Chapter 3

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Chapter 3 Key issues

3.1 This chapter examines the matters that were included in the terms of reference for this inquiry. The issues examined include:

the definition of tax (financial) advice service;
minimising regulatory duplication;
interplay of the Tax Agent Services Regime with the Future of Financial Advice (FOFA) reforms, in particular the best interests duty;
the proposed transitional arrangements; and
consequences of the measures for new advice providers.

3.2 The committee's overall conclusion and final recommendations can be found at the end of this chapter.

Definitional issues

3.3 A matter of some conjecture is the definition of tax (financial) advice services. The definition, which would be set in statute, would effectively determine the scope of the legislation. The way in which a tax (financial) advice service is defined will determine the number of Australian Financial Service Licence (AFSL) holders that will be required to register with the Taxation Practitioners Board (TPB). If the definition is set narrowly, comparatively fewer AFSL holders will be required to register with the TPB than if the definition is broadly based. The following section considers these issues.

The meaning of tax (financial) advice service

3.4 A key threshold issue relating to the proposed measures is the definition of a tax (financial) advice service. Proposed section 90-15 of previous schedule 3 to the Tax Laws Amendment (2013 Measures No. 2) Bill 2013 contained the following definition:

(1) A tax (financial) advice service is a *tax agent service (other than within the meaning of subparagraph (1)(a)(iii) of the definition of that expression) provided by a *financial services licensee or a *representative of a financial services licensee in the course of giving advice of a kind usually given by a financial services licensee or a representative of a financial services licensee to the extent that:

(a) the service 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; and

(b) the service 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.

(2) The Board may, by legislative instrument, specify that another service is a tax (financial) advice service.

(3) However, a service is not a tax (financial) advice service if:

(a) it consists of preparing a return or a statement in the nature of a return; or

(b) it is specified in the regulations for the purposes of this paragraph.[1]

3.5 The explanatory memorandum notes that a tax (financial) advice service consists of two elements:

providing a tax agent service; and
providing that service in the course of giving advice that is of a kind usually given by a financial services licensee or a representative.[2]

3.6 The explanatory memorandum clarifies that former schedule 3 would define a tax (financial) advice service as a tax agent service. The effect would be to integrate tax (financial) advice services within the existing legislative framework of the Tax Agent Services Act 2009 (TASA) where the concept of a tax agent service defines and limits those services regulated by the TPB.[3]

3.7 Importantly, services that are not tax agent services will not be tax (financial) advice services. Tax agent services are defined in the Tax Agent Services Regulations 2009. The explanatory memorandum also notes that where an entity in the financial services industry gives a client tax-related factual information it does not provide a tax agent service and therefore the advice will not be a tax (financial) advice service.[4]

3.8 In terms of defining a tax (financial) advice service through advice 'that is of a kind usually given by a financial services licensee or a representative', the explanatory memorandum makes the following point:

The relevant test is whether the tax agent service is given in the course of advice that is usually given by a financial services licensee or a representative. This broader advice is a necessary condition as it provides the context for the tax agent service and distinguishes tax (financial) advice services from other tax agent services. In effect, this means that the tax agent services will usually take the form of tax advice that can reasonably be expected to be relied on for tax purposes that is given for the purpose of helping to fully inform a client about their current and future financial affairs. As such, it could be given:

as part of a strategic discussion about a client's long-term financial objectives;

in the course of advising a client about the relative merits of particular financial products or other investments; or

in the course of advising a client about non-financial products such as real property.[5]

3.9 The explanatory memorandum provides examples of where this broader advice is given. It notes the case of a financial adviser who provides advice on a client's options for a transition to retirement strategy, which includes a discussion on the capital gains tax discount and the small business tax concessions. This advice is usually provided by financial services licensees.

3.10 On the other hand, the explanatory memorandum notes that where a registered tax agent provides tax agent services that do not take into account a client's financial affairs and objectives more generally, it is not advice usually provided by a financial services licensee, and the service will not be a tax (financial) advice service. If a tax agent does provide a tax agent service when giving advice that is usually provided by a financial services licensee, they do not need to separately register with the TPB as a registered tax (financial) adviser.[6] The explanatory memorandum advises that this is because registered tax agents can also provide tax (financial) advice services without contravening TASA.

Arguments to amend the definition of a tax (financial) advice service

3.11 The committee heard some arguments that the definition, as stated in proposed section 90-15 of previous schedule 3 to the bill, should be redrafted. It heard that the definition proposed in the exposure draft of the bill had been too tightly cast, while the definition proposed in schedule 3 is too broad. The Financial Services Council (FSC) and the Association of Financial Advisers (AFA) strongly support the following definition which, they argued, is a sensible midpoint:

A tax (financial) advice service is a tax agent service (other as within the meaning of subparagraph (1)(a)(iii) of the definition of that expression) provided in the course of providing financial advice services as defined below that relates to ascertaining an entity's tax liabilities, obligations or entitlements or advising an entity about tax liabilities, obligations or entitlements.

