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Breaking down the laws on taxation advice

Breaking down the laws on taxation advice

Daniel Butler
18 December 2018 — 15 minute read

A drawn-out battle between tax accountants and financial advisers has resulted in a set of messy and complex regulations on who can provide taxation advice.

This article examines who is authorised to provide taxation advice in view of the limitations in the Corporations Act 2001 (Cth) (CA) on advisers relating to who can provide financial product advice.

Broadly, there are a number of exemptions in the CA and Corporations Regulations 2001 (Cth) (CA Regs) that allow tax agents to provide limited financial product advice in relation to the providing tax advice in relation to financial products.

Registration with the Tax Practitioners Board

As a starting point, for an adviser to provide tax advice, they must be registered with the Tax Practitioners Board under the Tax Agents Services Act 2009 (Cth) (TASA).

Under s 50-5 of TASA an adviser contravenes the law if they are unregistered and provide tax agent services for a fee, advertise that they can provide tax agent services or represent themselves as registered.

What is a tax agent service?

A tax agent service is defined in s 90-5(1) of TASA as any service:

(a) that relates to:

(i)       Ascertaining liabilities, obligations or entitlements of an entity that arise, or could arise, under a *taxation law; or

(ii)      Advising an entity about liabilities, obligations or entitlements of the entity or another entity that arise, or could arise, under a taxation law; or

(iii)     Representing an entity in their dealings with the Commissioner; and

(b) that is provided in circumstances where the entity can reasonably be expected to rely on the service for either or both of the following purposes:

(i)       To satisfy liabilities or obligations that arise, or could arise, under a taxation law;

(ii)      To claim entitlements that arise, or could arise, under a taxation law.

An adviser must therefore be registered under TASA to provide taxation advice. Furthermore, a special type of registration was developed for financial advisers that are covered by an Australian financial services licence (‘AFSL’) who do not prepare and lodge tax returns nor represent taxpayers in relation to matters involving the ATO. Thus, broadly, we outline the provision of taxation advice below having regard to the services typically provided by:

  • Non-licensed advisers, eg, an accounting firm that is also a registered tax agent; and
  • Licensed advisers who are registered tax (financial) advisers.

In this regard, the Tax Practitioners Board website states:

All Australian financial services (AFS) licensees and their representatives that provide tax (financial) advice services for a fee or other reward must be registered with the Tax Practitioners Board (TPB). If you advise your clients about the tax consequences of the financial advice you provide, you are providing a tax (financial) advice service.

If your corporate authorised representative (CAR) provides a tax (financial) advice service for fee or reward, part or all of which is payable via a third party, your CAR will also need to be registered. Whether a CAR provides a tax (financial) advice service will depend on the nature of the ASIC authorisations that the CAR has.   

In most cases a CAR is considered to provide tax (financial) advice services if they have an ASIC authorisation to provide financial product advice or to deal with a financial product.

Commonwealth versus State or Territory tax advice

Note that many advisers are surprised to learn that TASA only provides authority for a tax agent to provide advice on Commonwealth taxation law but does not cover State or Territory laws such as stamp duty, land tax and payroll tax. Such advice would therefore not be covered by the exemption of tax advice under s 766B(5)(c). ASIC information sheet INFO 216 makes a distinction between the exemption of the advice that falls under s 766B(5)(c) and CA Reg 7.1.29(4) by saying:

If you are a registered tax agent, the exemption in section 766B(5)(c) will cover most of the same types of advice as the exemption in regulation 7.1.29(4) of the Corporations Regulations. However, the definition of ‘taxation law’ which applies to section 766B(5)(c) is slightly narrower than the tax laws that you can advise on under regulation 7.1.29(4). For example, advice about foreign tax laws and state and territory tax laws such as stamp duty, payroll tax and land tax is not covered under section 766B(5)(c).

(We examine the CA and CA Regs implications of providing tax advice further below.)

Further, advisers should be mindful that there are eight different State and Territory jurisdictions in Australia with substantially different legislation and specific laws in each jurisdiction. Accordingly, providing advice on State and Territory law is complex and subject to considerable risk. For example, the legislation and practices of State and Territory revenue offices levying duty on transfers of dutiable property can vary substantially from jurisdiction to jurisdiction. Indeed, we are aware of revenue offices in different jurisdictions taking opposite views in relation to exactly the same wording in their applicable legislation (i.e., with one office finding no duty applied and the other imposing duty).

What constitutes legal advice?

It is also important to note that advice on State or Territory tax matters also constitutes legal advice that should be provided by a lawyer in the relevant jurisdiction. Indeed, a tax agent or tax (financial) adviser would also be at risk of providing legal services in relation to Commonwealth taxation law if they were not covered by TASA.

