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Chapter 2

The need for reform

2.1        This chapter examines the current regulatory arrangements that apply to financial advisers who provide tax advice and the 'problem' that has been identified which the proposed amendments in the bill sought to address. The chapter also examines the potential costs and benefits associated with the reforms and the consultation process used by the government while developing the measures.

The problem

2.2        Following the enactment of the Tax Agent Services Act 2009 (TASA), a national framework for the regulation of tax agent services was introduced with effect from 1 March 2010. The object of TASA is to ensure that 'tax agent services are provided to the public in accordance with appropriate standards of professional and ethical conduct'.[1] However, the framework does not currently apply to financial advisers who may provide their clients with tax advice. When financial advice turns into tax advice can be difficult to pinpoint, as the explanatory memorandum notes:

In practice, a core part of giving well-considered and comprehensive advice about an entity's financial affairs will often include information about the tax implications of certain strategies and investments. However, giving this information will not necessarily be a tax agent service ... Nonetheless, it is often a fine line between whether an entity is merely providing general information about the tax implications of particular financial products or giving tax advice that could reasonably be expected to be relied on and therefore a tax agent service.[2]

2.3        As part of TASA, the government provided a carve out from the regulatory regime for tax agent services provided by financial services licensees and their authorised representatives (on condition that the entity advised the client that they are not a tax agent). The result is that while tax agents and BAS agents[3] are currently regulated by the Tax Practitioners Board (TPB), financial advisers are not.[4] The regulation impact statement (RIS) suggests that there are three reasons as to why the current framework is undesirable. The first reason is because of the 'regulatory anomaly' that arises from the regulation of tax advice given by tax agents but not the provision of tax advice by financial advisers. Second, various risks (consumer protection, professional accountability and the integrity of the tax system) exist as financial advisers are not subject to the ethical and professional standards imposed upon tax agents by TASA in order to guarantee the standard of tax advice. Finally, the RIS suggests that there is a 'lack of legislative clarity regarding the legal position of financial advisers who provide tax advice'.[5]

2.4        CPA Australia and the Institute of Chartered Accountants Australia (ICA), both of which support the bill, argued in their joint submission that the 'provision of tax advice is a highly specialised service which requires a high level of skill, knowledge and experience'. They argued that:

Consumers of tax advisory services deserve to have the comfort of knowing that those providing them with advice are appropriately registered, qualified, monitored and regulated by an oversight body, and that consumer protection measures exist to safeguard their interests.[6]

2.5        The Tax Institute noted the 'inherently complex' nature of tax as a discipline—quoting the former Chief Justice of the Federal Court and current High Court Justice Patrick Keane who has previously remarked that 'opening the Tax Act is like entering the door to a parallel universe'. The Institute provided the following reasoning of how the proposed amendments would address the problem that it perceives exists with the current framework:

In the context of the legislation before as today, it is very important to realise that what we are talking about is ensuring that those people who are trying to navigate through that parallel universe have the appropriate professional and ethical standards and the appropriate educational qualifications and experience to make that journey safely. That is also important for those who are relying on those people doing the navigation—that is, in this context, the people receiving the tax advice ... The problem is that any consumer, anyone from the general public, who speaks to a financial planner and receives advice of any nature regarding tax—the complex parallel universe of tax—has no protection should this legislation not pass, and has no protection should that advice be incorrect. So this legislation makes sure that the Tax Agent Services Act applies to that advice. What that means is that the extensive code of conduct within the legislation and the extensive disciplinary procedures of the Tax Practitioners Board, which is the agency charged with administering the Tax Agent Services Act, can apply to anyone who gives tax advice incorrectly and does not do that in a fit and proper way.[7]

2.6        Within the industry, the need for reform has been acknowledged. Following a meeting held in April 2011 between the Minister for Financial Services and Superannuation and representatives from the financial planning, tax and accounting bodies and government agencies, a broad set of principles for developing regulatory arrangements were agreed to. The Minister noted that he was:

... encouraged by the enthusiasm and constructive engagement of industry in this consultation process. The agreement of the key elements of a practical model will benefit the finance, tax and accounting industries. For consumers, this means they can expect to receive quality financial planning services that include competent advice on related tax issues.[8]

