Government getting mean on means testing

Recently proposed changes to the social security means test have many in the in-dustry up in arms. Samantha Walker takes a look at the proposals and the backlash from the industry.

Recently proposed changes to the social security means test have many in the in-dustry up in arms. Samantha Walker takes a look at the proposals and the backlash from the industry.

Late last year, the minister for family and community services Senator Jocelyn Newman released a discussion paper — Private Trusts and Private Companies: Maintaining the Integrity of the Means Test — weighing into what many consider to be an ethical debate for financial planners. The discussion paper proposes changes which would result in assets in private trusts and companies being included in the social security means test net, thereby excluding those individuals deemed too as-set rich to receive Government pensions.

The Government believes it holds the moral high ground on the issue.

“This proposed new treatment has been prompted by the increased use of private trusts and private company structures to gain social security entitlements. A pri-mary aim of the proposal is to forestall the continued growth in the use of this strategy,” the discussion paper states.

The Government singled out financial planners as one of the main culprits in what it sees as the misuse of private trusts and companies.

“While it is impossible to quantify the effect of financial planners’ advice on the growth in the use of private trusts and companies, there is substantial evidence to indicate that many planners promote the use of these structures for social security purposes,” Senator Newman says.

While Senator Newman allows for the fact that this practise is perfectly legal, she sees is as unequitable and argues in her discussion paper that it reduces the com-munity’s faith in Centrelink.

She argues the changes could save the government more than $100 million on an annual basis, while only affecting a small proportion of social security recipients. Only about 35,000 Centrelink customers (about 0.8 per cent of people receiving benefits) will lose some or all of their entitlements, she says.

However, the Financial Planning Association (FPA) begs to differ. Chief executive officer Michael McKenna says he harbours great concern about the retrospective nature of the proposed changes and the effect this would have on people who cur-rently receive social security benefits while holding their assets in a private trust or company. The FPA says the Government’s insistence that these changes will not be retrospective is dubious.

“We believe the effect of the legislation will be that any scheme that is in place which doesn’t comply with the new legislation can be overturned,” he says.

This would unfairly penalise those recipients of social security payments who were not breaking the law when they structured their finances using private trusts and companies, McKenna argues.

“It is totally within the law. An individual is perfectly entitled to order their affairs within the law.”

The FPA has prepared its submission to the government highlighting its concerns. The Australian Society of CPA’s has also prepared its own submission on the pro-posed changes, although its financial planning spokesperson Brad Pragnell refuses to discuss the nature of his group’s response.

But these are not the only concerns financial planners have. While most agree that using private trusts and companies to obtain pensions for clients with significant assets is ethically ambiguous, there is a large grey area where opinions are sharply divided.

One of the key issues raised by many planners is what they see as the govern-ment’s lack of understanding of the client-planner relationship. Who does the plan-ner have a fiduciary duty to — the client or Centrelink? Is the use of private trusts and companies a legitimate business and accounting tool? And even if it is argued that the use of these trusts by planners has the potential of being ethically ambigu-ous, isn’t it still legal and therefore can’t clients demand it?

McKenna argues that, in many cases, stark commercial reality mean some planners feel compelled to recommend clients invest their assets in private trusts and com-panies, mainly for social security reasons.

“There is pressure on financial planners. Clients can say ‘if you don’t do it, then I’ll go down the road and get someone else to do it’,” he says.

Lifespan’s social security spokesperson Michael Burke describes the Govern-ment’s suggested changes as “pretty Draconian”. Burke believes private trusts and companies can serve a legitimate purpose and he has no qualms in recommending some of his clients hold their assets in these vehicles.

“It’s a cost issue. A lot of people in advisory-type businesses need this type of structure to protect their assets. This is not an Alan Bond scenario. One disaffected customer can ruin you. These trusts serve as legal protection,” he says.

Burke does, however, acknowledge there are planners who abuse the system. He feels the Government should be concentrating their efforts into targeting these in-dividuals.