A person can only undertake legal work for reward if they are an Australian legal practitioner. The penalties, as outlined below, for breach of this prohibition are substantial. Extracts from part 2.1 of the Legal Profession Uniform Law Application Act 2014 (Vic) (NSW has also adopted the Legal Profession Uniform law) follow:

Section 2.2.9 provides:

9 Objectives

The objectives of this Part are —

  • To ensure, in the interests of the administration of justice, that legal work is carried out only by those who are properly qualified to do so; and
  • To protect clients of law practices by ensuring that persons carrying out legal work are entitled to do so.

Section 2.2.10 provides:

10 Prohibition on engaging in legal practice by unqualified entities

  • An entity must not engage in legal practice in this jurisdiction [Vic], unless it is a qualified entity.

Penalty: 250 penalty units or imprisonment for 2 years, or both.

  • An entity is not entitled to recover any amount, and must repay any amount received, in respect of anything the entity did in contravention of subsection (1). Any amount so received may be recovered as a debt by the person who paid it.

The two offences above carry a maximum $40,297.50 penalty (250 x $161.19) as one penalty unit under the Monetary Units Act 2004 (Vic) is $161.19 for FY2019. Also a non-qualified entity or person engaging in legal practice could also serve up to 2 years imprisonment.

What is a tax (financial) advice service?

In most cases, if you advise your clients about the tax consequences of the financial advice you provide, you are providing a tax (financial) advice service. A tax (financial) advice service consists of five key elements:

  • a tax agent service (excluding representations to the Commissioner of Taxation);
  • provided by an Australian financial services (AFS) licensee or representative (including individuals and corporates) of an AFS licensee;
  • provided in the course of advice usually given by an AFS licensee or representative;
  • relates to ascertaining or advising about liabilities, obligations or entitlements that arise, or could arise, under a taxation law; and
  • reasonably expected to be relied upon by the client for tax purposes.

Advisers that are tax (financial) advisers but not registered tax agents are not authorised to lodge tax returns nor are they authorised to represent a client in dealings with the ATO. Further, licensed advisers who are registered tax (financial) advisers can provide taxation advice on taxation matters that are not covered by an authorisation in their licence under CA Reg 7.1.29(4).

What tax advice can be provided by a non-licensed adviser?

Tax advice given by a registered tax agent in the ordinary course of their activities as a tax agent and that is reasonably regarded as a necessary part of those activities is excluded from constituting financial product advice under CA s 766B(5)(c) and CA Reg 7.1.29(4). We have extracted these provisions below.

Section 766B of the CA provides:

(5)      The following advice is not financial product advice:

(c)      except as may be prescribed by the regulations -- advice given by a registered tax agent or BAS agent (within the meaning of the Tax Agent Services Act 2009), that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities.

(For simplicity, we focus on registered ‘tax agents’ and will not cover BAS or tax (financial) advisers unless we discuss these expressly below. Note that ASIC information sheet INFO 216 sets out some basic principles which tax and BAS agents can apply in regard to SMSF services.)

The exemption provided under s 766B(5)(c) covers Commonwealth (of Australia) taxation law as that is what is covered by TASA being Commonwealth legislation. Accordingly, a non-licensed adviser seeking to provide tax advice in relation to State, Territory or overseas tax law would, subject to the requirement to also be a lawyer before providing legal advice, need to seek to rely on CA Reg 7.1.29(4) discussed below. However, before discussing the tax exemption in CA Reg 7.1.29(4), we need to discuss how the exemption under CA Reg 7.1.29(1) operates. Broadly, CA Reg 7.1.29(1) provides an exemption where an accountant is deemed not to provide a financial service if:

  • the accountant provides an eligible service in the course of conducting an exempt service; and
  • it is reasonably necessary to provide the eligible service in order to conduct the exempt service; and
  • the eligible service is provided as an integral part of the exempt service.

[Bolding reflects emphasis added]

For the purposes of CA Reg 7.1.29 a person provides an ‘eligible service’ if the person engages in the following conduct (extracted from s 766A(1)(a) to (f)):

(1)      For the purposes of this Chapter, subject to paragraph (2)(b), a person provides a financial service if they:

(a)      Provide financial product advice (see section 766B); or

(b)     Deal in a financial product (see section 766C); or

(c)      Make a market for a financial product (see section 766D); or

(d)     Operate a registered scheme; or

(e)      Provide a custodial or depository service (see section 766E); or

(ea)    Provide a crowd-funding service (see section 766F); or

(f)      Engage in conduct of a kind prescribed by regulations made for the purposes of this paragraph.

