On 27.8.2022, Keith de Mel (with Law degrees and studying for CPA qualifications), wrote to me saying: “Dear John, I have read your publication on “When does Tax advice becomes legal advice?” I am curious to know if Accountants are allowed to advise on asset protection strategies? And if so on what basis? I see it as a common practice, and would appreciate it, if you can give some guidance on this. Regards, Keith.” The publication he referred to was a (long) paper I presented, under this heading, at a Tax Institute National Convention, in March 2019 (remember those pre-Covid times). And I published it in Tax Technical – here and posted it on LinkedIn, producing a huge number of ‘views’ – many thousands (which was a complete surprise, to me, given its length). Here is the answer I gave Keith.
Hi Keith and thanks for your message – this paper was 3 years ago and a ‘labour of love’. You ask an important question, which is very parallel to the ‘tax advice’ issue.
Outside the Federal ‘over-ride’ for provision of ‘tax agent services’
A key part of this issue is that the a Federal Law: Tax Agents Services Act (TASA) allows tax agents (including ‘non-lawyers’) to provide ‘tax agent services’, and charge a fee, under the Commonwealth’s power to pass laws ‘incidental’ to their power to make laws in relation to ‘taxation’. Under the Australian Constitution, a Federal Act, such as TASA, has precedence (to the extend of any inconsistency) over the State and Territory laws – in this case, those making it an offence, to ‘engage in legal practice’ (and other related conduct), without being qualified, to practice, as a lawyer. So, the definition of ‘tax agent services’, sets the limit of the express protection from prosecution. There are interpretive issues around the scope of that definition, but that’s another issue and unlikely to bear on your question, which is about ‘asset protection’ advice.
The scope of this statutory phrase: ‘engage in legal practice’ is, broadly: conducting litigation, drawing documents that create or affect legal rights, and giving advice about legal rights and obligations.
Asset protection advice, is clearly, then, ‘engaging in legal practice’, subject to what follows, as it involves advising about the legal implications of being subject to liabilities, of various types, and structures that effectively protect assets, from liabilities, to which other entities might be subject. This type of advice is outside the protection of the Federal mandate to provide ‘tax agent services’ (as defined in TASA).
The ‘asset protection’ advice issue, is quite like a tax agent providing advice about state laws (eg. payroll tax, land tax and cognate taxes). This falls outside the protection of the Federal mandate relating to Federal taxes.
Similarity to accountants supplying document variables to standard form document suppliers
A not dissimilar issue is Accountants providing documents to implement tax advice (ie advice about Federal taxes). Providing documents goes beyond the Federal mandate. Rarely do accountants draft the documents themselves, but they frequently go to standard form document providers, who typically aren’t lawyers themselves. There is, from memory, at least one State (South Australia I think), where the Act deems a person (eg. accountant), who supplies the details, to go into a standard form document, to be engaged in legal practice, and thus exposed to committing an offence, unless qualified to practice as a lawyer.
Supplying the details might sound simple (and there will be cases where it is) but it could easily go wrong, too. Take, for instance, advising that a client should establish a (‘common or garden variety’) family trust. It could be that the choice of a discretionary trust is misconceived (eg. for two arm’s length families to run a business) – in other words some understanding, of the legal rights created, was missing . There are issues about what should be in the constituent document, for even a correctly identified entity. For instance, who will be the trustee; should it be a company; who should be the directors; who should be the shareholders; should they be different (why)? There will be questions as to who should be primary beneficiaries; who are the default beneficiaries; who should be the Guardian and Appointor; what provision should be made for their replacements (if any), what the Vesting Day should be; should the expiry of the perpetuity period be stated, and, if so, should it be a date different from the Vesting Day (why and for what reason). Does the arrival of Vesting Day require the trustee, to wind up the trust, or only, the interests in the trust vest. It goes on – what powers should require the consent of the Guardian (before being exercised); whether you need separate people as ‘Guardian’ and ‘Appointor’; what is the estate planning and testamentary impact, of these choices, what asset protection impacts do these choices have; what is the definition, in the trust deed, of the amount of ‘net income’ that is distributable; what provision does it make, for occasions, when trust law ‘net income’, and tax law ‘net income’ are different; is that mechanism sensible (and by what criteria)? And, without any real understanding of the Deed, the accountant is arranging his/her client to purchase, all these considerations could be reduced to a ‘blunt and dangerous’ metric – ‘what is the cheapest’ – whether it is the accountant or the client, who will be saved the cost. Further, the accountant might be taking some profit on the deed as well (eg. charging $400 for a deed, as that might be what the market will bear, paying only $100 – because some companies will go that cheap). You can get a sense, that this is an environment, that could get a bit ugly.
