Australian Broker forum is the place for positive industry interaction and welcomes your professional and informed opinion.

ATO sets sights on 'unaware' brokers: Could you be breaking the law?

Notify me of new replies via email
Australian Broker | 04 Dec 2013, 08:00 AM Agree 0
Brokers dealing with investment loans could unwittingly risk being prosecuted by the ATO as ‘scheme promoters’, says a legal expert.
  • Unanamious | 04 Dec 2013, 09:34 AM Agree 0
    What is rental income is credited to line of credit and loan repayments come out of line of credit? Is this still considered "scheme promoters"
  • Dave Robinson | 04 Dec 2013, 09:59 AM Agree 0
    I think you would be best seeking clarification from the ATO.
  • chrisc | 04 Dec 2013, 10:08 AM Agree 0
    Brokers, unless they are also a disclosed acting tax agent / accountant are not to advise on tax; that the client gets this from their financial advisor and/or accountant and if they advise a loan set up as explained here is required, they should be the only ones responsible for bad advice (we are not qualified in / don't know tax law so how can the Broker be deemed responsible or expected to pick this up as being incorrect). The Broker is just facilitating a loan structure the client or their advisor asked for. Notice also its the advisors and the brokers being held responsible in these comments - no mention of the banks who faciliated the accounts and the bank staff who approved them or are they too big to chase. Our legal system is very much one sided and short sighted in these approaches favouring the consumer in most cases ie, no common sense......they have to hang a fall guy somewhere.......pity the innocent party.
  • TJ | 04 Dec 2013, 10:44 AM Agree 0
    Silly Chris. Typical of most, always trying to pass the blame on to someone else. How would the bank know what the clients intentions were as to the use of the Line of Credit. And Chris, if you want to be a value add to your clients, and hence be professional in our industry, take responsibility. You are not expected to know all taxation laws and nor are you legally allowed to advise accordingly. But imagine your clients joy if you were to mention that this might be trouble in the eyes of our taxation law, and perhaps it would be wise of them to look in to this and even ring the ATO to confirm. They would be a client for life. We are there to assist, not just make a buck!
  • John Smith | 04 Dec 2013, 10:51 AM Agree 0
    This law has been around for a long time, and brokers involved in investment loans should know this.
    Unanamious - its the fact they use the rent to pay down debt that is not deductible while allowing debt that is deductible to capitalise which is caught by Section IVA of the tax act. Generally, the rent should be paid to the loan account, relevant to the security reducing the interest, however a broker should never give tax advice.
    I would suggest the ATO will look for brokers who promote the setup for tax avoidance.
  • JS | 04 Dec 2013, 11:20 AM Agree 0
    This has been around for too many years to remember since the Hart Case was decided. Any decent broker is well aware and wouldn't touch regardless of who requests the structure in this manner. It is not in clients best interest and therefore could also breach NCCP.
  • PeterT | 04 Dec 2013, 11:39 AM Agree 0
    @Chris there's no doubt in my mind that the legal system is both short sighted and one sided (don't get me started here), but this is one of those cases where there have been plenty of public rulings. If you are aware that clients are going to use a LOC to pay interest in this manner then you should be advising them to seek advice from an accountant and probably even get a private tax ruling (which will likely be turned down). If you're not aware of what they'll be doing with the money, then you're not doing your job as a broker. Either way you can't pass the buck that easily.
    I've had clients want to set this up many times and the advice is always the same. Get it cleared by your accountant and get a specific private ruling, otherwise keep it simple.
  • Aarong | 04 Dec 2013, 12:21 PM Agree 0
    I completely agree with Chrisc. Tax implications and being well versed in Section IVA of the Tax Act? Really? Who the heck can actually say they have read through this act? Oh yes, accountants can. Not mortgage brokers. If the customer or the accountant puts it in front of you and says do it this way what resource do we have to double check its legality? Our aggregator? Yep, I'm sure they will get straight on to that. Maybe we are supposed to seek independent legal and tax advise at our own cost now for our clients deals now just to satisfy ASIC. Is that what TJ and John Smith are saying we should do? The example they give is a pretty good one. Who knew that a LOC paying off an Investment loan (that is what the scenario said) has tax "scheme' implications? Probably a CPA, but not many mortgage brokers. This is a symptom of the overall problem of the NCCP. If you hire people to regulate, well, that is what they do. They don't just do a little regulating, they dream up new ways to regulate all the time and the are paid to do it. Get rid of the NCCP and ASIC sticking its nose in and these problems go away. If the client asks for advice on the structure, the broker would say,'We can do it the way you want, but its up to your accountant to advise you on how to manage it and what your tax implications are". As brokers we simply don't have the training (there are Uni degrees is just this sort of thing) to answer these tax implications on a sub-section of a law that was passed in 1934.
  • Unanamious | 04 Dec 2013, 12:27 PM Agree 0
    I had a quick read over the act, it seems the issue is that loan repayments are made from Line of Credit buffer and clients are claiming interest on interest
    In my opinion it is not wrong to set up a Line of Credit for funds to settle, just shouldn't make loan repayments from Line of Credit??
  • John Smith | 04 Dec 2013, 01:07 PM Agree 0
    Unanamious - no that is not the issue. The issue is that the income from the investment is being used to pay down other non-deductible debt not associated with the investment.
    Also lets not jump off the deep end. If you set up this structure, the ATO is not saying you are liable, UNLESS you specifically advise the client t set it up this way. This is not about structure, but ADVICE, which you should not be giving. However as another said here, if the client tells you that's what they want, I would definitely be advising the client there is a problem with setup, and making sure I had a copy or notes oo the email/conversation.
  • Obvious | 04 Dec 2013, 01:09 PM Agree 0
    You are allowed to capitalise the interest - just don't claim the capitalised portion as a tax deduction. That's what upsets the taxman. Just claim your normally allowable interest deduction. Simple.
  • MeerKat | 04 Dec 2013, 01:16 PM Agree 0
    Its probaby only a problem when the client (or his Tax Agent) claims the capitilised interest on the LOC. Always comes down to purpose....keep the equity portion seperate from the Buffer. Simples.
  • grahame hale | 04 Dec 2013, 01:42 PM Agree 0
    The ATO have warned against this type of loans for years and most accountants and tax agents can explain the ATO position. It is best to keep private separate from Business so everything is clear and transparent. Parcioli said this in 1492, you would think most businesses would know this.
  • Rocket Scientist | 04 Dec 2013, 02:55 PM Agree 0
    Harts case is a grey area.. The court system has proved this. These structures don't always breach part IVA. Sometimes there are other legitimate reasons for capitalising interest on investment LOC but it's best to seek an ATO opinion beforehand.
  • Alex | 04 Dec 2013, 04:36 PM Agree 0
    mortgage Brokers should NOT give advice on clients tax matters. Yes if something does not look correct and If we have an idea that a particular structure is not allowed by the ATO then we should ask the client qualify that structure with their accountant and have some proof of that suggestion, and that should be it, mortgage brokers should not state that the structure could be against ATO laws because we are not qualified to make any such statement! We know some of the clients financial story and we learn more the longer they remain a client but we can't find out every thing within the first few hours together. We should accept that there are OTHER professionals in our clients lives (or should be) and that those professionals can help our clients in a way that we can not. And I am fine with that further I believe that separation of services will always end in better outcomes for all clients. We already have financial planners that believe they are mortgage brokers, now it seems some brokers want to be accountants and not just accountants but tax lawyers.
    I sent an email to the ATO last year when I read in one of these online broker news letters an article "quoting" the ATO for brokers to look out for these schemes/arrangements, the request asked the ATO further clarify exactly what the issues were and what to look out for, I received no response. I can not remember seeing a directive from the MFAA or from my aggregator Clearly stating what the ATO had an issue with and what to look out for. All we have is an ATO person quoted in an online news letter and today we have a lawyer representing a financial firm giving an opinion or "is it qualified advice? hardly a way to get information out in a professional way that will be digested and understood by a large proportion of the industry.
  • Broker | 04 Dec 2013, 04:42 PM Agree 0
    Just make sure that whatever the latest non- issue is , that we always point the finger at Brokers as it always seems to be our fault.

