Why we should get behind the FPA on alienation

Alienation of personal services income is a bomb ticking beneath the financial planning industry.

There is a crack team of technical experts trying to defuse the bomb but it is likely there will be a controlled detonation which will spread shrapnel the length and breadth of the industry. The Financial Planning Association (FPA) is devoting huge amounts of time and energy arguing the case with the Australian Tax Office (ATO) but it seems the ATO is determined to catch financial planners in the alienation net.

Have no doubt, the moves by the ATO on alienation of personal services income could bring in the biggest structural change for the industry in its brief history.

Grossly simplified, the ATO is arguing that financial planners are employees of their dealer groups because their commission income from fund managers and insurance groups comes through the dealer group's administration system. This has come as a shock to most planners who think of their dealer group as an outsourced service provider; as an alternative to getting a dealer's licence themselves.

At worst, the alienation regulations could cost advisers tens of thousands of dollars in back taxes if the ATO decides to make the regulations retrospective. At best, it could cost dealers and advisers a lot of money mounting a case to the tax department that they qualify for an exemption to the regulation.

It could also make the current financial planner/ dealer relationship untenable. To convince the tax department that their practice is a company in its own right, a number of advisers may be forced to get their own dealer's licence. This would mean that dealers would essentially become nothing more than back office service providers without any responsibilities over the actions of the advisers who use their services.

If this scenario follows from an alienation rule, it will be a disaster for the industry watchdog. The Australian Securities and Investments Commission (ASIC) would not only have to process thousands of dealer applications but it would also be policing at least ten times as many organisations. Compliance would inevitably start to fall away and consumers would suffer from lack of protection from the cowboy element within the industry.

In other words, the alienation of personal income is a lose/ lose/ lose situation. Financial planners would lose, the regulator would lose and consumers would inevitably lose.

The only winners would be the tax office. But in fairness, the ATO has been given a very strong tax reform mandate by the Australian people through the coalition government. Financial planners had been at the forefront of the push for tax reform long before the coalition was elected on a strong tax reform mandate in 1998. You only really feel the full force of reform when it lands in your own backyard.

The push by the FPA to combat the ferocity of the alienation regulation should be applauded and supported by the industry. It is time for financial planners to understand the damage the changes could bring and support the battle.