Stories about how tax and financial advice are so interrelated

tax and financial advice

According to the ATO, over 70% of people engage the services of a tax agent/accountant. However, according to Blackrock, only 15% of Australians have a relationship with a financial advisor.

I believe that many people would benefit from having both. In fact, to crystallise the most value it is imperative that they have a close working relationship. To make my point, I would like to share some real-life stories about how integrated financial advice and tax advice can be and the value created when the approach is seamless.

I believe that lots of people are missing a lot of financial opportunities simply because they don’t have the right advisors. This is such an easy problem to solve. The key point of this blog is that tax and financial advice are so heavily interrelated and if not looked after properly, many opportunities could be missed.

Real-life stories: tax and financial advice working together

I could list all the pros and cons of having an advisory team that can provide both financial and tax advice, but I think that is both boring and relatively unconvincing. Instead, I have shared some stories below about some clients we have worked with recently. Whilst their financial circumstances are all different, I think they do demonstrate how interlinked tax and financial advice can be.

Use of tax losses

I was working on a plan for a new client. He has made some investment in the past that didn’t work out how he had hoped, and as a result had a lot of carried forward tax losses in a unique type of trust (hybrid discretionary trust and not a type we would typically recommend using). Part of the client’s financial plan included investing in shares and I wanted to investigate whether we could somehow utilise these carried forward tax losses.

The manager of our tax business was able to quickly review the trust deed, arrange a lawyer to draft documents to change the structure of the trust and confirm we can use the losses. This helped me finalise the plan (share investments will be owned by the trust) and has resulted in a great saving for the client and far less tax compliance risk for the client.

Start super pension to save tax

Whilst preparing SMSF financial statements for some clients, our accountant noticed that one of the members just had a birthday and as such reached her preservation age. He came and spoke to me and asked if we should therefore convert her account into pension phase as it then attracts a zero tax-rate. Of course, I agreed. A close working relationship, and our strong focus on finding ways to add value, have resulted in a perfect outcome for this client.

Structure of investments

This client was self-employed and had a company with a reasonable amount of retained profits in it. If we paid the profit out of the company (via declaring a dividend), the client would have paid more tax. Whilst formulating their investment strategy, our accountant and I considered how best to utilise these “trapped” profits. Considering we were going to recommend the client invest in a property, we advised the client to purchase that property as tenants-in-common such that the company owned 20% of the property and the clients owned the rest (in personal names). This allowed the clients to put that money to good use without crystallising additional tax liabilities (and it helped them avoid messy Div. 7A loan compliance issues).

Structure of super contributions to ensure you get a tax deduction

If you are self-employed, making super contributions can become messy and if you get it wrong, you might miss out on a tax deduction. Often, from a financial planning viewpoint, we review whether a client should make additional super contributions towards the end of the financial year (i.e. in May/June). If they are self-employed, these contributions could be recorded as personal or employer contributions – depending on whether they are made through an entity (company or trust) or personally. If they are recorded incorrectly, it could compromise their deductibility (as we have seen for some clients). The advantage for us is that we can meet as a team (i.e. both financial advisor and tax advisor) and work out the correct way for our clients to make super contributions so that tax deductions are not compromised.

Maximising your borrowing capacity

A tax accountant is usually keen to maximise all tax deduction because that will reduce the amount of tax payable by the client. However, this also reduces a client’s borrowing capacity too – and might retard their ability to achieve lifestyle and investment goals.

When we act as an accountant and financial planner for a client, we can give the bank written confirmation of expected normalised earnings (income) which they will rely upon when undertaking their borrowing capacity assessment.

We were recently helping some clients obtain finance to upgrade their home. However, last financial year they had a few non-reoccurring expenses (tax deductions) which reduced their taxable income. We were able to certify to the bank that their normalised income is actually a lot higher.

The more complexity you have, the more you could benefit

If you have a relatively simple financial situation i.e. few investments, no entities (company, trust, SMSF), not self-employed, etc., then you probably don’t have a lot to gain by having your financial advice and tax advice in one place.

However, if you do have some complexity then it is likely that you have a lot to gain from having one team look after all your financial affairs.

All in one place saves you time

We are all time-poor and having to see various advisors in various locations, providing the same information and having the same or similar discussions multiple times can be a waste of time. This problem is solved by having all your advisors in the one team. Only one appointment is needed which can be attended by your accountant, financial advisor and mortgage broker (if necessary). During that meeting you can review/address your tax, insurances, financial plan, investment super and mortgages needs in one fell swoop!

Nothing slips between the gaps

I love it when we look after a client’s tax and financial planning needs because it makes our job a lot easier:

  • Whilst formulating a strategy, if I have questions that relate to taxation affairs, I can walk over and speak directly to our accountant and we can workshop the issue to identify the best answer. Whilst I’m a registered tax agent too, it is virtually impossible to keep on top of all the tax laws so it’s important to speak directly with someone that lives, breathes and specialises in tax.
  • When our tax manager works on a financial planning client, he too can come over and speak to me and we can share ideas and thoughts to ensure all actions are congruent with their financial plan and goals. It is important that the right hand knows what the left hand is doing.
  • If I provide advice to a client as part of a plan (e.g. how to structure and investment), at least I know it will be implemented correctly. I know this sounds a bit control freakish and I acknowledge that there are some very good accountants out there, but there are also some practitioners that don’t have enough knowledge and experience and can unknowingly mess up an otherwise good plan.

Most accountants cannot give you financial advice

The misconception is that accountants can give you simple investment advice such as where to invest your super, whether to make additional super contributions, set up a SMSF and so forth. In fact, they cannot provide any financial advice unless they are authorised under an Australian Financial Services License (AFSL) and most are not. Some accounting firms might have in-house financial advisors but, depending on how they are licensed, they might be restricted on what advice they can give you (e.g. often no property advice).

It would be remiss of me to not mention that ProSolution has its own ASFL, Australian Credit License and tax agency registration so there’s very few matters that we are not able advise clients about.

Most accountant are focus on the past, not the present or future

Over the past 16 years since starting ProSolution, I cannot recall one time that a client’s accountant has picked up the phone to discuss or understand what a client’s financial plan looks like. Perhaps accountants are just too busy completing tax returns which forces them to focus all their attention toward what has happened in the past. And they probably move onto the next client before they have time to stick their head up and ask any questions about the future. Also, as noted above, most accountants are reluctant to overstep the advice mark for fear of breaking the law and exposing themselves to liability (if they are not licensed) – notwithstanding that they might not have the skill and experience to provide financial advice.

Don’t you think it is potentially dangerous for your tax advisor to not know what your plan is?

Are you missing out?

Have a think about your current advisors, your tax structures and investments. Are you confident that you are making the most of your opportunities?

If not, perhaps the best way to remedy the problem is to engage a firm that is able to provide holistic tax and financial advice. Or maybe you need to be the conduit for sharing information and future plans between your advisors – assuming they are all receptive to receiving it.

Of course, we welcome the opportunity to have a confidential discussion with you.