For the purpose of this option, financial advice services would mean advice in respect of a client’s financial affairs specifically related to wealth management, retirement planning, estate planning, risk management and related advice, including:

(b) advice on financial products as defined in s764A carried out pursuant to an Australian Financial Services License;

(c) advice and dealing in financial products as defined in section 766B and 766C of the Corporations Act;

(d) non-financial product advice including financial strategies or structures; and

(e) taxation advice which is related to advice provided under (a) or (b) or (c).

For the avoidance of doubt, a tax (financial advice) service does not include preparing, or lodging, a return or a statement in the nature of a return.[7]

3.12 This definition avoids mention of the phrase 'usually given by a financial services licensee'. Instead, it sets out what these services are as they relate to definitions of 'financial products' in the Corporations Act 2001.

3.13 The FSC noted in its submission that in closed consultations a fortnight before the bill was introduced into Parliament, this alternative definition was supported by 'all associations including industry super, accounting and tax bodies, financial planning bodies'.[8] In addition to the FSC, the AFA and the Financial Planning Association (FPA) also told the committee that they strongly support this 'industry definition' with its link to financial product advice.

3.14 The FSC, the AFA and the FPA all identified the breadth of the definition in proposed section 90-15 of previous schedule 3 as a matter of concern. The FSC told the committee that the bill's definition is a 'broad principles‑based definition, and may result in unintended consequences'. It claimed that while principles‑based approaches are generally preferable, in this instance the proposed definition 'captures all AFSLs'.[9] Ms Cecilia Storniolo, Senior Policy Manager at the FSC, told the committee that proposed section 90-15 would not only capture financial advisers but also insurance companies, superannuation funds and fund managers. She added:

That was never our understanding of the regime. That was not what was announced in the numerous press releases by the government across a couple of years. So we were very surprised when the bill was tabled that that was the definition the government had chosen to go with. In consultation that was had with the industry two weeks prior to the bill being tabled, peers in other association bodies, some of which are represented here, all agreed that that definition was not an appropriate definition; it was too broad. We recommended that the government consider the recommendation that we have included here in our submission, which specifically aims to narrow the definition to apply this category to advice providers, not generally to AFSLs.[10]

3.15 Similarly, Mr Phil Anderson, Chief Operating Officer of the AFA, told the committee that it was unfortunate that a definition was rejected that specifically addressed what financial advisers do. Of the proposed definition in schedule 3, Mr Anderson commented:

A financial services licensee is a very broad category. What does 'of a kind usually given by a financial services licensee or a representative of a financial services licensee' actually mean?

...It is our understanding that the TASA amendment was targeted at financial advisors, but a financial services licensee included a wide range of different types of entities and is much broader than just financial advisors. An FSL holder also includes product providers, managed investment schemes, superannuation funds, life insurers, general insurers, custodians, stock brokers, research businesses and so on. This opens up the question as to whether the TASA legislation is expected to apply to stock brokers, general insurance brokers, research companies, fund managers, platform operators and others who might be caught under this definition. We believe that this is an important point and would like to see Treasury reconsider the use of the definition that the industry collectively recommended.[11]

3.16 The FPA, which also supports the industry definition, expressed the same concerns with the breadth of the definition proposed in previous schedule 3. Mr Mark Rantall, the Association's Chief Executive Officer, told the committee:

The FPA believes the scope of this definition captures anyone being paid to operate and provide advice under a licence. It does not consider who should be captured versus who is captured or, similarly, the type of advice that should be captured versus the type of advice that is captured. For example, it is our understanding that the definition captures superannuation funds such as intra-fund advice, financial advice provided for wholesale or sophisticated investors, general advice including that provided even by bank staff, stockbrokers, general insurance brokers and mortgage brokers, to name a few.[12]

Tax information in the context of general advice

3.17 The Australian Bankers' Association (ABA) also expressed concern that the bill's definition would cover all AFS licensees across a range of financial services and business operations. It argued that this would include information and advice offered by banks and banking groups. Of particular concern for the ABA, however, is that general tax information, which is provided by banks 'in a number of contexts and in a number of ways by banks and bank staff', would be captured by the bill. Staff providing this general information would be required to become registered tax (financial) advisers. The ABA was adamant:

