A "walk through" of a typical accountant's SMSF advice, including tips & traps for the unwary

This is the third in a 4 part series, in which our Head of Financial Services, Cristean Yazbeck, explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients.

The "line" is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

For the purposes of this series, we're assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

Typically, an accountant providing any form of assistance to a client in relation to an SMSF is likely to be asked to give at least some of the following (and probably, all) in relation to their clients' SMSF:

  • Strategic advice
  • Tax & structural advice
  • Asset allocation advice
  • Investment advice
  • Execution advice/services

Each of the above services has potential AFSL implications. In part 1, we discussed the "accountant's exemption" and the scope under which an accountant could provide SMSF advice without an AFSL.

In part 2, we canvassed the fine line between "financial product advice" and "factual information". In thisarticle, we'll walk through the "typical" SMSF-related services that an accountant may be asked to provide, and the licensing implications (if any) of each of those services. We'll look at some tips and common traps that accountants may fall into, and consider some potential opportunities to restructure existing advice templates to ensure no potential adverse AFSL implications arise.

Let's examine each of the above "typical" SMSF-related services.

Strategic advice

Invariably, an accountant will wish to discuss their clients' strategic objectives, including on matters such as wealth creation, wealth preservation, income needs, risk appetite, and estate planning.

These discussions will likely take place at the start of the engagement and as part of the initial client dialogue, and to assist the accountant in determining the scope of his or her engagement.

To what extent do these discussions constitute the provision of "financial product advice" which require an AFSL, or to which an exemption applies?

To the extent that the initial client dialogue merely serves to scope, understand and restate the clients' objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. Refer to part 2 for further information on the distinction between a "recommendation" and "factual information".

Tax & structural advice

No accountant-client interaction will be complete if "tax" wasn't discussed. Indeed, tax is likely to be a key motivating factor for investing through an SMSF.

Typical "tax" advice in relation to an SMSF will include at least the following:

  • Tax rates that apply
  • Contributions caps and excess contributions tax
  • Restructuring of assets or creation of entities to minimise tax.

Surely such advice is financial product advice?

Fear not! Accountants should consider the following:

  • Tax Agents' exemption under the Corporations Act 2001 (Cth) (Corporations Act)
  • "Exempt" services under the Corporations Act as they apply to tax advice.

We talked about each of the above in part 1, but we'll consider them again here.

Tax agents' exemption

Section 766B(5)(c) of the Corporations Act 2001 (Cth) (Corporations Act) provides that advice given by a registered tax agent, which is given "in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities", is not financial product advice.

"Exempt" services under the Corporations Act as they apply to tax advice

In part 1, we identified s766A(2)(b) of the Corporations Act, which provides that the Corporations Regulations 2001 (Cth) (Corporations Regulations) may set out the circumstances in which a person is taken not to provide a financial service (and thus not require an AFSL covering the provision of that service). This takes us to Reg 7.1.29 of the Corporations Regulations, which provides that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

  “…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations also requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product. The “accountant’s exemption, though, kicks in (Reg 7.1.29A of the Corporations Regulations) to enable a recognised accountant to provide such advice.

In addition, Regulation 7.1.29(4)(a) of the Corporations Regulations provides that "advice to another person on taxation issues including advice in relation to the taxation implications of financial products", is also an exempt service. However, to be able to rely on this exemption, further conditions need to be met:

  • The accountant must not receive a benefit such as a fee or commission (other than from the client) as a result of the client establishing the SMSF.
  • The advice must be accompanied by a written statement that the accountant is not licensed under the Corporations Act to provide financial product advice, and that tax is only one of the matters that must be considered when making a decision, and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.

Asset allocation advice

Once an SMSF is established and funds are either contributed or transferred/rolled over to the SMSF, decision making will of course turn to investing those funds.

Accountants will invariably be asked for advice on how funds could or might be allocated: should the client purchase property using a limited recourse borrowing arrangement? What about shares? Managed funds? Should the client hold insurance within their SMSF? And so on...

It's not uncommon for accountants to recommend that their clients speak with a licensed financial adviser to deal with such questions. Accountants should bear in mind, however, that there is some scope to advise on such matters without it constituting financial product advice.

Regulation 7.1.33A of the Corporations Regulations provides that a circumstance in which a person is taken not to provide a financial service under the Corporations Act is "the provision of a service that consists only of a recommendation or statement of opinion provided to a person about the allocation of the person's funds that are available for investment among 1 or more of the following":

  • shares
  • debentures;
  • debentures, stocks or bonds issued, or proposed to be issued, by a government;
  • deposit products;
  • managed investment products;
  • investment life insurance products;
  • superannuation products;
  • other types of asset.

The Regulation covers “superannuation products”, which would include SMSFs.

The note to Regulation 7.1.33A also provides, though, that the exemption "does not apply to a recommendation or statement of opinion that relates to specific financial products or classes of financial products."

In essence, this regulation exempts what is often referred to as “broad asset allocation advice” from being a “financial service”. So long as it deals with the asset type as a whole, and does not refer to specific financial products or classes of financial products, then the exemption can apply.

Investment advice

Investment advice in relation to a specific financial product or class of financial product will invariably require an AFSL authorisation.

Execution services

As we know, persons generally need to hold an AFSL to cover the provision of a "financial service".

We've discussed "financial product advice" so far, which is one type of "financial service". Another "financial service" under the Corporations Act is what is referred to as "dealing" in a financial product.

"Dealing" is defined in s766C of the Corporations Act to include (among other things):

  • applying for or acquiring a financial product;
  • issuing a financial product;
  • disposing of a financial product.

Where a person arranges for a person to engage in any of the above, that will also constitute "dealing".

Accordingly, execution-type services provided by an accountant in relation to their clients' SMSFs will need to be examined to determine whether they constitute a "dealing" which requires an AFSL.

Below are some specific examples of common advice/recommendation scenarios involving SMSFs which may fall within some of the exemptions discussed above, and how they might cross the line and require AFSL authorisation.

Conclusion

To the extent that advice-related services are to be provided in relation to a client's SMSF, accountants should be aware of the specific AFSL implications of each of those services, and the available exemptions.

In addition, advice documentation should be drafted in such a way which is reflective of the exemption on which the accountant is relying.

For example, if relying on the "Tax Agents' Exemption" on the basis that the advice is given by the agent in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities, the factual bases to support such reliance should be clear from the advice. This would entail, for instance, making it clear that the advice is in relation to liabilities, obligations or entitlements which may arise under tax law. Such matters would objectively be seen as being within the ambit of the ordinary course of business of a tax agent.