Thus, a person who provides an eligible service of providing financial product advice in relation to the provision of tax advice would need to satisfy the following to fall within the exemption provided by CA Reg 7.1.29(4):

  • it is reasonably necessary to provide the eligible service in order to conduct the exempt service; and
  • the eligible service is provided as an integral part of the exempt service.

CA Reg 7.1.29(4) (as modified by ASIC Corporations (recognized Accountants: Exempt Services) Instrument 2016/1151 as amended by ASIC Corporations (Amendment) Instrument 2017/464) provides:

(4)      For this regulation, a person also provides an exempt service if:

(a)      The person provides advice to another person on taxation issues including advice in relation to the taxation implications of financial products; and

(aa)    If the person is a financial services licensee (including a limited licensee) or a representative of a licensee — the advice mentioned in paragraph (a):

(i)       In relation to the licensee or the representative — is not covered by an authorisation in the licence held by the licensee; or

(ii)      In relation to the representative — is not covered by an authorisation in the licensee to the representative; and

(b)     The person will not receive a benefit (other than from the person advised or an associate of the person advised) as a result of the person advised acquiring a financial product mentioned in the advice, or a financial product that falls within a class of financial products mentioned in the advice; and

(c)      Either:

(i)      The advice does not constitute financial product advice to a retail client; or

(ii)     The advice constitutes financial product advice to a retail client and it includes, or is accompanied by, a written statement that:

(A)     The person providing the advice is not licensed or authorised (as applicable) to provide financial product advice of the kind mentioned in paragraph (a); and

(B)     Taxation is only one of the matters that must be considered when making a decision on a financial product; and

(C)     The client should consider taking advice from the holder of an Australian Financial Services Licence with the appropriate authorisation before making a decision on a financial product.

CA Reg 7.1.29(4) was modified by ASIC Corporations (Recognised Accountants: Exempt Services) Instrument 2016/1151. This modification was implemented to facilitate accountants moving to the AFSL regime by permitting limited AFS licensees to provide advice to retail clients in relation to taxation implications of financial products which are not covered by their licence.

Subsequently ASIC Corporations (Recognised Accountants: Exempt Services) Instrument 2016/1151 was amended by ASIC Corporations (Amendment) Instrument 2017/464 to allow full AFS licensees (and ARs of full AFS licensees) with limited authorisations to provide exempt advice under CA Reg 7.1.29(4).

Note that tax advice can be provided in respect of a financial product by a tax agent under CA Reg 7.1.29(4) provided broadly that the adviser does not obtain any benefit in respect of that advice apart from payment from the client or an associate of the client. An adviser can also provide financial product advice related to the provision of the tax advice provided a disclaimer is issued under CA Reg 7.1.29(4)(c)(ii).

Example:

An adviser who is a tax agent, but who does not have an AFSL can discuss what a member’s concessional contribution cap is and whether the member is entitled to a tax deduction for super if they satisfy the appropriate tests in the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’). However, they should not recommend a member contribute $25,000 to superannuation as that, on its own, would constitute financial product advice. Further, the adviser providing such tax advice should issue a disclaimer that he or she is providing taxation advice and does not offer financial product advice nor do they have an AFSL.

A typical disclaimer regarding the provision of taxation advice that should be issued by an accountant who is not a licensed adviser would be as follows:

We are not licensed to provide financial product advice under the Corporations Act 2001 (Cth). Taxation is only one of the matters that must be considered when making a decision on a financial product. We recommend that you obtain advice from the holder of an Australian financial services licence under the Corporations Act 2001 (Cth) that has the appropriate authorisation before making a decision on a financial product.

The provision of taxation advice is a common basis for advice being provided by non-licensed advisers. Taxation advisers therefore need to be focused on when their advice relates to a financial product or could be considered to constitute financial product advice. Provided the taxation advice is covered by TASA, a disclaimer is issued and no benefit is received in relation to financial products, taxation advice that satisfies the exemptions in s 766B or CA Reg 7.1.29(4) should generally not contravene the CA.

The above (especially s 766B and CA Reg 7.1.29(4)) mean that an accountant who is a tax agent can generally provide taxation advice in relation to superannuation and SMSFs in relation to the following fact scenarios (with examples of tax advice under each heading):

  • Making contributions:

Example:

Your concessional contribution cap for FY2019 is $25,000. Your non-concessional contribution cap for FY2019 is $100,000 subject to the ability to invoke the bring forward rule and make up to three times $100,000 over a three year period provided your total superannuation balance does not exceed $1.6 million.

