“When you get something for nothing, you just haven’t been billed for it yet.”
— Franklin P Jones
Money, money, money.
You’re probably well aware that some of Australia’s largest banking and financial services institutions paid, or offered, over $1.8 billion in compensation to customers who suffered loss or detriment because of fees for no service misconduct or non-compliant advice. It was an ongoing saga well-covered by ASIC (see 21-023MR) but the fragmentation of those licensees, and their retreat from advice, has caused some additional issues.
One of the most obvious impacts is the decision of some licensees, to effectively exclude the adviser from any investigation into the matters to be remediated.
This may be, from their perspective, more efficient but it has led institutions to issue ‘goodwill payments’ (and sometimes very large goodwill payments) to clients that received service and quality advice.
You may dismiss this as institutional ineptitude except that, where amounts are paid to the client’s superannuation fund, it may cause significant problems that you will be forced to resolve.
The ATO’s position
We’ll address the ATO’s position in the following paragraphs but, if you’d prefer to go directly to the source, follow this link.
The ATO wrote:
Your super fund may receive compensation from a financial services provider due to the provision of inappropriate financial advice or where fees were paid but no advice provided. The compensation may include an amount reflecting a refund or reimbursement of adviser fees and/or an amount to compensate for lost earnings. It may also include an interest component.
Whether the compensation is a contribution and therefore counted towards your contribution caps will depend on the circumstances in which the compensation is received.
So take a moment to consider this position and the impact it may have on your clients’ arrangements.
Whether the ATO consider the payment to be an exempt contribution, a concessional contribution or a non-concessional depends on:
- where the client’s super fund engaged the financial service provider and has a right to compensation (exempt and no impact on contributions caps);
- where the client personally engaged the financial services provider and has a right to compensation (non-concessional contribution) ;
- where there is no right to compensation (concessional contribution).
The classification can have a significant impact, particularly where you, as their adviser, neither anticipate nor are aware of the categorisation of the payment. It could, depending on the size of the payment, exceed the contributions cap or lead to a non-concessional contributions determination.
You should be aware of the ATO’s position so that you can appropriately respond to clients surprised by your former licensee’s munificence. More importantly, if the goodwill payment jeopardises their strategy or existing arrangements (or may significantly impact them) you need to appreciate that your client can apply to the Commissioner to exercise discretion.
The ATO can exercise discretion to exempt payments from the contributions cap where the circumstances of the payment would lead to an unjust or unanticipated outcome.