We strongly believe this is contrary to the policy intent of the legislation to ensure that persons or entities providing tax advice, which is not merely incidental or general tax information, are covered by the legislation.[13]

3.18 The FSC also argued that legislation should explicitly exempt from definitions of a tax (financial) advice service a service that provides tax information in the context of general advice.[14] In other words, AFSL holders providing generally available tax information should be exempted from having to register with the TPB.[15]

3.19 The committee notes that paragraph 3.47 of the explanatory memorandum clearly states that where an entity in the financial services industry gives a client tax‑related factual information (therefore not providing a tax agent service), that advice will not be a (tax) financial advice service. As the explanatory memorandum should be read in conjunction with the Act and is used by the courts to determine the meaning of legislation, the committee believes that the wording in paragraph 3.47 is clear and adequate.

3.20 The committee also notes that general tax information is currently exempted from tax agent registration under TASA. However, the committee suggests that an explicit carve-out of banks and their staff providing general tax information could be inserted in the regulations, as allowed under paragraph 3(b) of proposed section 90-15 of previous schedule 3.

Treasury's view on the definition

3.21 The committee asked Treasury to explain why it had opted for the definition in proposed section 90-15 of previous schedule 3. Treasury responded:

The definition that is currently in the bill consists of two key elements. One is that the service has to be a tax agent service. That is an existing concept in the Tax Agent Services Act. The other element of the definition is that it needs to be a service given in the course of giving advice that is of a kind usually given by a financial services licensee or representative. That second part of the definition is to limit the types of services that financial advisers can provide, and it is to provide a connection with the other work that they do.[16]

3.22 Treasury explained to the committee the basis for its adoption of a principles‑based definition of a tax (financial) advice service in previous schedule 3. This definition was reached following industry disquiet that the initial proposal would not cover the full remit of financial advisers' services, and Treasury's concern that a definition based on the concept of 'financial product advice' may similarly fail to cover all types of services that financial advisers may be providing. Treasury told the committee:

The definition has evolved since the exposure draft, where it went out on the basis of it being a tax agent service and being given in the course of advice on one or more financial products. The concern that industry had with that definition was that it was very narrow and that it would not adequately cover all of the types of services that financial advisers would be providing. There are various ways of being able to widen the definition in relation to that aspect. One possibility could be connecting it to the concept of financial product advice, which is in the Corporations Act...

The concern was that if the legislation were limited to financial product advice then, again, it might not cover all the types of services that financial advisers may be providing. Where we ended up with the definition is trying to take a principled approach by saying that, on the basis that the registration requirements would include the need to be a financial services licensee or a representative of a financial services licensee, the second element of the definition would be that it is a tax agent service that is given in the course of giving advice that is of a kind usually given by a financial services licensee or a representative so that it best matches the types of registration requirements which would be required under this regime with the types of services that those entities would be providing.[17]

3.23 The committee asked Treasury to comment further on the concern about the industry association's proposed definition based on 'financial product advice'. Treasury responded:

The concern is that, if there is a reference to financial product advice in this definition and then there are other advice aspects in addition to financial product advice, that suggest[s] that those additional advice aspects are not incorporated in the definition of financial product advice. The definition of financial advice is a Corporations Act concept and it is administered by ASIC. There would be a concern that, if we were to adopt a definition which said 'financial product advice plus other advice aspects', that could throw into doubt how ASIC is administering the Corporations Act, which is not the purpose of these amendments.[18]

3.24 The committee asked the Australian Securities and Investments Commission (ASIC) to comment on this observation. ASIC told the committee:

The phrase 'financial product advice' is a defined term in the Corporations Act and it covers not the entire field but basically the whole field of what financial advisers do. The one obvious gap is that often financial advisers will give advice in relation to real property. That is not caught by the Corporations Act definition of financial product advice unless it is advice to an SMSF trustee. That is just a technical wrinkle. I have not seen these other definitions so it is hard for me to engage. But, as a general principle, we would be concerned if there was some suggestion that the definition of financial product advice in the Corporations Act did not cover, apart from that limited exemption I have referred to, the breadth of activities that financial advisers conduct.[19]

Committee view

3.25 The committee is concerned that the definition proposed by the industry associations may create uncertainty about the role of a financial adviser and that it may interfere with ASIC's administration of the Corporations Act. This should not and must not happen. The committee sees more merit in the broad, principles-based approach that was included in schedule 3. This will ensure that typical financial advisers can be registered as a tax (financial) adviser rather than a full tax agent.

