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TPB (PN) D41/2019: Transfers of businsess by tax (financial) advisers and confidentiality

Exposure Draft

TPB practice note TPB (PN) D41/2019

Transfers of business by tax (financial) advisers and confidentiality

This exposure draft is also available as a PDF, download TPB(PN) D41/2019 Transfers of business by tax (financial) advisers and confidentiality (229 KB)

Tax Practitioners Board exposure draft practice note

The Tax Practitioners Board (TPB) has released this draft practice note to provide practical guidance and assistance to registered tax (financial) advisers in understanding their obligations under the Code of Professional Conduct when executing a transfer of business. 

Comments invited

The TPB invites comments and submissions in relation to this draft practice note. The comment period is open for 28 days with the closing date for submissions being 7 June 2019

The TPB will then consider any submissions before settling its position, undertaking any further consultation required and finalising the practice note. 

Written submissions can be made via email at tpbsubmissions [at] tpb.gov.au or by mail to: 

Tax Practitioners Board 
GPO Box 1620 
SYDNEY NSW 2001 
 

Disclaimer

This document is in draft form, and when finalised, will be intended as information only. While it seeks to provide practical assistance and explanation, it does not exhaust, prescribe or limit the scope of the TPB’s powers in the Tax Agent Services Act 2009 (TASA). In addition, please note that the principles and examples in this paper do not constitute legal advice. They are also at a preliminary stage only. The TPB’s conclusions and views may change as a result of the comments the TPB receives or as other circumstances change. 

Document history

This draft practice note was issued on 10 May 2019 and is based on the TASA as at 15 March 2017.


Introduction

  1. This draft practice note has been prepared by the Tax Practitioners Board (TPB) to provide practical guidance and assistance to registered tax (financial) advisers to understand their obligations under the Code of Professional Conduct (Code), as contained in section 30-10 of the Tax Agent Services Act 2009 (TASA), when executing a transfer of business. 
  2. In this draft practice note, you will find the following information:
    • what is a transfer of business? (paragraphs 3 to 6)
    • factors to consider when executing a transfer of business (paragraphs 7 to 19)
    • practical examples involving transfers of business (paragraph 20)
    • consequences of not complying with the Code when executing a transfer of business (paragraphs 21 to 24)
    • where to find further information (paragraph 25). 


What is a transfer of business?

  1. The TPB has defined a ‘transfer of business’ as either a:
    • sale of client book[1];
    • transfer of a client book; or
    • sale of a practice[2]
  2. Essentially, a transfer of business involves a tax (financial) adviser entering into an arrangement with a third party[3] whereby information relating to a client’s affairs is disclosed to that third party. 
  3. Examples of scenarios where a tax (financial) adviser may execute a transfer of their business include:
    • a tax (financial) adviser retires or sells their practice to another tax (financial) adviser within their existing Australian financial services (AFS) licensee
    • a tax (financial) adviser retires or sells their practice to another tax (financial) adviser that is not within their existing AFS licensee
    • a tax (financial) adviser moves to a new AFS licensee and takes their client book with them
    • a tax (financial) adviser’s existing AFS licensee acquires a new AFS licensee
    • an employee representative of an existing AFS licensee or corporate authorised representative (CAR) retires, and the client book is transferred to another employee representative within the same AFS licensee or CAR.
  4. It is important to recognise that there are various arrangements that can result in the execution of a transfer of business. The scenarios listed in paragraph 5 are explained further by examples included in paragraph 20 below.


Factors to consider when executing a transfer of business

General considerations

  1. When executing a transfer of business, various factors need to be considered, depending on the nature of the transfer of business and also the circumstances of the tax (financial) adviser. However, as a starting point, tax (financial) advisers may wish to consider the following general factors:
    • what are the details of the existing privacy agreement?
    • who are the parties to the existing privacy agreement?
    • is there a general authority in place consenting to disclosure to third parties and what are the details of that general authority?
    • what client information is being transferred?
    • how or by what means is the client information being transferred?
    • does the client want their personal information to remain with the tax (financial) adviser or do they want their information to remain with the existing third party AFS licensee?

