seen major firms becoming very shy of taking risks because of PI cover, so the product ruling is a way of giving some qualified advice.”

Jacobs says product rulings are not always positive for the product, but if the product doesn’t meet current tax law, it won’t get a ruling. This offers the adviser some protection, he says.

“The dust hasn’t settled after FSR and there still needs to be some adjustment as to where the boundaries are for providing advice,” he says.

Greco agrees product rulings might be a solution.

“But the manager of that product must do what is in the ruling,” he warns. “Subject to that proviso, the move could be quite good and restore public confidence.”

Tax planning in practice

But what are planning firms doing about tax advice in the present climate?

A number of firms that would not comment publicly admitted it was a difficult area and confessed that product tax advice often crossed the line into personal advice.

However, a number of planning firms also had accountants who can legally provide tax advice for a fee.

Collins House financial planning manager Gary Levitt says the practice has both accountants and lawyers as well as planners providing advice.

“My experience is all taxation advice is a specialist subject,” he says.

“We offer a one-stop shop where the advisers can talk about tax simply, but we send the client to the accountant for specialist advice and doing the tax return.”

Levitt says if the advice is very specialist, such as advice relating to a family trust, the lawyers will also become involved.

“We can get everybody around the table with the client as all the services are under one roof,” he says.

“One benefit is that the adviser can send the client to one of our specialists if the client starts asking questions on personal tax advice. The adviser can’t stop giving advice mid-sentence because the client asks a specialist question.”

Head of KPMG Private Wealth Bill Raffle says it is very difficult for the client to understand that the adviser talking to them on investment strategy cannot discuss the personal tax implications.

“It is very hard for the client to be told the adviser must stop explaining what is proposed because of tax law,” he says.

“We cover the whole field here, but we would find it very difficult if we had to refer clients to a different tax expert every time.”

Raffle, who is both a planner and a registered tax agent, says the problem is how to enforce the law.

“To try and satisfy FSR requirements, how are you going to give generic advice yet advise the client about their circumstances?” he says.

“With ASIC seeking to have tax advice under FSR, the more complex it becomes, the more important the need to find out each client’s details.”

“There aren’t easy questions with tax. They are hard questions and hard issues,” Raffle adds.

The lobbying for clarification in the law will continue, with each group in the financial services industry protecting their turf.

A ruling in favour of planners will upset the accountants and vice-versa, so the Government is in a no-win situation. However, the problem is not going to go away.