  • Paying superannuation benefits:

Example:

If you obtain a lump sum benefit from a superannuation fund under 60 years, the taxable component will generally be taxed at 15% plus applicable levies, subject to the lifetime low rate cap amount for those who have attained preservation age. A lump sum benefit paid from a superannuation fund should be tax free once you attain 60 years.

In comparison, the taxable component of a pension is generally taxed as ordinary income less a 15% tax offset plus applicable levies if you are under 60 years. A pension should be tax free once you attain 60 years.

  • Commencing or commuting a pension:

Example:

Broadly, a tax exemption will apply to the fund to the extent it is in pension mode. Thus, the fund’s tax will generally only be payable on the fund’s taxable income to the extent it is not in pension mode. There are two methods of claiming an exemption when an SMSF is in pension mode. The segregated method requires assets to be selected to fund the pension (or if the entire fund is in pension mode, it will be taken to be segregated unless the disregarded small fund asset rule in s 295-387 of the ITAA 1997 applies). The unsegregated method, requires an actuarial certificate each financial year confirming the portion of assets related to funding pension liabilities. The pension exemption is subject to a maximum $1.6 million general transfer balance cap (ignoring earnings and growth). Further, the segregated method is generally not available to an SMSF member with a total superannuation balance of more than $1.6 million who is also receiving a pension from an SMSF.

  • insurance premiums and insurance proceeds:

Example:

Typically, the premium for life and permanent incapacity insurance (permanent and temporary) can be claimed as a deduction by a superannuation fund. The proceeds for such insurance is generally tax free on receipt by a superannuation fund. (Note, this does not cover the tax treatment of payments by a superannuation fund that includes insurance proceeds.)

  • An SMSF purchasing or disposing of assets:

Example:

A superannuation fund generally obtains a cost base on the purchase of an asset being its purchase price plus related costs. Where a superannuation fund disposes of an asset, if the proceeds on disposal exceeds the cost base of the asset, the gain will be assessable to the fund. A superannuation fund trustee may also benefit from a one-third CGT discount on a capital gain realised on an asset that has been held for more than 12 months. However, a superannuation fund that is in pension mode may obtain part of the gain tax free.

What tax advice can be provided by a licensed adviser?

Note that, as discussed above, licensed advisers or those who are authorised representatives can also provide taxation advice under TASA if they have the status of a registered tax (financial) adviser or a tax agent. Typically taxation advice is covered by a licensed adviser’s statement of advice (‘SoA’). Broadly, SoAs prepared by licensed advisers will generally include any taxation advice and there is no need to rely on an exemption under the CA or CA Regs; subject to the qualification below where the financial product advice is not covered by an authorisation in relation to that financial product under their licence.

A licensed adviser can rely on the exemption in CA Reg 7.1.29(4)(aa) to provide tax advice as follows:

(aa)    If the person is a financial services licensee (including a limited licensee) or a representative of a licensee — the advice mentioned in paragraph (a):

(i)       In relation to the licensee or the representative — is not covered by an authorisation in the licence held by the licensee; or

(ii)      In relation to the representative — is not covered by an authorisation in the licensee to the representative.

Thus, a licensed adviser who is a registered tax (financial) adviser or a tax agent can rely on the exemption in relation to tax advice that is not covered by an authorisation under their licence.

Note, in contrast, that accountants must not provide financial product advice unless they have an AFSL or become an authorised representative of a AFSL holder apart from the exceptions provided in relation to taxation advice related to financial products under s 766B(5)(c) and CA Reg 7.1.29(4).

Other duties

Note that tax agents and tax (financial) advisers under TASA are subject to the Code. Broadly, under the Code, a tax agent and tax (financial) adviser must ensure that the taxation advice and services they provide, or that are provided on their behalf, among other things, are provided competently. This will generally require the tax agent or tax (financial) adviser to maintain adequate supervision and control over services provided on their behalf including any outsourced or offshoring arrangements. Additionally, partnerships and companies that are registered with the TPB must have a sufficient number of individual tax practitioners to provide services to a competent standard and to carry out supervisory arrangements.

Conclusion

The above complex outline is the result of a drawn-out dispute between tax accountants and financial advisers, whereby the tax industry sought to prevent financial advisers who were not registered tax agents providing tax advice from mid-2014. Broadly, a new designation of tax adviser was introduced to cater for financial planners to provide ‘limited’ taxation services (within the ambit discussed above for ‘tax (financial) advisers’). Further, a financial adviser can become a registered tax agent that authorises them to also lodge tax returns and represent their clients in matters involving inquiries or disputes with the ATO.

What we need now is for this law to be reviewed and streamlined so it can be readily understood and fit for purpose.

Daniel Butler, director, DBA Lawyers

Breaking down the laws on taxation advice
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