Minimising regulatory duplication

3.26 One of the features of the proposed regulatory arrangements is that it will be a co‑regulatory regime involving both the TPB and ASIC. In theory, a co-regulatory regime could create confusion for industry participants and lead to regulatory duplication. This risk, and ways to address it, seems to have been adequately considered during the policy development process. In fact, the explanatory memorandum expressly states that a key objective of the new regime is 'to minimise compliance costs by avoiding regulatory overlap' between the TPB and ASIC. The explanatory memorandum adds that this is intended to be achieved by 'removing legislative impediments to the TPB and ASIC sharing information about those entities regulated by both agencies'.[20] It adds that the TPB and ASIC are currently developing a memorandum of understanding 'to underpin their future relationship with a commitment to work closely together through an open and consultative approach and to provide each other with positive assistance wherever possible'.[21]

Stakeholder views

3.27 The FPA suggested that ASIC remain the primary regulator of financial planning and that registration with the TPB should be facilitated through ASIC's licensing process. The FPA also noted that the co-regulatory model could lead to confusion for clients as to which regulator to approach with a complaint, although it noted that most complaints are referred to the holder of the AFSL in the first instance.[22]

3.28 Noting that the education and competence requirements are not yet finalised, the ABA suggested that 'it is unlikely that the training and competency requirements would do anything more than be a duplication' of requirements expressed in ASIC's Regulatory Guide 146. Accordingly, it called for the regulations to clearly deem that existing requirements and competencies are satisfactory.[23]

3.29 The FSC provided a number of suggestions on how regulatory duplication could be minimised. The first suite of its recommendations focused on the proposed professional indemnity insurance (PI insurance) requirements, noting that it is a licensing requirement for an AFSL to have PI insurance cover. The FSC called for the TPB to consider for its requirements a number of PI insurance arrangements, including:

the PI insurance held by a licensee where it already insures the licensee for tax advice;
an AFSL's PI insurance cover (when considering individual entity registrations); and
whether there are circumstances where self insurance may be a viable alternative to extra PI insurance requirements, such as when licensees can demonstrate sufficient financial strength.[24]

Committee view

3.30 The committee notes the views expressed by stakeholders regarding PI insurance and the education requirements. On the potential for regulatory duplication that can arise from these issues, the committee is not of the opinion that the proposed legislative amendments would need to be reviewed. The committee is confident that the regulators will develop a sensible and appropriate approach to PI insurance and competency matters.

The interplay between the Tax Agent Services Act 2009 and the best interests duty in the Future of Financial Advice reforms

3.31 This inquiry's third term of reference directs the committee's attention to how TASA interacts with the 'best interests' duty in the recently passed FOFA legislation. This was a matter of some concern for several submitters and witnesses.

3.32 Section 961B of the Corporations Act relates to the best interests duty of financial advisers. These obligations require the adviser to identify:

the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances).

3.33 In addition:

where it is 'reasonably apparent' that information relating to the client's relevant circumstances was incomplete or inaccurate, the adviser must make reasonable inquiries to obtain complete and accurate information;
the provider must assess whether they have the expertise to provide the client advice on the subject matter sought and, if not, they must decline to provide the advice (paragraph 961B(2)(d));
if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product, the provider must conduct a reasonable investigation into the financial products that might achieve those objectives and needs of the client that would reasonably be considered as relevant to advice on that subject matter;
the provider must base all judgements in advising the client on the client's relevant circumstances; and
take any other step that at the time of the advice would reasonably be regarded as in the best interest of the client. This is the best interest 'safe harbour' (paragraph 961B(2)(g)).[25]

3.34 In December 2012, ASIC released Regulatory Guide 175 (RG175) to explain how these obligations will operate when they come into effect on 1 July 2013.[26] Paragraphs 298 to 301 of RG175 relate to 'assessing the expertise of the advice provider'.

3.35 The AFA has expressed strong concerns about the interplay between the TASA experience requirements and paragraph 961B(2)(d) of the Corporations Act. As noted above, this provision requires the adviser to assess whether they have the expertise to provide the advice. The AFA noted in its submission that the TASA legislation:

...will lead to the establishment of a standard for taxation qualifications that is likely to be above the current level for a significant proportion of advisers. We believe that there is a risk that financial advisers, who provide advice without this qualification, will be in breach of the Best Interest Duty.[27]

3.36 In other words, TASA will set a qualifications standard that many financial advisers (required to register as tax (financial) advice service providers) are not able to meet, and they may therefore fall foul of the best interests expertise provisions in paragraph 961B(2)(d) of the Corporations Act. The AFA explained that this matter was discussed with ASIC on 3 June 2013. According to the Association, ASIC responded by suggesting that 'it will be possible for an adviser to satisfy both these obligations' with some guidance material to be provided 'further down the track'. However, the AFA expressed concern that:

