FPA makes two key pre-Budget advice recommendations

The Financial Planning Association of Australia (FPA), in its 2023-24 pre-Budget submission, has suggested amendments to the proposed Compensation Scheme of Last Resort (CSLR) and advocated that advice should have tax-deductible status.

While broadly supporting the Hayne Royal Commission’s recommendation to establish a CSLR, it put forward amendments to ensure the scheme would run more efficiently and benefited consumers more directly.

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The model currently proposed, FPA said, left financial planners to pay more than 75% of the cost of the scheme (which would include the establishment, administration and capital reserve costs) while consumers remained unprotected.

It estimated the administration costs alone would amount to $3.7 million per annum. 

It put forward that the costs of establishment and any legacy claims relating to the proposed CSLR should be borne by the Government.

“Whilst we do not object to contributing to consumer redress, it seems unjustifiable to see up to half of the value of the industry cost recovery levies expended on administration and red tape on an annual basis. 

“Therefore, the efficiency of the operation of the scheme must be closely scrutinised to ensure it represents value for money and is fair for contributors and effective for consumers,” read the pre-Budget submission.

“Further, contributions by participants in the scheme should reflect their sub-sectors current risk. This will ensure more equity across the financial services industry by ensuring the size of contributions is tied to the requisite behaviour and risk profile. This in turn will encourage every participant to play a role in lifting standards across the industry.”

It recommended broadening the scope to include the entirety of the jurisdiction of the Australian Financial Complaints Authority (AFCA) to ensure equity for industry and consumers and long-term sustainability for the scheme. 

Presently, the model under consideration would only apply to securities dealing, personal advice on relevant financial products to retail clients, credit intermediation, insurance product distribution, and credit provision.

Additionally, the FPA endorsed making all financial advice tax deductible in order to help address the issue of affordability and accessibility, a topic it raised with advisers earlier this  year.

“We note that the Australian Tax Office (ATO) has at Advice Under Development 4055 committed to looking into the tax deductibility of financial advice. FPA would encourage the Government to proactively provide surety to the sector by including this offset in this year’s Budget,” it stated.

“Tax treatments of financial advice occur in numerous ways, dependent on the nature of the advice sought and when it is provided. As an example, the ATO has determined that a fee for service arrangement in the preparation of an initial financial plan, is not tax deductible. However, ongoing advice fees are treated as tax deductible as they are deemed to have been incurred in the course of gaining or producing assessable income. 

“The treating of the creation of an initial financial plan in a different fashion from that of ongoing advice provides a disincentive for Australians to seek financial advice which will assist them to actively plan, save and secure their financial future. It also acts as a further barrier for Australians who have not previously sought or received financial advice.”

The FPA added that, to offset impacts on the Budget, the inclusion of caps on the amount of any tax deductions or a cap on income for those able to receive a deduction, could be adopted.