2.7        Although noting that the tax advice provided by financial advisers is most frequently general information in nature, the Financial Services Council (FSC) advised that it supports amending TASA to create 'a specific and appropriate type of tax adviser' that relates to the type of advice a financial adviser provides. The FSC recognises that 'increased advice provider competency is a public good and will enhance the quality and value an advice provider delivers to their client'.[9]

Costs and benefits of the proposed changes

2.8        As part of the development of the proposed amendments, a RIS was produced and published on the Department of Finance and Deregulation's website. The RIS is also included in the explanatory memorandum. The RIS provides Treasury's assessment of the costs and benefits of various options for creating a regulatory framework for tax (financial) advice services. As noted earlier in this chapter, the key benefit associated with the proposed amendments arises from improving the consumer protection regime in place for taxpayers by raising the standard of advice provided by those financial advisers who provide tax advice. The RIS also notes benefits from strengthening the integrity of the tax system that arise from similar regulation applying to all providers of tax advice.[10]

2.9        It is generally the case that the benefits to consumers that arise from measures dealing with consumer protection are difficult to quantify. Unsurprisingly, the RIS does not provide a dollar figure on the benefits that consumers will receive. Nevertheless, the benefits can still be considered. CPA Australia, the ICA and Treasury noted, in general terms, examples where consumers had received poor advice from financial planners. Treasury's evidence on this point is particularly instructive:

CHAIR:  I ask a question that is really at the heart of why this legislation has come to the parliament and is before us today. The question was put earlier ... what is the problem? The question is: what are the consequences for people who have received incorrect tax advice? Do you have any real‑world examples for the record of what happened when somebody got incorrect advice from a financial adviser because of a taxation knowledge deficit?

Mrs Macdonald:  There have been a number of high-profile collapses, plus there have been other cases of people who have lost money as a result of being sold financial products where the tax advice has not been accurate or correct.

Mr Antioch:  I will just add to that. There are always proximate causes for why something may not have worked out as people had intended. The bill—and the whole process, as I understand it, of linking tax services with financial service advice—is to make a seamless, integrated kind of industry which is better for consumers. They can go and get tax advice and financial advice from a properly regulated and administered system. One other thing that is worth bearing in mind is that, with the tax system ... a degradation of quality standards is not felt immediately. One imagines that that also applies to the financial services area. It builds up. So this is like an integrity to keep both systems operating well and to a standard where consumers feel confident that they are getting the services that they are paying for, ultimately.[11]

2.10      However, the Financial Planning Association of Australia (FPA) argued that there is 'no substantive evidence' to suggest that consumers are not sufficiently protected. The FPA pointed to reports produced by various bodies to support its argument:

The primary external dispute resolution system, the EDR scheme, used by the advice profession is the current Financial Ombudsman Service—currently known as FOS. There is no evidence in any of our reports that there are any complaints or systemic risks on tax advice failings by financial planners. It is also our understanding from the reports publicly available from ASIC, including Shadow Shopper reports, that there are no systemic problems of consumer risk issues with financial planners providing inappropriate or incorrect tax advice within the context of financial planning. The FPA can also confirm that our own surveillance and complaints reports do not highlight any concerns with tax advice provided by our members. Further, the introduction of the Future of Financial Advice reforms from 1 July 2013 will further enhance existing consumer protections, especially with the introduction of the best-interest duties, the removal of conflicted remuneration and enhanced ASIC powers.[12]

2.11      The Tax Institute responded to the FPA's reasoning:

Tax advice being what it is, often poor tax advice does not manifest itself for years to come, so I do not think a lack of a stream of claims against incorrect advice is necessarily evidence that things are okay now.[13]

2.12      While estimates of the likely benefits are not available, estimates of the costs associated with the proposed amendments have been put forward. However, the figures reached by Treasury and other stakeholders varied significantly. The FSC estimated that the cost to the industry of compliance by 1 July 2013 would be $1 billion.[14] The key sources of costs identified by the FSC were:

• the need to replace documents and update websites to amend current disclosure statements with the revised statement contained in the bill (including documents that were recently updated to comply with the FOFA reforms); and
• during the transition period, financial advisers will need to undertake education to comply with the competency requirements.[15]

2.13      The ICA disagreed with the FSC's assessment of the costs that the industry faces. The ICA's General Manager, Leadership and Quality, stated:

I find it hard to grapple with the notion that there are considerable costs associated with shredding documents, when we all know that by and large most organisations, small and large now, deliver their advice electronically and print it out at the time of the provision of the advice. If that advice has been prepared beforehand, there might be some questions about whether or not that advice has been sufficiently tailored for the client's circumstances. That may be one issue, but the reality of the matter is that, but for that modest change of disclaimers and wording of disclaimers, financial planners will be able to continue to provide the same advice after 1 July as they are providing right now.[16]

2.14      A senior officer at Treasury also stated that he was 'puzzled' by the FSC's estimate. The officer advised the committee that this figure had not been put forward at previous consultations with the industry that Treasury had conducted.[17] Treasury provided the committee with its summary of the costs that the industry would face, highlighting in particular that the transitional arrangements for registration mitigate the potential costs associated with changing the disclaimer:

[To register] the cost would be $400 for three years for a non-individual and $200 for an individual for three years. We went on to say the education costs are estimated to range between $680 and $1,060 in order to acquire appropriate qualifications that someone may not have. In relation to the disclaimer, there will be just a couple of words that will be changing and it is only for those who do not register. If you choose to register with the Tax Practitioners Board, then you do not put on the disclaimer. For those who choose not to register and use a disclaimer, they can do that [until] after 31 December 2014.[18]

Committee comment

2.15      The committee has asked the FSC for further details regarding its $1 billion estimate of the total cost to industry associated with implementing these measures. Treasury's RIS advises that there is between 8,000 and 17,000 financial advisers in Australia who could be providing tax advice for a fee or other reward.[19] However, one stakeholder directed the committee to evidence received during a previous inquiry, where ASIC advised that, as at 10 May 2013, there were 5,027 entities that held AFSLs and 51,147 authorised representatives of AFSL holders.[20] Regardless of the figure used, the compliance costs per adviser appear overstated when based on a $1 billion cost to industry. Given the evidence provided by Treasury, CPA Australia and the ICA, and the extended transitional arrangements that means the full regime would not be in effect until 1 July 2016, it is difficult to believe that the $1 billion estimate of costs has not been based on an unrealistic analysis. However, the committee would welcome further clarification from the FSC on this issue.

2.16      In any case, the committee is eager to ensure that any compliance costs during the transitional period are minimised. Issues related to this are examined in chapter 3.

The policy development process

2.17      The consultation undertaken by Treasury regarding the government's policy and the amount of time that industry had to respond to the specific amendments were matters that were raised by stakeholders during this inquiry. However, noticeably different views about the consultation process were put forward.

2.18      CPA Australia and the ICA stated that the development of a new regulatory environment for tax advice 'has been in development for more than 20 years, culminating in the passage of the Tax Agent Services Act 2009'.[21] The Tax Institute characterised the policy and legislation development process as involving 'substantial consultation' noting that since 2010 a number of meetings have been held to discuss the policy; in particular, the Tax Institute suggested that the definition of tax (financial) advice service had been 'consulted on substantially'.[22]

2.19      Other witnesses, however, made some critical comments about the process for developing the bill. For example, the Association of Financial Advisers described it as 'sporadic, with large gaps' and, although there had been engagement with the industry more recently, in its view 'it has been quite limited with not a lot of detail provided'.[23] These perspectives led to some stakeholders suggesting that the implementation of the measures should be delayed by up to 12 months. Additionally, the FSC noted that draft regulations, competency requirements and information about available training courses and the accreditation process have not been released.[24] In response to this discussion, however, Mr Paul Drum, Head of Policy at CPA Australia remarked that 'we would all love certainty in every element of law, but we do not always get it':

We accept that there are matters of fine detail and interpretation that will of course need to be worked through as part of the implementation of this new framework. Any new policy or regulatory framework is always going to be subject to the need for interpretive guidance to be provided to those impacted once the rules are in place. We draw parallels with how new tax laws are enacted and then become the subject of rulings by the Australian tax office or indeed the introduction of the new FOFA reforms, which are now only just being subject to regulatory guidance from ASIC. So this is not a new approach to legislation and interpretation.[25]

2.20      Various stakeholders have provided the committee with information on the consultation process that led to the introduction of the bill. This evidence, supplemented by relevant information from the explanatory memorandum, the RIS and other publicly available information, is presented in Figure 2.1.