... there may subsequently be conditions related to the manner of supervision, which may present issues in terms of how the financial advice industry is structured. We have illustrated this point to highlight the potential for conflict between TASA and the Best Interests Duty. FoFA is a very complex piece of legislation, and therefore it would be necessary to give the issue of inconsistency between the legislation much greater thought. No one has had the opportunity to do this.[28]

3.37 The AFA also has concerns about the mechanism in TASA that requires that only a 'sufficient number' of tax agents need to be registered with the TPB. The Association questioned whether this would mean that only one person in a financial advice practice needs to be registered. It noted that a clear answer to this issue is important to understand the registration process and education requirements of tax (financial) advice service providers under the new legislation and how these requirements interact with the best interests duty.[29]

3.38 A further (related) concern of the AFA is the interplay of experience requirements in TASA and for gaining an AFSL under section 911A of the Corporations Act. In its submission, the Association observed that while there is no experience requirement in the AFSL regime, by 2016, there will be a requirement for tax (financial) advisers to pass an experience requirement of at least 12 months before being able to apply for registration with the TPB. The AFA claimed that the TASA experience requirement will:

... fundamentally change the recruitment of new advisers into the financial advice industry. This is another area where there is potential inconsistency between the AFSL regime and the TASA regime. It is difficult to understand the full implications of this without being able to understand who will need to be registered under the 'sufficient numbers' requirement.[30]

3.39 The FSC recommended that ASIC amend RG175 to enable an advice provider to comply with the best interest duty safe harbour. Specifically, it argued that a statement such as the following be included in paragraph 298 of RG175:

with regards to tax (financial) advice services, an individual advice provider need not be registered with the Tax Board to demonstrate expertise but may provide tax advice under the supervision of a registered tax (financial) advice services entity.[31]

3.40 Paragraph 301 of RG175 currently sets out a range of factors that an advice provider must consider in determining whether they have the necessary expertise to deliver the advice. The FSC also recommended that subparagraph 301(d) be amended to read:

an individual advice provider need not have the expertise in the provision of tax (financial) advice services as demonstrated by registration with the Tax Board provided the individual advice provider is working supervised by a registered tax (financial) advice services entity.[32]

3.41 In verbal evidence to the committee, the FPA outlined its concern with the interplay between TASA and FOFA. Mr Dante De Gori, General Manager of Policy and Conduct, put the following position:

Specifically our main concern is around the best interest duty obligation, the fact that the Future of Financial Advice reforms are proceeding down a path of individual accountability and responsibility on the advice provider, and the tax agent services regime is very much at a supervisory level, if you like, as opposed to individual responsibility and accountability. The two regimes do not work together in respect of the way in which one gains the experience and ability for them to be able to operate and be able to provide the services that they have been employed to provide. The sticking point is that even though it is the same regulated family, as in financial advisers, and there are two separate regulatory regimes that can operate in isolation, they are actually regulating the same activity, which is the provision of financial advice. That is the concern.[33]

3.42 The FPA requested in its submission that ASIC review paragraphs 298–301 of RG175. It recommended the same amendments to paragraphs 298 and 301 as proposed by the FSC.[34] The ABA also recommended that ASIC should amend RG175 to enable the advice provider to comply with the best interests duty safe harbour in the provision of financial advice.[35] It did not provide details of how this might be done.

3.43 Other submitters and witnesses downplayed concerns that TASA was incompatible with the FOFA requirements. In his opening statement to the committee, Mr Paul Drum, Head of Policy at CPA Australia, observed:

The new tax advice services regime for financial planners is complementary and consistent with the AFSL framework which applies under the Corporations Law. Meeting the obligations of acting in the best interests of your client for FOFA purposes under the Corporations Law will be entirely consistent and compatible with acting in the best interests of your client for tax advice purposes. We have received written confirmation on this point from ASIC in the last few days.[36]

Committee view

3.44 The committee notes that TASA and its regulations also have a 'best interests' duty and competency and experience requirements. Section 20-5 states that 'an individual, aged 18 years or more, is eligible for registration as a registered tax agent or BAS agent if the Board is satisfied that ... the individual meets ... requirements relating to qualifications and experience ... in respect of registration as a registered tax agent or BAS agent'. Subsection 30-10(4) of TASA (the Professional Code of Conduct) states that 'you must act lawfully in the best interests of your client'. Subsection 30-10(7) states: 'you must ensure that a tax agent service that you provide, or that is provided on your behalf, is provided competently'.

