Financial advisers warned on litigation risks with tax advice

Financial advisers recently registered as tax (financial) advisers have been warned by an industry lawyer to stay within the scope of the tax advice they are registered to provide, or risk litigation from clients in later years.

Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said with the number of financial advisers registered as tax (financial) advisers now fast approaching 17,000, it is vital these advisers ensure the tax advice they are giving is competent, and they are staying within the realms of the tax advice they can legally provide.

Mr Butler said while the Tax Practitioners Board will easily catch out any advisers completing tax returns when they are not licensed or registered to do so, when it comes to providing tax advice, it’s more likely to be clients that get the financial adviser into trouble.

“The main fear I have is planners potentially getting involved in a litigation claim, where they give advice, which is not up to scratch and the client suffers damage,” said Mr Butler.

“One example of this is a recent case where a tax adviser gave advice on some overseas issues and when he gave this advice he didn’t have international tax expertise but he was sued on the basis of what a reasonably competent international tax adviser would provide.”

Mr Butler said it is likely therefore to be the clients, or the risk of litigation that keeps financial advisers honest in terms of the tax advice they provide.

The code of professional conduct for tax (financial) advisers in section 30-10 of TASA Mr Butler said is very open, with the code stating advisers must “ensure that a tax agent service [they] provide, or that is provided on [their] behalf is provided competently”.

“Now that is really quite open; I’ve been in tax for over 30 years and I find it an extremely complex area to practice in and I’m always needing to keep up to date with ongoing changes . Are financial planners attending tax seminars and doing much reading in the technical tax aspects they provide advice on and are they competent in the advice they’re providing?” said Mr Butler.

He said if financial advisers are providing advice in this area it is vital they maintain their knowledge and skills for the tax advice service they are providing.

“Tax laws must be applied correctly, and you must advise your client on their rights and obligations that are materially related to their service, one of the points I put out is that tax is complex, it’s a moving beast, there’s a lot of issues in tax,” he said.

While financial planning he said also comes with a range of complexities, advisers are more likely to be across them.

“They have to work out where their competency lies, and if they are really upskilling,” he said.

“It’s a matter of them maintaining their knowledge, skill level and competently – the onus is on them to do it properly."

He stressed that it was more advantageous for advisers to be registered to give tax advice or they would otherwise need to issue a disclaimer that they are not qualified to provide tax advice on such matters as negative gearing and claiming franking credits which clients may not like.

"However, if a financial planner does not have the skills, they are more limited on what they can provide to clients," he said. 

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