Regulatory Roundup – April 2016

Sharpest pencil in the box? Financial reporting quiz for directors

A survey of directors, auditors and other financial professionals conducted by the Financial Reporting Council* revealed that, on average, directors believe their knowledge of the more technical accounting issues was “fair”.

While the survey acknowledged a large diversity between directors of ASX top 200 companies, versus other listed, non-listed, not-for-profits, and superannuation trustees, almost all survey respondents acknowledged concerns about directors’ knowledge of financial reporting.

In response to concerns, the Australian Securities and Investments Commission (ASIC) has developed a confidential quiz to test the financial reporting knowledge of a wide variety and sample of Australian company directors.

It was developed in conjunction with the Australian Institute of Company Directors, CPA Australia, The Chartered Accountants Australia and New Zealand and the Institute of Public Accountants.

The quiz consists of 10 multiple choice questions, and seeks to:

– to provide a self awareness of general competence relating to financial reporting requirements

– to provide education in respect of each specific question

– to provide links to additional resources and/or training to maintain or improve competence.

The quiz focuses on the more technical elements of financial reporting rather than broader financial knowledge. For example, the quiz doesn’t test understanding of matters such as financial products or instruments, assessments for capital and funding decisions, financial processes and controls, or how decisions can impact on the future financial health of a company.

Completion of the quiz is confidential, and no names or email addresses of participants are recorded. As well, IP addresses of respondents are hidden and not made available to ASIC.

Completion of the demographic data in the questionnaire is optional, but ASIC says this data will enable it to refine further questionnaires and also aid the shaping of its educational offerings in the future.

Click here to begin the quiz.

After completion, your results will be displayed and explanations provided so you can improve your knowledge (or give yourself a pat on the back).

* The Financial Reporting Council (FRC) is responsible for overseeing the effectiveness of the financial reporting framework in Australia. Its key functions include the oversight of the accounting and auditing standards setting processes for the public and private sectors, providing strategic advice in relation to the quality of audits conducted by Australian auditors, and advising the Minister on these and related matters.



Benefits specifically “outside” the FBT net

Just to dot all the Is and cross the Ts now that we are into a new FBT year, here are some specific benefits under family business arrangements that the ATO has deemed to be outside the scope of FBT law.

The items that do not attract FBT include:

– a birthday present given to a child who works in a business run by the parents

– a wedding gift given by parents to an adult child who had some years earlier worked after school in the family business

– an interest-free or concessional loan given to such a child for the purpose of buying a matrimonial home

– the value of meals and accommodation provided to children of a primary producer in the family home where they work on the family farm

– the rental value of a farm homestead occupied by a family whose private company conducts the farming business in which they work and holds the title to the homestead

– the value of accommodation provided free in the family home to a child apprenticed to his/her parent as a motor mechanic, and

– the administration costs of an employer in providing fringe benefits.
And some “left field” FBT fun facts
The following are examples of obscure or misunderstood FBT rules.

– Shopping centre car parks that provide free parking for an initial period (the first two hours, for example), and thereafter charge a fee based on time (to discourage all-day parking), are not considered by the ATO to be “commercial parking stations” for the purpose of determining if there is a car parking fringe benefit.

– Where a mobile phone or similar item is treated as an exempt work-related item and the monthly call costs are exempt, the exemption will extend to internet data usage fees

– Where a loan is made in respect of employment to an employee who is also a shareholder of a private company, there will be no loan fringe benefit if the loan amount (or residual un-repaid balance) is deemed to be a dividend made to the borrower.



SMSF trustees: Regulator looks to tighten the screws on robo free-for-all

On the back of the government’s statement on Australia’s “fintech” future, the Australian Securities and Investments Commission (ASIC) has released a consultation paper and draft regulatory guide for digital financial product advice —more commonly known as “robo advice”.

The adoption of robo advice — where financial product information is automated using algorithms and technological triggers rather than a human adviser — has been growing steadily, first in the US before rolling out here in Australia.

Another example of a US trend expected to inevitably manifest in the Australian market, the vertical integration of players in the automated financial advice space, looks like severely disrupting incumbent business models. The US example has seen no price attached to the advice side of the value chain, which commentators say has led to the US boom in robo advice solutions. There, firms realise value from the subsequent take-up of their own investment products.

This could cause obvious conflicting outcomes within the Australian regulatory environment.