3.45 Nonetheless, the committee does recognise differences in how competence is tested under TASA and as a financial services provider under the Corporations Act. The committee asked ASIC if it could comment on concerns raised by industry associations about the expertise requirements in the two regimes. ASIC responded:

... 'expertise' is a broad concept in the best interest duties, so it does not just relate to competence; it also relates to things such as whether the individual adviser has authorisation to advise on the particular subject matter et cetera. But clearly, one part of expertise is having the competence to provide the advice sought. The idea is that if you do not have the competence you should not give the advice. Under the Tax Agent Services Act, as I understand it, not all individual advisers will be registered with the Tax Practitioners Board. In fact, competence will be tested at a higher level.

There was some concern expressed to us from industry that if there were an individual adviser who was not actually registered with the Tax Practitioners Board that we would take the view that they were not competent to give advice if it related to taxation issues. We said, 'No, it is just that the TASA regime tests competence at a particular level, but it still requires everybody who gives tax advice to be competent'. So we did not see any inconsistency, and we would be happy to provide guidance to that effect. This would simply say something like, 'An adviser may still have the expertise required to give advice even if they are not individually registered, because they operate under the supervision model'. So they are supervised by somebody who is competent, and we would of course also expect them to have met the training standards that we impose on individual advisers.[37]

3.46 The committee finds this clarification useful. It will be important for ASIC and the TPB to explain clearly in guidance material how the competence tests in TASA and under the Corporations Act differ. The key point is that despite differences between TASA's supervisory model of registration—under which a 'sufficient number' of individuals must be registered as tax agents—and registration of individual advisers under the Corporations Act, there is a requirement that the service provider is competent.

Recommendation 1

3.47 The committee recommends that the Australian Securities and Investments Commission, in consultation with stakeholders including the Taxation Practitioners Board (TPB), consider the case for amending Regulatory Guide 175 along the lines proposed by the Financial Services Council and the Financial Planning Association. The prime consideration must be to protect the integrity of the principles underpinning the best interests duty.

3.48 The committee suggests that as part of this process, the TPB should discuss with relevant stakeholders the current requirement in the Tax Agent Service Act 2009 for a 'sufficient number' of individuals to be registered as tax agents before a company is eligible for registration.

Transitional arrangements

3.49 The bill included detailed arrangements for transitioning to the new framework. While the amendments were drafted to commence on 1 July 2013, the full regime would not be effective until 1 July 2016. This three year transitional arrangement, described by two witnesses as 'very generous',[38] was divided into two 18 month periods, as follows:

The notification period (1 July 2013 to 31 December 2014). During this period, to become registered an entity would need only to notify the TPB that they are providing tax (financial) advice services and that they are either a financial services licensee or an authorised representative. Unregistered entities may continue to give tax (financial) advice during this period provided that it accompanies such a service with the required disclaimer (this aspect is discussed further below).[39]
The transitional period (1 January 2015 to 30 June 2016). During this time entities may be registered without having satisfied all of the ongoing registration requirements that would apply under the full framework. For example, individuals would need only to satisfy the TPB that they have sufficient experience to be able to provide tax (financial) advice services to a competent standard, rather than satisfy any specific registration requirements. However, unlike the notification period, an entity would only be registered once the TPB has notified the applicant that their application was successful.[40]

The disclaimer

3.50 The disclaimer is similar to that which financial advisers currently give clients under the carve out from TASA, however, the wording is updated to reflect the new term 'registered tax (financial) adviser'. Specifically, if financial advisers do not take advantage of the notification-based registration framework that is proposed to be in place from 1 July 2013 to 31 December 2014, they will need to provide a disclaimer to their clients that confirms that they are not a registered tax (financial) adviser. This is broadly similar to what advisers are required to do under the current carve out from TASA; to illustrate, the existing disclaimer and the proposed disclaimer are reproduced below.

Disclaimer valid until 1 July 2013

(a) the provider of the advice is not a registered tax agent under the Tax Agent Services Act 2009; and

(b) if the receiver of the advice intends to rely on the advice to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, the receiver should request advice from a registered tax agent.

Disclaimer available from 1 July 2013 to 31 December 2014 to financial services licensees and authorised representatives that are not registered tax (financial) advisers

(d) if the receiver of the advice intends to rely on the advice to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, the receiver should request advice from a registered tax agent or a registered tax (financial) adviser.