Code obligations

  1. When executing a transfer of business, tax (financial) advisers need to understand and comply with their obligations under the Code. The Code, as contained in section 30-10 of the TASA, regulates the personal and professional conduct of registered practitioners, and contains obligations in relation to honesty and integrity, independence, confidentiality, competency, and other obligations, such as responding to requests from the TPB.
  2. In particular, Code Item 6 requires that a tax (financial) adviser must not disclose any information relating to a client's affairs to a third party unless:
    • the tax (financial) adviser has the client's permission; or
    • there is a legal duty to do so.[4]
  3. For the purposes of the TASA, a third party is any entity other than the client and the tax (financial) adviser.
  4. Examples of third parties can include:
    • the existing third party[5] AFS licensee of the tax (financial) adviser
    • a new third party AFS licensee of the tax (financial) adviser
    • a new tax (financial) adviser who is an authorised representative or employee representative of the same third party AFS licensee
    • a new tax (financial) adviser who is an authorised representative or employee of a new third party AFS licensee
    • a new shareholder owner of an existing CAR.
  5. It is only necessary that the information relates to the affairs of the client. Therefore, the information does not have to belong to the client, or have been directly provided by the client to the tax (financial) adviser.
  6. Assuming that there is no legal obligation, tax (financial) advisers must obtain permission from each client prior to divulging their information to a third party. This permission has to be relevant to the engagement and may be by way of a signed letter of engagement, signed consent, or other communication with the client. The relevant communication should outline the disclosures to be provided, as well as information about the entity/entities that will have access to the client information. There is no set formula or methodology used to obtain client permission.
  7. The following factors are relevant in ensuring compliance with Code Item 6, among other things:
    • Tax (financial) advisers must obtain permission from each client prior to divulging information to a third party (including an AFS licensee). When obtaining this permission, it is recommended that the tax (financial) adviser clearly inform the client about the proposed disclosure (including noting to whom and where the disclosure will be made).
    • A general authority consenting to disclosure to third parties may be acceptable. However, even in the context of a general disclosure, tax (financial) advisers should require a ‘positive step’ from their client to authorise the requisite disclosure. This may include an appropriate ‘opt-in’ type approach. Further, a tax (financial) adviser is not excused from taking steps to protect information just because it would be inconvenient, time-consuming or costly to do so.
    • In addition to the obligations under Code Item 6, the Privacy Act 1988 (Privacy Act) sets out a number of Australia Privacy Principles (APPs) which may have a direct impact on the requirement to obtain consent (express or implied) from clients. 
  8. In relation to a transfer of business, a tax (financial) adviser must obtain consent from their clients to disclose client information to a new (or potential) owner. This is achieved by way of a ‘positive step’ from the client authorising the requisite disclosure. Obtaining client consent through an opt-out letter (or similar mechanism) will not meet the TPB’s requirements as there is no positive step from the client to authorise disclosure. 
  9. For further information relating to terms of engagement, including in relation to 'permission' and 'legal duty' refer to the TPB draft practice note TPB (PN) D40/2019: Letters of engagement
  10. Ultimately, the onus is on the tax (financial) adviser to exercise appropriate due diligence when executing a transfer of business.

Privacy Act

  1. In addition to their obligations under the Code in the TASA, registered tax (financial) advisers should also be aware that the Privacy Act sets out a number of APPs which govern the use of, storage and disclosure of personal information. 
  2. Registered tax (financial) advisers  should seek their own advice about whether the provisions of the Privacy Act apply to them. Information about obligations under the Privacy Act is provided by the Privacy Commissioner and is accessible from the Office of Australian Information Commissioner’s (OAIC) website at www.oaic.gov.au.


Practical examples involving transfers of business

  1. The following are indicative examples which illustrate the general application of Code Item 6. In all cases, consideration will need to be given to the specific facts and circumstances of each matter. 

Example 1 - Tax (financial) adviser retires and sells their practice to another tax (financial) adviser within the same AFS licensee

Situation
Sam, a tax (financial) adviser, decides to retire and sell his practice to Paul, another tax (financial) adviser within the same AFS licensee. Sam is an authorised representative of AFS licensee A and Sam’s clients have an existing privacy agreement with the AFS licensee A. 

Obtaining client permission

From the perspective of Sam’s clients, although the AFS licensee remains the same, Paul is a new third party of Sam. In this situation, even if there is a general authority in place to disclose client information within the AFS licensee, Sam would require a positive step from his clients to authorise the disclosure to Paul as there is no current arrangement in place between Paul and Sam’s clients for disclosing client information to a third party.