SMSF trustees are already enthusiastic adopters of exchange traded fund (ETF) products, with the banks already making moves into the ETF investment market. Robo advice offerings can be appealing to SMSF trustees looking to automated advice options where low-cost, scaled-advice parameters are available. Vertically integrating these product offerings, as per the US models, is viewed as problematic, given past problems the regulator has had with trailling (or indeed conflicted) commissions.

ASIC’s draft regulatory guide brings together some of the issues that firms and advisory businesses providing, or intending to provide, digital advice to retail clients need to consider when operating in Australia. Considerations range from the licensing stage — that is, obtaining an AFSL (Australian financial services licence) — through to the actual provision of advice.

It is unclear at this stage whether the regulator views that the robo solution itself requires an AFSL.  Such a position has been considered by the Tax Practitioners Board (TPB) with respect to tax agent licensing requirements for software vendors. The TPB has issued an “information sheet” detailing information about the operation and impact of the tax agent regulation for software providers.

ASIC is also seeking feedback on issues that are unique to digital advice businesses, in particular:

– the organisational competence obligation that applies in a digital advice context; and

– the ways in which digital advice licensees should monitor and test their algorithms.

Submissions have been called for, which close on May 16. Download the consultation paper here.



Profits of professional firms under ATO spotlight

The ATO has revised its guidance on the taxing of profits made by certain professional firms.

In particular, it is concerned about the risk of arrangements that on the surface comply with tax law but are intentionally designed to affect a certain tax position (under a tax avoidance rule that tax advisers will know as “Part IVA”). Certain professional firms can achieve a particular tax outcome through how they are structured.

Often the result of economic and legal choices made by business owners, business structures can also influence tax consequences. The ATO’s concern stems from the risk of Part IVA applying to the allocation of profits from a professional firm carried on through a partnership, trust or company where the income of the business is not “personal services” income.

The professional businesses within its sights include, but are not limited to, firms operating in the accounting, architectural, engineering, financial services, legal and medical professions.

The ATO says its revised guidelines take into account feedback it has received through consultation about the practical issues at work.

It says its booklet “Your service entity arrangements” still applies, but that it is committed to reviewing its guidelines during the 2016-17 income year “subject to the possibility of judicial guidance pending an appropriate test-case being identified”.

Benchmarks have been established by the ATO to use when examining income earned by individual professional practitioners (IPPs) to help it identify situations that it says may require Part IVA risk assessment.

There are three such benchmarks:

– equivalent remuneration — the IPP should be remunerated an equivalent amount to the upper quartile of the highest band of professional employees providing similar services to the firm, like employees of comparable firms or relevant industry benchmarks

– 50% entitlement — half or more than half of the income from the firm to which the IPP is entitled (directly or indirectly through interposed entities) should be assessable, and

– 30% effective tax rate — the income from the firm to which the IPP (and associated entities) is entitled must be taxed at 30% or more.

The last benchmark will also take into account the taxable value of fringe benefits.

The ATO also says it will use gross income when considering the benchmarks, although for assessment purposes deductions, losses and offsets will naturally continue to be able to be utilised.

It says that a professional firm that does not satisfy one of the benchmarks will be considered high risk, especially where the effective tax rate arrived at due to business arrangements is low.

For queries on the guidelines, or for comments and feedback, email the ATO at this email address.



New accounting rules on balance sheet tax values released

The Australian Accounting Standards Board has announced changes that aim to clarify the application of the tax effect accounting rules. The standard, known as AASB 112 Income Taxes, was amended to better deal with the issue of losses that occur during the period between an entity’s purchase of an instrument and when the instrument reaches maturity.

Unrealised gains and losses in accounting usually reflect movements in balance sheet values that do not have an impact on a company’s “hard cash”.

They are, however, figures that provide users of financial statements some notion of what an entity is worth in accounting terms.

The standard specifies that deferred tax assets arising from deductible temporary differences – differences between the initial carrying amount and the movements up or down in value – should be reflected on the balance sheet when it is likely profits against which temporary differences may be used will exist.

Accountants should read the standard in detail to better understand the exemptions that apply in these circumstances.

Amendments to the accounting standard are effective for reporting periods beginning on or after 1 January 2017, but early adoption is permitted. Entities using the newly minted provisions must disclose their use of the new standard.

Electronic versions of the accounting standard are available on See here for the amendments.


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