AFA Response to the Discussion Paper Reform to Deductions for Education Expenses

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1 12 July 2013 Manager Individual Tax Unit Personal and Retirement Income Division The Treasury Langton Crescent PARKES, ACT, Dear Treasury, AFA Response to the Discussion Paper Reform to Deductions for Education Expenses The Association Of Financial Advisers Limited ( AFA ) has been serving the financial advising industry for over 65 years. Its aim is to provide members with a robust united voice, continually improve practices and focus firmly on the exciting, dynamic future of the financial advising industry. The AFA also holds the client to be at the center of the advice relationship and thus support policies that are good for consumers and their wealth outcomes. With over six and half decades of success behind it, the AFA s ongoing relevance is due to its philosophy of being an association of advisers run by advisers. This means advisers set the agenda, decide which issues to tackle and shape the organisation's strategic plan. Thank you for the opportunity to provide feedback on the discussion paper on reforms to the deductions for education expenses. The AFA, as a professional association, is a strong supporter of continuing education and therefore is opposed to any measures that will limit the pursuit of further education. This is a particularly key issue for the financial advice industry as we strive to get full recognition as a profession that Australian consumers can place a high level of trust in. A number of the outcomes from the Global Financial Crisis and the Government regulatory reform agenda have placed the industry in the spotlight. One of the key means of responding to this is to drive an increase in professionalism through increased education levels. As an industry, we also face the introduction of additional education requirements through the Tax Agent Services Act and the proposal from ASIC to increase the education requirements for financial advisers under Consultation Paper 212. For an industry going through such significant change, a limitation on the ability to claim education expenses is particularly counter-productive. We also question the inconsistency that this will create between different business models. A large number of financial advisers either work within or own small businesses. Where the business is set up as a sole trader business, this change will have a big impact. Alternatively, where the business is corporatised the impact will be much less. 1

2 We also have significant concern about the complexity that this proposal will have and the likely impact that this will have on business. The suggestion that professional associations will need to identify the education component in membership fees and the proposed changes to salary packaging arrangements means that these changes will have a costly impact upon business. Our response to the Discussion Paper questions is as follows: 1. In your industry or field are there studies or courses that are compulsory and must be completed in order to meet license requirements or other continuing professional development training? Yes there are courses that are mandatory for financial advisers. At present, the mandatory requirement is a Diploma of Financial Planning under ASIC s Regulatory Guide 146 (RG 146), however many financial advisers then go on to complete the Advanced Diploma of Financial Planning and other further designation training. Under ASIC Consultation Paper 212, it is proposed that the mandatory education standard will be progressively increased from Diploma level to Advanced Diploma level and then Bachelor Degree level. In addition, under the Tax Agent Services Act, financial advisers will need to study taxation law and commercial law as a new requirement. In addition, financial advisers have a mandatory ongoing Continuous Professional Development (CPD) obligation of at least 30 hours per year, which typically requires coverage across a range of different technical areas. a) What is the average amount of the expense? The typical course costs are as follows: Diploma of Financial Planning - $1,800 Advanced Diploma of Financial Planning - $1,800 AFA Designation Fellow Charter Financial Practitioner - $3,920 Bachelor and Masters Degrees - $25,000 - $30,000 each at a University Online CPD content can be obtained for as little as $500 per year. At this stage, the course requirements for the Tax Agent Services Act have not been finalised, however it appears that it will involve two courses that would each be in the vicinity of $1,000. The requirements of ASIC CP 212 are also yet to be finalised, however this is likely to drive a need for further education for both new and existing financial advisers. b) What is the highest amount of the expense? The DFP and ADFP courses noted above are for distance learning. Where the student seeks to undertake this study by a class-room format, the cost can be significantly more. 2

3 CPD hours or points can be obtained through a range of means. Where there is utilisation of conferences, the cost will be significantly greater. For example the standard member registration at the AFA National Conference is $1,495. Travel and Accommodation costs are additional. c) What is the nature of these courses? These professional courses are predominantly distance learning, which includes course materials, access to online resources and assessment activity. The AFA conference is a domestic conference that runs over 3 days and contains a great deal of content and opportunity for financial advisers to interact with other financial advisers and gain from their experience. 2. Is training undertaken in your industry predominantly held in Australian or overseas? Can you provide examples? Initial training, including the DFP and ADFP are typically undertaken by distance education and as such are normally undertaken in Australia. Financial Services Licensees hold a combination of Professional Development (PD) Days and Conferences. PD Days are more likely to be local and more regular, whereas conferences are likely to be held on an annual basis in one location. Conferences are most commonly held in Australia, but may also be held overseas. 3. In employment relationships, are employees largely obliged to incur work-related education expense themselves or are they employer provided? Do you anticipate this changing in response to this measure? We expect that there is a variety of different forms under which education expenses are incurred, with some businesses paying this expense on behalf of their employees and others who expect their employees to pay for the course. The same applies with respect to attendance at conferences. Also as mentioned above, given the typical small business nature of this industry, some businesses are structured as sole traders and others operate through companies. PD Days are more typically provided by Financial Services Licensees for both salaried advisers and self-employed advisers. We would expect to see changes in response to this measure, where education costs and conference costs were increasingly picked up by employers. We would also expect to see more sole trader businesses transition to corporate structures as a result of this measure. 4. Are you aware of examples where education expense deduction can be claimed under the current arrangements, even where significant private benefits are enjoyed? The area where there is some possibility for significant private benefits, is with conferences and most particularly overseas conferences. It is likely that some advisers will undertake private travel in connection with attendance at overseas conferences. This alone does not invalidate the education benefit from attendance at the conference. Conferences in overseas locations have potential benefits, including cost advantages and better access to international speakers. 3

