Tax (financial) advice, five years on…

It’s now more than five years since the commencement of the tax (financial) advice regime. The Tax Agent Services Act 2009 (TASA) was amended, generally with effect from 1 July 2014, to bring individuals and corporate bodies that provide tax advice in the course of giving advice that is usually provided by financial services licensees, or their representatives, within the regulatory regime administered by the Tax Practitioners Board (TPB). 

This article examines what is, and what isn’t, tax (financial) advice (TFA), and how financial services professionals can meet their compliance requirements in a practical manner.

WHAT IS TFA?

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The definition of ‘tax (financial) advice service’ in section 90-15 of TASA involves the following key elements:

  1. a tax agent service 
  2. provided by a financial services licensee or a representative
  3. in the course of providing advice of a kind usually provided by a financial services licensee or a representative
  4. the service relates to ascertaining, or advising, a client about liabilities, obligations or entitlements that arise, or could arise, under a taxation law
  5. the client receiving the service can reasonably be expected to rely on the service for tax-related purposes.

For example, TFA services may be provided in relation to strategic advice about a client’s long-term financial goals, when providing advice about the relative merits of particular financial products or advice regarding non-financial products such as real estate. 

Element 1 – tax agent service 

Providing factual tax information or general taxation advice is not a tax agent service, and so cannot be a TFA service. For example, giving a client information about the tax consequences that usually arise from managed investment schemes is not a TFA service. 

Elements 1 and 5 - reasonably be expected to rely 

It must be reasonable to expect a client could rely on the service for tax-related purposes for it to be a tax agent service. This same test is also applied in element 5. The term ‘tax-related purposes’ includes satisfying liabilities or obligations, or claiming entitlements, that arise, or could arise, under a taxation law. 

‘General advice’ (as defined in section 766B of the Corporations Act 2001) is unlikely to be considered a TFA service, as it does not take into consideration the client’s specific circumstances, hence it is not reasonable to expect the client to rely on it. 

Services provided by online calculators or information in product disclosures are not TFA services because they do not take into account all of a client’s circumstances, so it’s not reasonable to rely on them for tax-related purposes.

It follows that TFA services are generally associated with personal advice.  There is no distinction in TASA between wholesale and retail clients – if personal advice is provided and the above five key elements apply, the service will be a TFA service regardless of the retail or wholesale status of the client.

More generally however, the reliance test is not straightforward. The explanatory memorandum (EM) to the TASA amending bill  provides some guidance on reliance for purposes other than tax-related purposes. 

"Where it is reasonable to expect that advice is to be relied upon for purposes other than to satisfy tax obligations... such as making an informed financial or business decision...the advice is not a tax agent service."

The EM also states:

"...it is often a fine line between whether an entity is merely providing information about the tax implications of particular financial products or giving tailored tax advice that could reasonably be expected to be relied on and therefore a tax agent service."

Example 1.2 indicates that advice stating real estate management fees of an investment property are generally tax deductible is not a TFA service. 
A gearing recommendation is referred to from an earlier EM: 

"In determining whether Adam has the cash flow to afford the interest costs on borrowed funds, Angelia [a financial adviser] estimates Adam's cash flow taking into account the potential tax deductibility of interest costs, the taxable nature of the dividends, the impact of franking credits on Adam's income tax position and his eligibility for certain tax offsets."

Although the taxation consequences are integral to Angelia’s advice, the advice is not a tax agent service (hence not a TFA service) as it cannot reasonably be expected that Adam will rely on the service for tax-related purposes.

Another example involves consideration of the capital gains taxation impact of selling certain parcels of shares. 

"Erica [a financial adviser] recommends that Caroline sells some of her existing shares and uses the proceeds for investment in managed funds to increase diversification of her investments. In assessing which shares Caroline should sell, Erica alerts Caroline to the fact that selling certain shares could potentially raise CGT liabilities. This would not ordinarily be a tax agent service because it is provided for the purpose of advising Caroline about an appropriate asset allocation that fits her risk profile."

The threshold between what is, and what’s not, a TFA service.

The threshold that elements 1 and 5 set appear clearer when the above examples are compared to Example 2.10: 

"...In addition to providing advice about the tax implications of decisions about financial products, Norma [a financial adviser] provides extensive analysis of her clients' tax positions and details of the relevant entries into her clients' tax returns that would result from adopting certain financial product decisions.

"... because the advice is extensive and sufficiently detailed to be able to be reflected in her clients' tax returns, it is reasonable to expect her clients to rely on the advice to satisfy their obligations under the taxation laws. As such, Norma is providing a tax agent service."

Norma provides “extensive analysis of her clients’ tax positions and details of the relevant entries into her clients’ tax returns”. This more detailed focus and the impact on the tax returns appears to cause Norma to cross the threshold into a tax agent service, hence the advice is a TFA service.

We have seen that providing tax-related factual information regarding managed investment schemes may not be a TFA service. However, applying that information on a more detailed and extensive basis to the specific circumstances of the client, to an extent that it is reasonable for a client to rely on it when completing their income tax return, may be a TFA service. 

Similarly, providing factual information about SMSF establishment is not a TFA service, but advice on how an SMSF compares to an APRA-regulated super fund in relation to the client’s particular circumstances may be a TFA service.  

Current or future financial affairs

If the advice relates to future income tax years, that issue alone will not preclude the advice from being a TFA service. 

Superannuation advice

Paragraph 2.45 of the EM indicates that advice on the deductibility of superannuation contributions, or the extent to which superannuation benefits would be subject to tax, may constitute a TFA service.

With regard to superannuation advice, the distinction between factual information, general advice, and advice specific to the circumstances of the client are still relevant criteria for determining if a TFA service is provided, as well as the expectation of reliance on the advice for tax-related purposes.

Factual information about superannuation contribution caps is unlikely to be a TFA service. For example, advising a client that the concessional contribution cap is $25,000 in 2019-20, and the annual non-concessional contribution (NCC) cap is generally $100,000, is unlikely to be a TFA service.

However, taking into account a client’s recent NCCs and providing advice of their remaining maximum NCC capacity in 2019-20 is likely to be a TFA service, if it’s reasonable to expect the client may rely on that advice and make a contribution.

Similarly, providing factual information that the minimum pension payment requirement from an account-based pension for a person under age 65 is four per cent per annum is unlikely to be a TFA service.  But calculating and advising a client of the amount of minimum pension based on their 30 June account balance is likely to be a TFA service.

WHY IS UNDERSTANDING TFA IMPORTANT FOR ADVISERS?

Not all providers of personal advice are authorised to provide TFA or registered as a tax (financial) adviser with the TPB. For those who aren’t, it’s important they understand where the boundary lies between what is TFA, and what is not, so they don’t cross that boundary and provide advice they are not authorised to provide.

Given the ambiguity in the definition of TFA service, it would be prudent for all providers of personal advice to be either authorised to provide TFA services by a Financial Services Licensee that is registered with the TPB as a tax (financial) adviser, or be personally registered with the TPB themselves. 

David Barrett is head of Macquarie Technical Advice Services.




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