Example 2 – Tax (financial) adviser retires and sells their practice to another tax (financial) adviser in a different AFS licensee

Situation
Stephen, a tax (financial) adviser, decides to retire and sell his practice to Mary, another tax (financial) adviser from a different AFS licensee. Stephen is an authorised representative of AFS licensee A and Mary is an authorised representative of AFS licensee B. Stephen’s clients have an existing privacy agreement with AFS licensee A but not AFS licensee B. 

Obtaining client permission
In this scenario, both Mary and AFS licensee B are new third parties of Stephen. Stephen would need to obtain the permission of his clients to disclose their information to Mary and AFS licensee B and the clients would need to enter into a new privacy agreement with AFS licensee B. 

Example 3 – AFS licensee ceases to operate and tax (financial) adviser moves to another AFS licensee

Situation
AFS licensee A ceases to operate and surrenders its licence. William is a tax (financial) adviser and authorised representative of AFS licensee A. As AFS licensee A has ceased to operate, William moves to AFS licensee B and takes his client book with him. 

Obtaining client permission
In this scenario, William’s clients have an existing privacy agreement with AFS licensee A. Although William remains the tax (financial) adviser to his clients, AFS licensee B is a new third party. William will need to obtain the permission of his clients to disclose their information to AFS licensee B and the clients would need to enter into a new privacy agreement with AFS licensee B.

 

Example 4 – Tax (financial) adviser moves from one AFS licensee to another and takes their client book with them

Situation
Kylie, a tax (financial) adviser and authorised representative of AFS licensee A, decides to move to AFS licensee B. Kylie brings her client book with her and becomes an authorised representative of AFS licensee B. 

Obtaining client permission
As was the case in example 3, Kylie’s clients have an existing privacy agreement with AFS licensee A. Although Kylie remains the tax (financial) adviser to her clients, AFS licensee B is a new third party. Kylie will need to obtain the permission of her clients to disclose their information to AFS licensee B and the clients would need to enter into a new privacy agreement with AFS licensee B.[6]  


Example 5 – A shareholder of a company tax (financial) adviser sells an interest in the company to another (where the existing privacy agreement is between the client and the company)

Situation
Sue holds 100% shareholding in ABC Pty Ltd, a registered company tax (financial) adviser and corporate authorised representative of AFS licensee A. Sue decides to sell her interest in ABC Pty Ltd to Robert.

ABC Pty Ltd’s clients have an existing privacy agreement with ABC Pty Ltd. Although Sue has sold her shareholding to Robert, the business name and entity remain the same.

Obtaining client permission
In this scenario, the privacy agreement is between the clients and ABC Pty Ltd. There is no privacy agreement in place between Sue (the former business owner) and the clients. Therefore, there is no need for the client’s permission to be obtained in this scenario. The existing privacy agreement is with the company tax (financial) adviser and a change in shareholding does not affect this arrangement.


Example 6 - A shareholder of a company tax (financial) adviser sells an interest in the company to another (where the existing privacy agreement is between the client and the shareholder owner)

Situation
Assume the facts in example five, but in this situation, the privacy agreement is between the clients and Sue. 

Obtaining client permission
In this scenario, the privacy agreement is between Sue and the clients of ABC Pty Ltd. As Sue has sold her 100% interest in ABC Pty Ltd to Robert, Sue will need to obtain her clients’ permission to disclose their client information to a third party. The clients of ABC Pty Ltd will need to enter into a new privacy agreement with either Robert or ABC Pty Ltd. 


Example 7 – An AFS licensee acquires another AFS licensee

Situation
Olivia is a tax (financial) adviser and authorised representative of AFS licensee A. Ben is a tax (financial) adviser and authorised representative of AFS licensee B. AFS licensee A acquires AFS licensee B by way of a corporate takeover. The authorised representatives of AFS licensee A and their respective client books remain with AFS licensee A whereas the authorised representatives of AFS licensee B and their respective client books move to AFS licensee A. 

Obtaining client permission
In this scenario, Olivia remains an authorised representative of AFS licensee A after AFS licensee A acquires ASFS licensee B. As AFS licensee A continues to be an existing third party of Olivia, there is no need to obtain the client’s permission or seek a new privacy agreement with AFS licensee A. 