Views on the transitional arrangements

3.51 The FSC and the AFA are concerned that the commencement date of 1 July 2013 would require that, to comply with the new law, financial advisers would immediately need to use the new disclaimers until they obtain their registration via the notification process. The FSC suggested that:

... it will be impossible for the majority of the industry to comply with this requirement on 1 July 2013. Currently, most participants in the industry use a simple warning informing the client to seek tax advice from a qualified tax adviser. Therefore the current warnings would not comply with the TASA warning proposed.[41]

3.52 The AFA advised that the changes that would need to be made include 'system changes, process changes and training, all at a time when key resources are focussed on FOFA'. It provided some specific examples:

There are many hundreds of licensees and there are thousands of advice practices. With financial advice software, it is often necessary to get system providers to make these changes. This is not as simple as changing some words in a word processing template. There are other documents such as Financial Services Guides that need to be changed. In some cases Licensees run this centrally, so this represents a logistics exercise of significant proportion. On the product side, we are also talking about changing Product Disclosure Statements, right across the industry. This is an absolutely enormous task. Given the scale of the task, the industry would need to have at least 6 months to make this change.[42]

Committee view

3.53 As discussed in chapter 2, substantially different estimates of the costs involved in complying with the new framework were provided to the committee. It is noteworthy that the segment of costs that the FSC first advised would result from the proposed amendments was attributed to compliance with the new disclaimer from 1 July 2013.[43]

3.54 The committee is sympathetic to concern about the need to comply with the new disclaimer from 1 July 2013. Even if an entity takes advantage of the simple registration process that is available during the notification transition period, there will be a period of time, however brief, when they will be unregistered and will need to comply with the revised disclaimer requirement. The committee is also of the view that there should be greater time for affected industry participants to become aware of and understand their obligations.

3.55 The committee notes that essentially there is little difference between the two disclaimers. If the proposed amendments are enacted from 1 July 2013, the statements contained in the current disclaimer still appear to be accurate.[44] Therefore, while the overall framework should commence on 1 July 2013, some relief from the disclosure requirement should be provided.

3.56 It appears to the committee that there are two options that could resolve this. They are:

delete the new disclaimer and instead legislate to allow the existing disclaimer to be used from 1 July 2013 up to 31 December 2014; or
legislate to allow a period of time, perhaps six months, during which both the current disclaimer and the new disclaimer can be used.

3.57 The committee prefers the second option. Allowing a six month period during which both the current disclaimer and the new disclaimer can be used will allow entities that intend to remain unregistered for some time during the notification period to move to the new disclaimer at a time of their choosing between 1 July 2013 and 31 December 2013. It removes the risk of immediate non-compliance with the new disclaimer required after 1 July 2013. Alternatively, a period of six months will provide entities with sufficient time to register under the simplified notification process and, therefore, avoid altogether any costs that may arise from changing disclaimer statements. Provided that the transition timeframe is not otherwise changed—that is, that the full regime still commences on 1 July 2016—a six month period where the transition has commenced, but during which effectively nothing has changed, will allow affected industry participants an appropriate amount of time during which they can better understand their new obligations without risking non‑compliance.

Recommendation 2

3.58 The committee recommends that the transitional arrangements be amended to stipulate that, from 1 July 2013 until 31 December 2013, unregistered financial services licensees and representatives may provide tax (financial) advice services on condition that they accompany such a service with a disclaimer which states that:

(a) the provider of the advice is not a registered tax agent under the Tax Agent Services Act 2009; and

or which states that:

(c) the provider of the advice is not a registered tax (financial) adviser under the new law; and

3.59 However, the amendments should ensure that from 1 January 2014 to 31 December 2014 only the second disclaimer outlined above may be used.

Impact on new financial planners

3.60 Another issue raised by industry regarding the proposed amendments is the impact that they may have on new advice providers, particularly in light of the new requirements regarding qualifications and experience.

3.61 Under the transitional arrangements, from 1 July 2013 to 31 December 2014 financial services licensees and authorised representatives that provide tax (financial) advice services may register with the TPB simply by notifying the TPB. At the public hearing, a Treasury officer observed that advisers who register during this period will be registered for three years without having been required to satisfy the educational and experience requirements, which will only need to be met when they apply for the registration to be renewed.[45] However, regarding this stage of the transition process, the AFA suggested that limiting the registration to licensees and authorised representatives will have implications for new advisers:

If advisers need to meet these experience requirements before providing advice, this will fundamentally change the recruitment of new advisers into the financial advice industry. The legislation only allows for AFSLs and authorised reps to register during the notification period, which is 1 July 2013 to 31 December 2014. So representatives or salaried advisers will be unable to register during this notification period. What are the implications for salary channels and the supervision of advisers during this period?[46]

3.62 From 1 January 2015 to 30 June 2016 applicants for registration will need to satisfy the TPB that they have sufficient experience to be able to provide tax (financial) advice services to a competent standard. From 1 July 2016 the full framework will come into effect and applicants will need to meet the specific eligibility requirements prescribed by the regulations. In its submission, the FPA detailed its concern about the potential impact that the experience requirement will have on new planners:

While the FPA supports the proposal for a combination of education and experience requirements, we are concerned about how new entrants to the profession can meet the experience requirements. This would create restrictions on entry to the profession and serve as a deterrent particularly to graduates and young students considering career options.