The better standard document providers have at least their original precedent ‘signed off’ (settled??) by a lawyer, but how long ago was that and does it need revising? Many are an entirely lawyer free zone – meaning that there was no lawyer between client and deed. There is room for much to go wrong here. I was once offered a ‘free’ family trust deed, by one of these services (which will remain nameless) but it was so bad, I didn’t use it. My own view is that these standard document providers are ‘engaged in legal practice’ and they would be better registering with the relevant Legal Services Board, and employing a solicitor at least part time, who will be responsible for the legal quality of the documents; some disclosure about relevant issues, when considering using one of their documents, providing an advice service, where required, and keeping an eye on how sensible the instructed variables seem.
Unlicensed legal practice prohibition relaxed where adequate ‘consumer protection’ is otherwise available (applicable to ‘asset protection’ and ‘estate planning’ advice?)
Now for some better news. The case law evolved to relax the prohibition, on unlicensed practice, in line with its ‘consumer protection’ rationale. It was that a person, who is a member of a class of persons, who regularly provide services of that type, and the public rightly has confidence in their capacity to provide reliable services, does not offend the laws against unlicensed legal practice, by providing those services. A good example of this might be a town planner, who is navigating and advising on town planning law, without being legally qualified. This relaxation, might protect an accountant, who is administering state taxes for clients and advising about them (as well as doing the same in addition to federal taxes).
Which brings us back to the question you asked – is it legal for an accountant to give ‘asset protection’ advice? It would depend on whether accountants are of a class, which a court would regard as suitably competent (as a whole) to give asset protection advice? I don’t know the answer to that. Some might be quite good at it, but I don’t think that is the test – this is a consumer protection issue, and the test is whether a client, getting this type of advice, from this class of professional, would have adequate assurance of competence. There might be relatively simple liability protection issues, that are incidental, to the service provided – like advising that the client should have a family trust and it gives some added asset protection, if the trustee is a company. But this might fall a bit short. It could be that saving the money, and having a natural person, was effective enough. Some liabilities can be avoided, by ensuring that the deed closes down any liability, a trustee might otherwise have, to beneficiaries. Then, again, the Corporations Act, makes directors liable, for trust debts, when the trustee’s indemnity, against trust assets is limited. There is a need for quite deep understanding of the Bankruptcy Act (about what vests in the trustee in bankruptcy and what doesn’t) and what the clawback rules are. For instance, if you gift assets into the trust, then become bankrupt, or insolvent, before the relevant claw-back period has expired, then the trustee in bankruptcy (or liquidator of the donor corporate) can demand the assets be returned. There might be related issues – for instance, the personal liability of directors, for allowing insolvent trading to occur, or for unpaid liabilities, to the Commissioner of Taxation, of certain defined types (ie. under the Directors’ Penalty Notice or ‘DPN’ provisions). Also, interests in superannuation funds do not vest, in a trustee in bankruptcy, but payment of benefits, might. Further, it is not just assets, that vest in the trustee in bankruptcy, that are at risk. A bankrupt might be obliged to make payments out of his/her income, towards his debts. There would need to be an understanding of this, too.
Asset protection would need to include protection from claims under Family Law (which is just about impossible) and also from claims against the estate of a deceased person, for further provision, by a person, under the deceased’s will. These provisions vary from State to State.
So, on balance, I doubt that accountants, as a class, have sufficient training, to provide the level of ‘consumer protection’ confidence, the courts would require, to sidestep the prima-facie offence of engaging in unlicensed legal practice. Perhaps accountants could be relied on, to not hold themselves out, as competent, to give asset protection advice, unless they were actually very good at it – but this doesn’t give very robust consumer protection assurance, and would be risky.
Other considerations
Then an accountant might consider whether they want to be opened up to claims for negligence, in an area, where they don’t have legal qualifications. And, a related question is whether their professional indemnity policy would cover them for services outside ordinary tax and accounting services. I’ve seen insurers take the point, that the services provided were illegal (as in breach of the rules against unqualified legal practice) and use that as one of their bases for denying liability.
Various non-lawyers (financial planners and accountants) provide ‘estate planning’ services, too. This includes a blend of commercial/human, tax and general law skills – which puts practitioners in an awkward position. There is a high legal component, which would make it an offence, unless they were of a class of professional that can give the relevant consumer protection assurance. I’m not sure that they are.
And there are considerations closer to home, too. The Code of Conduct, for tax agents, requires them to be ‘competent’ – which could be problematic, when there is a high level of non-tax legal technicality involved, and they are not trained in that. Similarly, the Code requires appropriate insurance, and insurance that didn’t extend, to services provided, in the ordinary course of business, that turned out to be excluded from cover, because they were illegal, as unqualified legal practice, might not satisfy the Code requirements.
Often the answer is, that it it is safer (and maybe even easier) to get registered as an entity entitled to engage in legal practice. Multi-disciplinary practices (and even non-practice entities) can be registered, with a Principal Officer, who is legally qualified and responsible for the provision of legal services.
That turned out to be much longer than I thought, when I started my answer, to your question, but I hope it assists.
Cheers, John Morgan.
[Tax Month – August 2022 – Previous Month, 28.8.22]