However, Ben is now an authorised representative of AFS licensee A, a new third party. Consequently, Ben is required to obtain permission from his clients and his clients would need to enter into a new privacy agreement with AFS licensee A. 


Example 8 – An employee representative of a company tax (financial) adviser retires and client book transferred to another employee representative of the same company

Noah and Joshua are employee representatives of XYZ Pty Ltd, a registered company tax (financial) adviser and provide services on behalf of XYZ Pty Ltd. Noah decides to retire and the client book is transferred to Joshua.

Obtaining client permission
As Noah is an employee representative of XYZ Pty Ltd, he does not own the client book but rather, provides services on behalf of XYZ Pty Ltd. Upon his retirement, the client book remains with XYZ Pty Ltd. There is no need to obtain the client’s permission in this scenario as Joshua is an employee representative of XYZ Pty Ltd and there is an existing privacy agreement in place between the clients and XYZ Pty Ltd.

Consequences

  1. If a registered tax (financial) adviser breaches the Code, including in the context of executing a transfer of business, the TPB may impose one or more administrative sanctions, which include a written caution, order, suspension or termination of registration.
  2. In addition to the above consequences for Code breaches, or any other relevant statutory consequences (such as, from the Privacy Act), a registered tax (financial) adviser should also consider relevant commercial consequences such as legal action for damages. 
  3. The TPB recognises that the current business practices of some tax (financial) advisers with respect to transfers of business may be different to what has been outlined in this draft practice note. Therefore, the TPB will take a pragmatic approach to ensure that tax (financial) advisers have adequate time to modify their business practices, if required, in order to comply with the legislative requirements contained in the Code.  
  4. Tax (financial) advisers must ensure that their business model with respect to transfers of business complies with the requirements set out in paragraphs 7 to 19 of this TPB(PN) in order to meet the requirements of section 30-10 of the TASA. 


Further information

  1. Outlined below is a listing of reference material that may provide further guidance in relation to what is a whole of practice transfer, general considerations and issues to consider when executing a transfer of business. 
  Information product Purpose of document
Tax Practitioners Board TPB(I) 21/2014 Code of Professional conduct - Confidentiality of client information Further information regarding Code item 6 in the Tax Agent Services Act 2009 - confidentiality.
TPB(I) 01/2011 Letters of engagement Further information regarding letters of engagement or terms of engagement
TPB(I) 30/2016 Code of Professional Conduct - Having adequate arrangements for managing conflicts of interest for tax (financial) advisers Further information regarding Code item 5 the Tax Agent Services Act 2009 - managing conflicts of interest for tax (financial) advisers
Office of the Australian Information Commissioner Guide to securing personal information Provides guidance on protecting personal information and in relation to destroying or de-identifying personal information once information is no longer needed.
Australian Privacy Principle Guidelines Outlines requirements of the Australian Privacy Principles (APPs), how the OAIC will interpret the APPs, and matters the OAIC may take into account when exercising functions and powers under the Privacy Act 1988 (Cth).


[1] A ‘client book’ has been defined as the collection of clients of a business. A client book may include information, such as, the client’s full name, address, phone number, investment details, and dollar amounts of income generated from the client.

[2] A ‘sale of a practice’ may include the assets, client book, and income of the business.

[3] For the purposes of the TASA, a third party means any entity other than the client legal entity and the registered tax practitioner legal entity. See also paragraphs 8 to 17 in relation to Code Item 6 below.

[4] For further information in relation to client permission and what is a legal duty, see TPB(I) 32/2017: Confidentiality of client information for registered tax (financial) advisers

[5] An ‘existing third party’ means that there is a current arrangement in place between the tax (financial) adviser and client for disclosing client information to a third party. 

[6] Note that guidance published by the Office of the Australian Information Commissioner (OAIC) recommends that in this situation, all affected clients should be contacted, in writing, informing them about the changing business circumstances and providing them with a choice as to whether their records stay with the financial adviser when they move to AFS licensee B or whether they want their information to remain with AFS licensee A. The guidelines recommend that two attempts are made to contact clients to determine their preference. For tax (financial) advisers operating within the TASA regime, a positive step from the client to authorise the requisite disclosure is required. 
Further note that the OAIC’s guidance, published as a frequently asked question, is specific to this particular scenario only.