9 October 2009
The Executive officer
Economic Development and Infrastructure Committee
Parliament of Victoria
Spring Street
East Melbourne VIC 3002
Financial Planning Association
of Australia Limited
ABN 62 054 174 453
Level 4, 75 Castlereagh Street
Sydney NSW 2000
GPO Box 4285
Sydney NSW 2001
edic@parliament.vic.gov.au
Tel: 02 9220 4500
Fax: 02 9220 4580
Member Freecall: 1800 337 301
Consumer Freecall: 1800 626 393
Fax: 03 9627 5280
Dear Sir/Madam
fpa@fpa.asn.au
www.fpa.asn.au
Inquiry into State Government Taxation and Debt
1
The Financial Planning Association of Australia (FPA) welcomes the opportunity to respond to the Committee‟s
inquiry into State Government Taxation and Debt. We identify a specific concern with regard to the application
of payroll tax to financial planners as Authorised Representatives of Australian Financial Services Licence
(AFSL) holders.
Financial planners provide valuable advice that is important for the long-term economic welfare of Australians.
The financial planning profession is uniquely positioned to promote wealth creation, providing for greater self
sufficiency, which ultimately facilitates a more efficient use of our financial resources.
We recognise the strong public policy case for inter-jurisdictional consistency of payroll tax, nation-wide
harmonisation, and ensuring consistency with pre-existing Commonwealth legislation. We have welcomed
improvements in jurisdictional consistency of taxation definitions and legislation, as a result of harmonisation in
this area. However, we remain concerned that financial planners have suffered detriment as a result of the lack
of accommodation of their specific circumstances, which are inherently different to those intended to be captured
by the relevant Victorian law on taxation of contractors. This is wholly inconsistent with the Federal income tax
regime, which treats financial planners more fairly, by recognising their specific circumstances and
accommodates them via the personal services income threshold test.
Nature and structure of the relationship between AFSL holder and Authorised Representative
Financial planners operate as Authorised Representatives of AFSL holders. The fundamental characteristics of
AFSL holders‟ operations and the nature of their business structures are a direct result of various amendments
to the Corporations Act (2001). The relationship of an Authorised Representative to its AFSL holder is
substantially different to a typical contractor relationship captured by the law, termed a “relevant contract”.
Relevant contracts include building and construction tradespeople and IT professionals, who operate within very
different relationships and structures to those of financial planners.
There exist a number of distinctions which make the relationship of Authorised Representatives to their
respective AFSL holders unique and, as such, the treatment of such a relationship as a relevant contract is not
only unjust, but runs contrary to the spirit of payroll tax law. Unlike a typical principal/agent relationship, financial
planning firms, which consist of Authorised Representatives, often establish various structures whilst operating
as independent entities carrying on business and assuming entrepreneurial risk.
1
The FPA is the peak professional organisation for the financial planning sector in Australia. With approximately 12,000 members organised
through a network of 31 Chapters across Australia, the FPA represents qualified financial planners who manage the financial affairs of over
five million Australians with a collective investment value of more than $630 billion.
New South Wales / ACT
GPO Box 4285
Sydney
NSW 2001
Ph: 02 9220 4500
Fax: 02 9220 4580
nsw@fpa.asn.au
Queensland
433 Logan Rd
Stones Corner
Qld 4120
Ph: 07 3394 8288
Fax: 07 3394 8289
qld@fpa.asn.au
NT / SA / Tas / WA
Suite 20, Carrington House
61-63 Carrington St
Adelaide SA 5000
Ph: 08 8237 0520
Fax: 08 8237 0582
sa@fpa.asn.au
Victoria
PO Box 109, Collins St West
Melbourne
Vic 8007
Ph: 03 9627 5200
Fax: 03 9627 5280
vic@fpa.asn.au
The relevant law on contractors finds a contracting relationship where there is significant labour input inherent in
the contract. This is made explicitly clear in the law and in the descriptions of the specific exemptions.
Authorised Representatives of AFSL holders typically own their client relationships with the investing public, can
transfer from one AFSL holder to another, are able to sell their businesses without consultation with the AFSL
holder, and are subject to their own GST and CGT liabilities. In addition, individual Authorised Representatives
typically bear the costs of their own education and training, are liable for client errors, and are subject to
criminal/civil sanctions for their breaches of the law.
The contractual relationship is generally that of operating under an AFSL, as administered by ASIC under the
Corporations Act, of a registered AFSL holder who undertakes additional obligations in the form of license
conditions. In practice, Authorised Representatives “own” their relationships with their clients, many of whom
would have few, if any, dealings with their respective AFSL holders. Clients contact their planners directly with
queries, product issues, or requests to modify their portfolios. Authorised Representatives actively seek and
pursue their own client-bases in market segments they select. These relationships are inherently different to
those of contracting plumbers or builders operating under the licences of registered plumbers or builders, to give
some examples.
Authorised Representatives could avoid the negative tax consequences by attaining their own AFSLs. However,
from a public policy standpoint, such an outcome would be suboptimal. Indeed, a clearly stated objective of
Government when introducing changes to the Corporations Act was to achieve disintermediation of government
and regulators by placing responsibilities for review of Authorised Representatives‟ activities on AFSL holders.