The experience requirements create a situation where new entrants to the profession cannot register with the TPB as in most cases they will not meet the relevant experience requirements. However, under TASA individuals are required to be registered with the TPB when doing the work required in order to gain the 'relevant experience' required by the TPB, resulting in new entrants breaching the law in these circumstances.

For example, Griffith University offers an integrated learning course in financial planning which requires students to undertake two years full-time study, followed by one year working in the financial planning industry, and a final year of study. It is unlikely that these people would be authorised under the Corporations Act or registered with the TPB.

A graduate may take position as a paraplanner which includes determining the tax liabilities of clients. Cadetships commonly offered within the financial planning industry, are another example.[47]

3.63 The FSC provided further evidence on how the transitional arrangements may affect new planners. It argued that the maximum relevant experience that could be prescribed in the regulations not exceed the three year transition period:

Otherwise, it will be nonsensical that any new entrant to the industry on 1 July 2013 is unable to qualify for registration under the transitional relief. If we look to like competency regimes such as the removal of the accountants exemption from Licensing (under the Corporations Act), the profession has been afforded six years transition until 30 June 2019 to comply with all AFLS [sic] competency requirements.[48]

3.64 A common complaint expressed by various industry associations was that draft educational and experience requirements have not been released for consultation. However, at the public hearing Treasury advised that a draft version of the relevant regulations will be released shortly. A Treasury officer also noted that they have recently discussed the draft educational requirements with key industry associations.[49]

3.65 On 14 June 2013, Treasury released a discussion paper on the proposed educational and experience requirements for tax (financial) advisers that an individual would need to meet to be registered as a tax (financial) adviser.[50]

Committee view

3.66 It is clearly vital to ensure that new advice providers are not prohibited from employment in the future as a result of the changes. It appears that, to some extent, the concern about the education and experience requirements that will be required stems from the relevant regulations not having been released for public comment.

3.67 Now that Treasury has commenced formal consultation on the proposed educational and experience requirements, the committee considers that concerns about the possible consequences that qualifications and experience requirements may have for new advice providers should be considered through that targeted process. This is particularly the case given that Treasury is accepting submissions until 11 July 2013—that is, the consultation period is open for four weeks—and as it does not appear necessary for these issues to be resolved by the primary legislation.

Concluding comments

3.68 The proposed amendments that the committee has been tasked with reviewing will be an important regulatory change. It is clear that by bringing financial advisers who provide tax advice into the existing regulatory regime that applies to other providers of tax advice, such as tax agents and BAS agents, the regulatory environment that applies to tax advisory services will be strengthened. As a result, all tax advice that is provided for a fee or other reward will be consistently regulated.

3.69 The important feature of the changes, however, is that they will further protect consumers. If the proposed measures are enacted, financial advisers that provide tax advice will need to meet the new standards of relevant qualifications and experience. Accordingly, consumers of tax advice can be confident that the standard of advice they receive is of a similar professional standard to that provided by tax agents.

3.70 It needs to be recognised that these measures have not been suddenly announced and then thrust onto the industry. It is clear that there has been ongoing consultation with industry since the measures were first proposed in 2010. The committee acknowledges that their remains some uncertainty as the relevant regulations and policies have not yet been released; however, this is not an uncommon feature of the legislative process. Importantly, the measures include a generous three year transitional arrangement with the full regime not commencing until 1 July 2016. For an 18 month period from 1 July 2013, financial advisers could effectively continue to provide services in the same manner they do today.

3.71 Another feature of the transition period is that it will allow registrations to occur in an orderly fashion and for the necessary additional detail about the regime to be developed and enacted. The committee also expects the TPB and ASIC to work together to minimise any unnecessary regulatory overlap and to reduce compliance costs for financial advisers. Nevertheless, the committee has made some recommendations in this report that are intended to minimise any burden on industry participants during the transition period. The committee notes, however, that a far more significant burden will be imposed on the industry if the currently regulatory exemption from TASA that exists until 31 June 2013 expires without a suitable replacement being enacted. Accordingly, the committee urges that the measures be reintroduced into the Parliament and passed.

Recommendation 3

3.72 Subject to recommendations 1 and 2, the committee recommends that the proposed amendments contained in schedules 3 and 4 to the version of the Tax Laws Amendment (2013 Measures No. 2) Bill 2013 that was read a first time in the House of Representatives be reintroduced and passed.

Ms Deborah O'Neill MP

Chair

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