4 As a professional association we do not have visibility of the attendance of our members at overseas conferences or visibility of who pays for these conferences or what is claimed as a selfeducation expense. 5. Are there any lessons for Australia in the experiences of other countries with restrictions on education expenses deductions? The AFA is not in a position to discuss education expense deductions in other jurisdictions. 6. Should the $250 no-claim threshold under section 82A of the ITAA 1936 be removed when the $2,000 cap is introduced? We do not support the introduction of a $2,000 cap. It is the AFA s view that this would have serious negative consequences and we strongly advocate that this measure is not proceeded with. With respect to the $250 no-claim threshold, we believe that the removal of this would lead to greater simplicity and consistency; however we note that it may also remove a number of smaller claims. We do not have a strong view on this. 7. How should this be prioritised? The introduction of a $2,000 education expense cap should be rejected. If this question is with respect to the removal of the $250 no-claim threshold, then we would see this as a middle order issue. If the Government believes that the self-education expense deduction is being inappropriately used in some cases, then a regulatory solution should be developed, that specifically addresses this inappropriate use, rather than a measure that will have broad negative consequences. We envisage that it should be possible to put a sensible cap on travel and accommodation, or alternatively introducing some more appropriate caps that would be positioned at a much higher level and would impact a much reduced number of people. 8. What types of assets that relate to an education activity are placed into a low-value pool or similar small business pool? In our view, depreciation expense will represent a small percentage of total education expenses, and thus is not a critical element to this consultation. We will leave this question to other participants who have a closer appreciation of the treatment of depreciation. 9. What are the advantages of the reasonable estimation method proposed above? As per our response to question 8, we do not propose to respond to this question. 4

5 10. Is the use of low-value pools under these circumstances appropriate? As per our response to question 8, we do not propose to respond to this question. 11. Are there any unintended consequences from the proposed reforms? We believe that there will be significant negative consequences that flow from this proposed measure. These unintended consequences would include the following: A reduction in the level of education that is undertaken, which in the context of financial advice, would hold back the transition to a higher level of professionalism and would result in a deterioration in outcomes for consumers. There will be an overall reduction in the level of education activity, which will have a negative impact on those organisations that provide education. There is also likely to be a reduction in the quality of courses as a result of a reduction in the funding to invest in courses. A reduction in students undertaking further education will push the cost up for those who do decide to proceed with education, without the ability to claim a deduction. There will also be a reduction in the focus upon new ways to operate and the sharing of best practice. This will impact upon business efficiency and client outcomes. There will be an increase in the level of red tape and administrative complexity for business. It is likely to lead to decisions being made on business structures, including an increased transition to corporate structures to ensure that this measure does not limit the targeted spending on education, including for the business principal. We believe that any cap, if it is to be introduced, should be subject to indexation. The removal of indexation suggests a declining value being placed upon education in Australia. 12. What practical aspects of the proposed reforms need further consideration? This proposal needs to go through a proper consultation process. The Government needs to clearly spell out the problem that they are trying to solve and the likely consequences of this proposal. As set out in response to question 11, there are a number of negative consequences that will flow form this proposal. We would expect that as a result of a more detailed consultation process there will be further issues that arise. With respect to the operations of a financial adviser professional association, we are concerned that we will end up in a complex process of reviewing all our activity to identify training that might need to be considered as a separate training cost. This would be a very complex matter as we do run some events that are of a training nature, which are sometimes at no cost or are subsidised. The complexity of working out a value and then communicating this to members would be both challenging and wasteful. People based in regional and rural locations typically have a greater need to travel in order to attend 5

6 training and conferences. Accordingly, their travel costs will be notably greater. We would like to point out that this policy proposal will have a disproportionate impact upon regional and rural Australians who are seeking to increase their education level. 13. Are there any interactions with other areas of the tax law that need to be addressed? We would strongly recommend that any policy change in this area should be kept as simple as possible. This includes removing any connection to membership of a professional association and the complexity that comes from changes to the Fringe Benefits Tax. 14. Do you consider that further amendments will be required to the tax law outside of those already mentioned in the discussion paper? We do not support the measures as proposed. This issue needs to be addressed at a policy level first, in terms of the policy intent and the potential consequences of this proposal, in advance of consideration of the detailed tax law implications. 15. Are there alternative approaches that you would like to see considered? How would they work in practice and are there any precedents in Australia or other jurisdictions? We believe that it is essential that the Government is clear with respect to what they are seeking to address with this policy. Is the target of this policy overseas travel and accommodation expense claims or is it the high cost of particular graduate courses, or both? If these are the key targets, then we would suggest that there are more sensible caps applied specifically to these areas of concern. The policy should target specific identified concern areas rather than the vast majority of Australians who are seeking to enhance their education standard. Conclusion We do not support the proposal for a $2,000 cap on self-education expenses. In our view this would have a detrimental impact on the financial services industry and would create a number of distortions in the market place. If the Government is seeking to target particular types of selfeducation expense claims, then their actions should target this, rather than impact a broad range of people seeking to increase their education and skills. Should you have any questions, please do not hesitate to contact me on (02) Yours sincerely, Philip Anderson Chief Operating Officer 6