Facts
An Advisor identifies a potential restructure to save their client substantial tax.
To ensure $nil tax, there is reliance on CGT rollover or CGT small business concessions.
The Advisor is remunerated well for being pro-active.
Question
What if the CGT rollover or CGT small business concessions advice was incorrect?
Tax Tip
We strongly recommend such advice is triple checked before it is finalised to give the Advisor the best chance that:
it is correct; or
if not correct, the Advisor’s professional indemnity will cover them against a professional negligence claim.
This will mean the process of preparing the advice will take longer and this ought to be factored into the timing of the restructure. However, in this case, one would rather be the turtle (slow and steady and no mistake) and not the hare (who made a mistake). What are the consequences?
The sequence of events:
the Advisor is satisfied with the advice (not knowing it to be incorrect). The client relies on the Advisor as the advice is really a foreign language to the client;
the most likely party that may identify the mistake is the ATO during an audit, some years later, when all has seemed well for the Advisor and client;
the client is hit with a significant tax liability with interest and potential penalty;
noting that there was no money received by the client because it was an internal restructure and the client will be required to find their own funds to pay the tax liability;
one could argue the tax liability does create a cost base and future potential tax savings but the client will unlikely care as they will be out of pocket for tax.
Providing advice regarding restructures rewards Advisors well. It is the golden goose. However, if the advice is incorrect, it is a deadly golden goose. For example (assuming a worst case scenario):
a $9.9M turnover small business;
EBITDA percentage of 20% resulting in $1.98 annual EBITDA;
market value of $5.94M based on capitalisation x 3 of future maintainable earnings;
the tax liability (for incorrect tax advice) is $1.3959M plus interest and potential penalty, being $5.94M (capital gain assuming nominal cost base) x CGT 50% general discount (reasonably assumed to apply) x 47% (tax rate).
There is no doubt the client will be successful against the Advisor for a claim of professional negligence as the Advisor identified the restructure opportunity based on information known by the Advisor.
What the Advisor can do now is to triple check any advice as follows:
ensure an independent senior Advisor within the firm reviews the advice, that is, the junior prepares the advice, the authorising senior approves the draft and the independent advisor reviews before finalisation; and/or
engage an independent outsider Advisor which includes obtaining an ATO private ruling.
Triple checking will put the Advisor in the best position to be covered by their professional indemnity insurance.
Note, ATO private rulings are taking three (3) to four (4) months to finalise (outside the ATO standard of 60 days). It is taking about two (2) months before matters are even allocated to an ATO officer. This ought to be factored into any restructure timing.
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