Thus, a common business structure is one in which clients remit payments to an account of an AFSL holder, and
commissions/rebates are subsequently paid to Authorised Representatives.
Typically, Authorised
Representatives determine how and what amount an investing public client may be charged for services
rendered. The Authorised Representatives themselves decide whether or not to turn up to work and determine
their levels of their productivity and, again, unlike relevant contracts, the relationships tend to be for an indefinite
period of time and do not address contractual output.
Though the Victorian Treasury may argue that an Authorised Representative can be exempt by meeting the
criteria stipulated within the seven available exemptions, none of these exemptions appropriately address all the
relationships noted above. Indeed, it would appear that the criteria are not intended to apply to those working in
financial services.
2
Justice Gzell in the Bridges Case acknowledged the unique relationship of Authorised Representatives and
their AFSL holders, and the complex issues that must be considered before pay-roll tax may be applied. He
noted that the issues of control relied upon by the Chief Commissioner in making assessments were directed to
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matters subject to regulatory restriction under the Corporations Act, ASX requirements, and ASIC regulations .
As a result, the AFSL holder was bound to exercise a degree of “control” in the business relationship,
commensurate with the regulatory requirements imposed upon it and not inconsistent with a relationship of
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principal and independent contractor .
The agents in Bridges, typical of those in an Authorised Representative / AFSL holder situation, did not deal with
matters one would expect in a contract of employment. For example, the representatives were not required to
provide services to clients. Additionally, they operated from their own premises, determined their own working
hours, made decisions on the clients they wished to serve, were not paid any form of leave or allowances, and
were not under any obligation to provide work or refer clients. They were completely free to delegate work and
5
hire / fire their own staff . In his conclusion, Justice Gzell noted that representatives‟ abilities to sell their
businesses and make capital payments to acquire existing businesses are highly significant factors that militate
6
against the finding of common law employment relationships . Of the ten representative categories considered
7
in Bridges, all but one, the „Mr Wilson Category‟ , were held to fall within the relevant exceptions.
2 Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue [2005] NSWSC 788.
3 Ibid at 187.
4 Ibid at 189.
5 Ibid at 200.
6 Ibid at 216.
7
Ibid at 235.
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Any potential liability for payroll tax must be limited to amounts paid or payable for or in relation to the
performance of work relating to a relevant contract. Payments such as trailing commissions or asset-based fees
do not fit within this description. Because Authorised Representatives typically own their client relationships, and
can transfer amongst AFSL holders, trailing commissions and the like follow Authorised Representatives when
they transfer to new AFSL holders. Thus it is quite common that payments derived in respect of financial
products are paid by new AFSL holders for investments Authorised Representatives placed whilst associated
with earlier AFSL holders. Put more simply, there are many examples of payments received in the context of an
8
agreement that are not related to the performance of work with or for the AFSL holder party to the agreement.
Justice Gzell also noted in respect of payroll tax that, as a matter of plain language, the provision is limited to the
9
labour content of the commissions and brokerage received on behalf of a representative . Thus, after limiting
any liability to a „Mr Wilson Category‟ and after extracting trailing commissions and the like, the potential taxable
value must be further reduced with reference to the labour content. Of the few remaining „Mr Wilson Category‟
Authorised Representatives, further potential limits on the amount of payroll taxable “wages” may be found in the
issue of whether their activities constitute services that are performed by a person who ordinarily provides
services of that kind to the public generally.
From a public policy perspective, the loss to tax revenue, if any, would be negligible and would be significantly
offset by administrative, compliance, and regulatory cost savings to state revenue offices, as well as private
sector entities such as AFSL holders and Authorised Representatives.
Recommendation
The Victorian Government should review its position and adopt an approach that recognises the business
structure and nature of the Authorised Representative / AFSL holder relationship. Harmonising payroll tax
definitions across all jurisdictions, whilst maintaining consistency with the highly relevant Personal Services
Income tests developed by the ATO in consultation with industry, would provide a logical and sensible outcome
without unduly disadvantaging any particular industry or providing special treatment to anyone.
In the absence of such consistency, an alternative would be to recognise the particular characteristics of
Authorised Representatives of AFSL holders, as they were described in the NSW Office of State Revenue‟s
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former Revenue Ruling PT064 . This Ruling clarified that personal services income paid or payable by AFSLs
to Authorised Representatives is exempt from payroll tax and was supported by measures to prevent abuse.
This approach, including the requirement to satisfy specific criteria, was well understood by the industry.
We would request that the Committee give appropriate consideration to such options. If you require further
information, please contact me, , via email at gerard.fitzpatrick@fpa.asn.au or by phone on (02) 9220 4505.
Yours faithfully,
Gerard Fitzpatrick
General Manager, Policy and Government Relations
8 This is the reference by Justice Gzell at 202 where he stated While the representatives did not bring expensive physical assets to their
activities, a most significant aspect of this matter was the level of capital, valued as a factor of trail commissions, that were brought into the
relationship.
9
Ibid at 237.
10 NSW OSR Revenue Ruling No. PT064 – Effective 19 July 2004.
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