Financial services professionals often need to consult with or hire other professionals. This can include lawyers, actuaries, insurance brokers, mortgage brokers and accountants. In some cases, a client will already be using one of these other professionals. The importance of assessing these other professionals was made clear to me recently.
When I was navigating the $1.6 million transfer balance cap, I learnt the dangers of not asking questions and choosing the wrong actuary.
Some actuaries use the start of the day chosen to commence or commute a pension, while others use the end of the day. Choosing an actuary who used the end of the day for such calculations meant that my clients that had been in pension phase for all of the 2017 financial year and had to roll back an excess over the cap missed out on allocating a small percentage of the income for the 2017 year to the new accumulation account.
Other areas where professionals need to be careful include choosing an accountant for tax strategies and assessing the competence of an accountant a client already uses.
One of the problems with the accounting profession is that many public accountants have, in effect, become tax agents. There is an important difference between tax agents and true professional accountants.
Tax agents prepare financial statements and income tax returns, while accountants look after compliance affairs, have a good understanding of all strategic tax matters, help with exit strategies, and provide advice on improving tax and finance outcomes.
In September 2017, I was asked to provide tax planning advice to someone who had sold a pool business for about $700,000 in September 2016. The owner had started the business and, therefore, did not have a purchase cost. The strategies this business owner could use to minimise the tax payable on the $700,000 gain were limited because the business was owned and operated through a company.
As a general rule, companies should not be used to operate a business that will generate goodwill and can be sold at a premium in the future, and also should not be used to own active assets such as a business property. This is because a company does not get the benefit of the 50 per cent general capital gains tax (CGT) discount, and shareholders do not get the benefit of the 50 per cent active asset discount.
The pool business owner was advised that they could use the retirement exemption for $500,000 of the gain, and the rollover concession for the remaining $200,000. After receiving this advice, they decided to use their current accountant for processing the 2017 accounts and tax returns.
In May this year, I was again contacted by the pool business owner, who said their accountant wanted to know what sort of super contribution should be made for the $500,000 retirement CGT concession.
Realising that the contribution had not yet been made, I had the unenviable duty of telling the owner that, because the tax returns for the company and him personally had already been lodged, they could not claim the CGT concession. To claim the CGT exemption, the contribution should have been made either at the time of lodging the tax return or beforehand.
I was, thankfully, able to advise him that an amended tax return for the company could be lodged that corrected the mistake of claiming a $500,000 CGT retirement exemption and instead claimed a $700,000 rollover exemption.
This is an extreme example of how using the wrong professional could have resulted in a major loss to a client, and how important it is to ask questions of a professional you plan to use or whom a client already uses.
