​‘Scheme promoters’: Banks need to take responsibility

by Amy Rosenfeld09 Dec 2013
Banks are being called on to step up their game, following revelations potentially illegal loan structures are being promoted to investors.

Following comments from lawyer Mark Halsey that many brokers and advisers are “unaware” they may be breaching tax law, a number of brokers contacted Australian Broker to give their understanding of the legislation - and we sought clarification from the ATO.

While some readers commented that the legislation was common knowledge, others expressed surprise at the extensiveness of the practices the ATO considered prosecutable offences, furthering highlighting the complexity of the legislation and potential misinformation in the industry.

But brokers and advisers are not the only players in the game, warns FBAA president Peter White.

“The banks need to step up to the plate and ensure as best they can that these products are not being manipulated,” says White. “I do not believe the broker market is ripe with them being the main perpetrator of such undertakings, and I would suggest that banks also need to look inwardly/internally very carefully at this ‘potential’ practise as well.”

This sentiment was echoed by a number of Australian Broker subscribers, with reader Chris C labelling the legal system “one-sided and short sighted” in its approach.

“Notice also it’s the advisors and the brokers being held responsible in these comments - no mention of the banks who facilitated the accounts and the bank staff who approved them, or are they too big to chase?”

Assistant commissioner Wayne Barford, however, rejected this argument, stating that the loan products themselves are perfectly legal, and it is the structures set up by financial advisers and brokers that are the issue.

White stresses to brokers that advisers, accountants and lawyers are the experts in these fields, and brokers should be wary of giving advice they are not qualified to give.

“Any breach of law or potential breach of law is always a concern and people need to ensure they have expert qualified advice in all matters – herein is one, tax law, leave it to the experts to give the advice upon… And as commented by one of your readers, Hart went to prison.”

MFAA president Phil Naylor agrees, but does not discourage brokers from giving general financial advice.

“While brokers can’t provide tax advice, they can and should suggest appropriate finance,” says Naylor. “Most financial transactions have a tax consequence, and borrowers should be referred to accountants for that advice.”

Naylor also further clarified the MFAA’s stance on these kinds of structures.

“Any sensible person would repay non tax deductable loans before tax deductable loans.  Many individuals arrange their affairs in this way on their own account, and that appears entirely legal and sensible,” he says.  “It is unfair that when a lender, broker, or accountant suggests that such a structure be used that it could be a scheme. This prevents ‘ordinary Australians’ being helped to manage their affairs properly.”

This is an issue that has been around for some time, says Naylor, adding that the MFAA gave advice to member on it in both 2011 and 2012.


  • by Sylvia 9/12/2013 10:35:05 AM

    Phil Naylor are you suggesting its fair for taxpayers to fund paying off home loans of investors by allowing them to rake up the debt on their negative geared properties creating higher tax deductions. You clearly have no idea what the issue is. Investors are lucky the Government hasn't canned negative gearing. Keep this up and they might. This part of the tax law is complex and specific. The ATO nipped this in the butt ages ago. It's old school planning. I have to wonder though which brokers know this strategy. Ex bankers who are now brokers or those who have other qualifications such as planners and accountants who are also brokers. Maybe these are the ones ATO is concerned about who should know better.

  • by Johnny B 9/12/2013 11:10:37 AM

    Of course brokers should be able to provide general advice to their clients about loan structure etc. But canning negative gearing altogether??? I don't think so... The government would be committing political suicide by scrapping this altogether! Clearly this Sylvia has no idea why the negative gearing tax laws are in place. Ordinary Mum's and Dad's who invest in residential property are providing housing for those who are not fortunate enough to be in a position to buy their own home, so why not give them a tax break for doing that. If there was no incentive for doing it, no one would... Typical Mum's and Dad's have no time to worry about loan structure, tax law and negative gearing. So they seek information and advice from financial experts.
    Brokers are considered by ordinary Australians as financial experts, so Brokers should be making every effort to become accredited to be able to provide their clients this type of advice. The gap between good brokers and the rest come where brokers are uneducated and basically talk to their clients about tax laws they clearly have no idea about. One of these brokers, clearly, is the lady who commented above! I am not claiming to be an expert on negative gearing tax law, however I know the reason the laws are in place, and I am making every effort to make sure I am doing the absolute best for my client and their financial well being.

  • by Sylvia 9/12/2013 11:55:29 AM

    Johnny B with all due respect its brokers like you and the likes of the MFAA who are uneducated to mske a call in this issue. I am degree qualified with post graduate qualification as a CPA. I have quite the knowledge and experience to comment. You clearly have no idea about this issue which questions the tax deductibility of interest for tax deductible loans. Not the validity of negative gearing. Btw I am also and investor. But if mum and dad investors keep being advised to let interest capitalize on their investment properties loans while they use all income sources to pay off their o/o home loans by using split facilities then that creates and a higher interest deduction and that is against tax law. So Johnny B if mum and dad investors continue to make unsubstantiated claims I am just saying the ATO may review negative gearing as a legitimate scheme. So instead of reaching with the limited info and knowledge you have I suggest you do some reading in this matter and then comment.