Date posted: 6/02/2019 3 min read

How the Royal Commission impacts tax advisers

While Commissioner Hayne devotes almost no attention to tax issues, CAs specialising in tax have several reasons to be interested in the Final Report.

In brief

  • Exploring the income tax ramifications of receiving compensation from financial institutions.
  • From the payer perspective, considerations need to be given to the tax treatment of the substantial amounts paid by some large financial institutions
  • The report doesn’t mention the struggle with demarcation lines between different types of service providers

The tax treatment of compensation (recipient perspective)

The CA ANZ Tax Team has been liaising with the Australian Tax Office (ATO) on the income tax ramifications of receiving compensation from financial institutions.

The tax issues are complex and in total terms, we're talking about a lot of money here. According to Commissioner Hayne, "between them, AMP, ANZ, CBA, NAB and Westpac will pay customers of their advice licensees or their superannuation funds compensation totalling $850 million, or more, for taking money as payment for services that were not provided".

More compensation will no-doubt flow for other types of wrong-doing. This may be paid voluntarily, as because of successful litigation against financial entities.

The ATO has published some initial guidance and we understand more is under development on more complex issues, including the important area of advice for individuals where there are superannuation implications.

The tax treatment of compensation (payer perspective)

We suspect that the tax treatment of the substantial amounts paid (or to be paid) by some large financial institutions will attract some ATO attention.

Payers naturally seek to treat such outlays on revenue account (deductible), but any financial penalties attracted for breach of the law or court convictions attract non-deductible treatment under section 26-5 of the Income Tax Assessment Act 1997.

The nexus between compensation or brand re-building outlays and goodwill (a Capital Gains Tax asset) is an interesting topic in tax circles.

Regulation of tax and financial advisers (Recommendation 2.10)

To say there is confusion about where tax advice ends and financial planning advice begins is a massive understatement. Throw SMSFs into a client conversation and the boundaries become even more blurred.

The Final Report cites the Tax Practitioners Board as a reason for recommending the mandatory individual registration of financial planners but the Commissioner fails to mentions the TPB's own struggle with demarcation lines between different types of service providers.

Hayne favours "a single, central disciplinary body for financial advisers" but does not expound on his preferred model, acknowledging the resourcing issues and suggesting this is a matter for government.

CA ANZ will watch this topic with keen interest.