Figure 2.1: Key stages in the development of the proposed amendments

13 November 2008	Tax Agent Services Bill 2008 is introduced into the House of Representatives.
March 2009	Tax Agent Services Bill is passed by Parliament. The Act commences on 1 March 2010.
23 April 2010	The government announces further details about the coverage of the tax agent service regime, including that public consultation would take place on regulatory arrangements for tax agent services and advice provided by financial planners. Also announced that financial planners will be exempt from TASA until 30 June 2011.
29 November 2010	The government releases an options paper for public consultation: Regulation of tax agent services provided by financial planners. The paper set out two possible options for regulation.
15 December 2010	Assistant Treasurer Sherry meets with representatives of finance and accounting bodies to discuss possible regulatory frameworks for financial advisers.
8 February 2011	Minister Shorten, representatives from the financial planning, tax and accounting bodies, Treasury, the TPB and ASIC meet to discuss principles for future regulation.
6 April 2011	Minister Shorten and government agencies meet with industry representatives. A broad set of principles for developing regulatory arrangements is agreed to and announced. Also announced is an extension to 30 June 2012 of the exemption of financial planners from TASA.
27 February 2012	Confidential meeting between Treasury and financial planning, tax and accounting bodies, the TPB and ASIC takes place.
May 2012	Confidential consultation between Treasury and industry associations on the framework takes place.
30 April 2012	An extension of the exemption of financial planners from TASA to 30 June 2013 is announced.
October 2012	The government's proposal for regulation is announced in 2012–13 Mid‑year Economic and Fiscal Outlook.
8 February 2013	Treasury releases for public consultation an exposure draft of the bill that would give effect to the government's policy. Submissions due 8 March 2013.
May 2013	Confidential discussions held (at association level) with Treasury and Assistant Treasurer Bradbury's office regarding the definition of tax (financial) advice services.
29 May 2013	Bill introduced to the House of Representatives.
3 June 2013	The House of Representatives Standing Committee on Economics discharges an inquiry into the bill.
4 June 2013	ASIC writes to key stakeholders regarding the interaction of TASA and FOFA.
6 June 2013	The House of Representatives agrees to a motion moved by the government that amends the bill to remove the schedules relevant to this inquiry. The matters covered by the former schedules are referred to the Parliamentary Joint Committee on Corporations and Financial Services.
14 June 2013	Treasury releases a discussion paper on the proposed educational and experience requirements for tax (financial) advisers. Submissions are due to close on 11 July 2013.

Sources: Senator the Hon Nick Sherry, 'Coverage of Tax Agent Services Regime', Media release, 2010 no. 72 (23 April); The Hon Bill Shorten MP,' Communiqué: Future regulation of financial planners providing tax advice', Media release, 2011 no. 27 (10 February) and 'Future Regulation of Financial Planners Providing Tax Advice', Media release, 2011 no. 49 (7 April); explanatory memorandum, paragraphs 4.38, 4.40, 4.89; Financial Services Council, Submission 7, p. 12; Ms Joanna Bird, Australian Securities and Investments Commission, Proof Committee Hansard, 12 June 2013, p. 32.

2.21      Regardless of opinions about the consultation process, among stakeholders there was broad agreement that the legislation needs to proceed in some form, or that a further extension to the TASA carve out needs to be granted, given that the current exemption expires after 30 June 2013. Mr John Brogden from the FSC summed up this issue well:

The worst outcome of all would be if the legislation did not proceed in any form, because that would leave the financial advice industry in a perilous situation where an enormous number of advisers simply would be in breach and be unable to comply. That is not an acceptable environment for Australians and their financial advice.[26]

Committee comment

2.22      The committee considers that the process for developing this legislation has been thorough and consultative. The committee commends the government and Treasury officers for the ongoing engagement with industry that has occurred since 2010. As with many new pieces of legislation, there will be various legislative instruments and policies that need to be developed to ensure that the primary legislation operates as intended. However, it is difficult for public consultation on these to be conducted prior to the primary legislation being passed.

2.23      The committee also notes that, given the TASA exemption ceases on 1 July 2013, there is a clear need for legislation to be enacted before this date to ensure that financial advisers are not immediately brought into the full TASA regime. Accordingly, the approach taken by the government in seeking to guide legislation through the Parliament that would prevent this outcome is clearly appropriate.

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