Treasury reform to aid big business by hurting the little guy
The first indication of the primary focus of the Coalition government came in the last week of August. Joe Hockey, in a joint press release with Andrew Robb explaining how the Coalition would balance the budget and fund the paid parental leave scheme, set out some budget saving measures.
At the top of this list was the scrapping of the instant asset writeoff available to small businesses that is expected to save the government $2.9 billion. Also, the new accelerated depreciation for motor vehicles purchased by small business entities up to a value of $5000 is going to be scrapped.
This pain being borne by small business is disproportionate to the pain being suffered by big business. The cost to big business of the 1.5 per cent extra paid parental leave tax is offset by a 1.5 per cent decrease in the company tax rate. This leaves big business in a zero net position compared with small business. Because most small businesses are operated through a company they get no reduction in tax but suffer a loss of tax deductions.
The Coalition's focus on helping big business is also evidenced by another policy. As a result of the financial collapses during the GFC, and the findings of a parliamentary inquiry that put most of the blame on advisers who maximised commissions ahead of their clients' interests, the Future of Financial Advice legislation was passed.
One of the FOFA reforms requires financial advisers to have their clients opt in every two years to pay for continuing advice. Under the guise of reducing compliance costs for small business, the Abbott government plans to remove the opt-in requirement.
Under the old system, advisers attached trailing commissions to products they sold under the guise of providing ongoing financial advice. In most cases their clients did not receive any real advice and were unaware they were still paying their financial advisers. As this opt-in condition currently stands, financial advisers must disclose every two years exactly what advice they will be providing and its cost, and have their clients opt in.
Because the majority of financial advice companies are owned by the four major banks, scrapping the opt-in requirement does not help small businesses. In fact, the administration burden of the opt-in requirement is a beat-up by the commission-driven sector of the financial planning industry.
If a financial planner is providing continuing advice, this requires at least some form of a report, and not a performance report automatically produced by the platform provider that collects commissions on behalf of the adviser. This report can easily include an opt-in response form for the client to sign and return.
If the opt-in requirement is abolished, investors' interests will have been sacrificed to the betterment of big business.
Frequently Asked Questions about this Article…
The Coalition announced it would scrap the instant asset write-off for small businesses (a move estimated to save the government $2.9 billion) and abolish the accelerated depreciation concession for motor vehicles purchased by small business entities up to a value of $5,000.
Removing the instant asset write-off and the small-business vehicle depreciation will reduce the immediate tax deductions small businesses can claim, meaning many small operators lose tax relief that previously helped cash flow and investment.
The Coalition proposed a 1.5% levy related to paid parental leave that is offset for big companies by a 1.5% decrease in the company tax rate. That leaves big business roughly in a zero net position, while many small businesses—often run through companies—get no company tax cut but still lose deductions, so the impact is heavier on smaller firms.
Under the Future of Financial Advice (FOFA) reforms, financial advisers must get clients to opt in every two years to pay for continuing advice. The rule was introduced after the GFC and parliamentary inquiries found some advisers were prioritising commissions over clients, so the opt-in forces advisers to disclose ongoing services and costs.
Abolishing the opt-in could make it easier for advisers to continue charging trailing commissions without re-confirming services and fees with clients, which the article warns would sacrifice investors' interests to the benefit of big business and commission-driven providers.
The article notes that the majority of financial advice companies are owned by the four major banks, so removing the opt-in largely benefits these larger, commission-driven firms rather than small businesses or individual investors.
FOFA targeted trailing commissions because, under the old system, advisers often attached ongoing commissions to products while providing little or no genuine continuing advice. Many clients were unaware they were still paying advisers for ongoing services they were not receiving.
Keep an eye on changes to small business tax breaks (instant write-off and vehicle depreciation), the interaction between paid parental leave levies and company tax cuts, and any rollback of FOFA opt-in rules—especially whether advisers must disclose ongoing fees and get periodic client consent, as these changes affect transparency and potential ongoing charges.
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