    Next we will be blamed for global warming!
  • Marty | 05 Dec 2013, 08:01 AM Agree 0
    If you deal with investor clients you need to have a good understanding of the legal and financial frameworks they work in or you are just another salesman. That doesn't mean you are giving advice rather you are able to point out when a professional opinion is required.
  • TJ | 05 Dec 2013, 10:12 AM Agree 0
    Alex. Good post, but where you use the phrase "could be against ATO laws", we are certainly allowed to say this and should very much do so if we want to be professional and of great benefit to our clients. This could save our clients from unknowingly being in breach of ATO laws. (exactly what the article refers to). Keep in mind they may have learnt of this concept from a friend or publication not even thinking of any possible tax law breaches. What we cant say is "is against ATO laws", that would be definitive and deemed to be giving advice on tax matters.
  • TJ | 05 Dec 2013, 10:19 AM Agree 0
    To the broker who is worried about Global Warming, read the article. It says "many brokers are advising clients to undertake these kinds of arrangements". It does not point the finger at brokers in general. Those brokers that have written such loans for clients where the client has requested such a facility specifically, would surely not be considered culpable. It is referring to situations where clients have sought financial assistance to purchase an investment, and they have been advised that such a structure would suit their needs!
  • chrisc | 05 Dec 2013, 11:12 AM Agree 0
    I feel some of us may be missing the point here. I recall there was a Broker in WA last year struck off because he processed and structured a loan for a client (investment purposes) that went sour. I understand both the client and the Broker followed the Financial Planner's advices and that the Broker had written evidence of the Financial Planners advices. Although the Broker did not give the advice and was acting 'as instructed' he was also deemed culpable for placing the loan. I think the Financial planner was also struck off. This may have been for investment purpose rather than tax avoidance in this case but it is a simialr comparsion - although the Broker (and Bank) may place a loan / loan structure for a client on their Financial Planner's / Accountant's advices, the Broker seems to be drawn into the mix and we should all be aware of what could happen to us under current legislation that moreso supports the consumer regardless of common sense. We all could see Brokers right from the start being placed at risk under the NCCP.
  • Maria Rigoni | 05 Dec 2013, 11:05 PM Agree 0
    How many brokers feel like me and suggest that the "regulators" and "law makers"should start to concentrate on important issues that impact on the daily lives of Australian borrowers and investors instead of huffing and puffing about stuff that is irrelevant.
Post a reply