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…
In late August the Coalition (announced by Joe Hockey in a joint release with Andrew Robb) set out budget-saving measures to help balance the budget and fund paid parental leave. Key items include scrapping the instant asset write-off for small businesses, removing accelerated depreciation for some motor vehicles, and introducing a 1.5% extra paid parental leave tax offset by a 1.5% company tax rate cut.
The instant asset write-off available to small businesses was removed as a savings measure (expected to save the government about $2.9 billion). That means many small businesses will lose an immediate tax deduction for eligible purchases, increasing their after-tax cost of buying equipment.
The Coalition proposed to scrap the accelerated depreciation concession that applied to motor vehicles purchased by small business entities up to a value of $5,000. Removing this concession reduces the ability of small businesses to claim quicker tax deductions on low-cost vehicles.
Big business effectively nets zero from the package: the 1.5% extra paid parental leave tax is offset for large companies by a 1.5% reduction in company tax rate. Most small businesses, many run through companies, do not receive the company tax reduction but do lose deductions — so the changes disproportionately disadvantage small businesses compared with big business.
FOFA (Future of Financial Advice) requires financial advisers to get clients to opt in every two years to continue paying for ongoing advice, with advisers disclosing exactly what advice will be provided and its cost. The Abbott government proposed removing that opt-in requirement, citing reduced compliance costs for small business.
Under the old rules the opt-in forced advisers to disclose ongoing services and fees, helping prevent situations where clients unknowingly paid trailing commissions for little or no service. Abolishing the opt-in risks reducing transparency and could leave investors exposed to commission-driven practices that the FOFA reforms were designed to curb.
The article notes that the majority of financial advice companies are owned by the four major banks. Scrapping the opt-in requirement is unlikely to help small independent advisers and may instead benefit the commission-driven parts of the sector owned by the major banks.
Stay alert to reduced small business tax deductions (such as the instant asset write-off and vehicle depreciation changes) and to changes in adviser transparency (the potential removal of FOFA opt-in). Those changes could raise costs for small businesses and reduce visibility over ongoing adviser fees and trailing commissions — matters that directly affect both business owners and everyday investors.
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