Looming changes for the BNPL market

Grahame Allen • Dec 16, 2022

The government has given the strongest indication yet that it will be seeking to regulate the Buy Now Pay Later (BNPL) market soon with the release of a consultation paper on the appropriate regulatory approach for emerging financial products to ensure access of credit while protecting consumers. It has been estimated by the Reserve Bank of Australia that there are approximately 7m active BNPL accounts making $16bn in transactions in the 2021-22 financial year. This accounts for around a 37% increase on the previous year. Low value BNPL products that typically provide a spending limit of $2,000 are the most popular in Australia, although spending limits of up to $30,000 are available with some providers for large ticket items such as home upgrades. Currently, the BNPL space is unregulated in Australia because it falls under the exemptions available to certain types of credit under the Credit Act. Due to this exemption, BNPL products are not subject to responsible lending standards or other requirements of the Credit Act. In addition, providers do not need to hold an Australian Credit licence (ACL). Perhaps due to this lack of regulation, there has been an exponential growth in the BNPL market in Australia and many other similar unregulated markets. Consumer advocates argue that this regulatory gap has the potential to create harm in the absence of key consumer protections. “…as a minimum, I think putting in place some sort of credit checks to ensure that the product is affordable and suitable for the people…We don't want to see people who are in the same situation they were in the bad old days of the credit card…where they might have had five, six, seven or eight credit cards. No one company knew that the other one had one and this person was just simply unable to pay off their debts...And that's what we want to address.” – Assistant Treasurer and Minister for Financial Services, Stephen Jones Some of the issues raised by various stakeholders on BNPL schemes include: Unaffordable/inappropriate lending practices contributing to financial stress/hardship; Poor complaints handling process and lack of hardship assistance; Excessive/disproportionate consumer fees and charges (ie large default fees relative to size of debt); Non-participation in Australia’s credit reporting framework, meaning information is not available for use in credit checks by other lenders; Poor product disclosure practices, meaning consumers cannot make informed choices; Unsolicited selling targeting consumers and encouraging the use of BNPL for essentials such as groceries and utilities; Uncomplicated sign-up to BNPL products which increase chances of other consumer harms such as scamming, overselling and financial abuse; and Inadequate reverse charging provisions when goods purchased on BNPL are returned. To resolve some of these issues, the consultation paper proposes three broad options of varying levels of regulatory intervention. Option 1 will impose a bespoke affordability assessment for BNPL providers under the Credit Act and address any other regulatory gaps in a strengthened Industry Code to make it fit-for-purpose. Option 2 will require BNPL providers to obtain and maintain an ACL, and in addition, introduce modified responsible lending obligations under the Credit Act to determine unsuitability combined with a strengthened industry code. Option 3 will impose the strictest regulation, with BNPL providers needing to obtain and maintain an ACL. The existing responsible lending obligations in the Credit Act will also be applied to all BNPL credit, including requirements around reasonable inquiries into a consumer’s financial situation and taking reasonable steps to verify this information.

Navigating complexities of crypto investments: SMSFs

By Grahame Allen • 03 May, 2024
The digital currency landscape continues to be treacherous terrain for Self-Managed Super Fund (SMSF) trustees, with a growing number of reports indicating significant losses due to a variety of factors, including scams, theft, and collapsed trading platforms. As the allure of high returns from crypto investments tempts many, the ATO is emphasizing the need for increased vigilance and education to safeguard superannuation benefits. The ATO has identified several causes of crypto investment losses: Trustees are being duped by fraudulent crypto exchanges, which promise high returns but are designed to siphon off investors' funds. Cybercriminals are increasingly targeting crypto accounts, hacking into them to steal valuable cryptocurrencies. A number of crypto trading platforms, particularly those based overseas, have collapsed, leaving investors with significant losses. Some trustees find themselves permanently locked out of their crypto accounts due to forgotten passwords, losing access to their investments. Scammers impersonating ATO officials are tricking individuals into revealing wallet details under the guise of investigating tax evasion, leading to losses. The ATO is urging trustees to educate themselves on the potential pitfalls of crypto investing. Resources such as the ACCC's Scamwatch and ASIC's MoneySmart provide valuable information on recognising and avoiding scams. Moreover, the ATO highlights that many crypto assets are not classified as financial products, meaning that the platforms facilitating their trade often lack regulation. This increases the risk of loss without recourse. For those SMSF trustees faced with the loss of a digital wallet, the first step is to determine whether the loss is simply one of lost access or if there is loss of evidence of ownership. In either case, meticulous record-keeping is the key to navigating the situation. The ATO allows for the claim of a capital loss if trustees lose their crypto private key or if their cryptocurrency is stolen. However, to substantiate such a claim, trustees must provide comprehensive evidence, including the date of acquisition and loss of the private key, the associated wallet address, the cost to acquire the lost or stolen cryptocurrency, and the amount present in the wallet at the time of loss. Additionally, proof that the wallet was under the trustee’s control, such as transactions linked to their identity or hardware that stores the wallet, is essential. It is important to note that while some may still consider cryptocurrency to be private and anonymous, and may baulk at reporting gains made, the reality is much different. The ATO has the ability to track cryptocurrency transactions through electronic trails, in particular where it intersects with the real word. In addition, through data matching protocols, the ATO requires cryptocurrency exchanges to furnish them with information on transactions, making it possible to trace and tax crypto trades. Trustees are therefore encouraged to report all transactions. For SMSFs that run businesses and accept cryptocurrency as payment, the approach to accounting is akin to dealing with any other asset, the value of the cryptocurrency needs to be recorded in Australian dollars as a part of the business’ ordinary income. In addition, where business items are purchased using crypto, including trading stock, a deduction is allowed based on the market value of the item acquired. SMSFs that run businesses should also be aware that there may be GST issues with transacting in crypto.

Trust reporting changes from 1 July 2024

By Grahame Allen • 26 Apr, 2024
Changes to simplify reporting for trustees and beneficiaries are commencing from 1 July 2024 as a part of the Modernisation of Trust Administration Systems (MTAS) project. From that date, labels in the statement of distribution, which is a part of the trust tax return, will be modified, a new schedule will be introduced for all trust beneficiary types, and new data validations will be added. Looking at each of these changes in depth, from the 2023-24 income year and onward, four new capital gains tax (CGT) labels have been added into the trust tax return statement of distribution. These changes will enhance the ability of trustees to appropriately notify beneficiaries of their entitlement to income and support the calculation of the CGT amount in individual tax returns. The ATO recommends that all beneficiaries obtain copies of the trust statement of distribution as it relates to their individual entitlements. This will allow beneficiaries to include the correct information in the new trust income schedule. The trust income schedule instructions will demonstrate how the information on the tax statement provided should be reported on the trust income schedule. This also includes trust income from a managed fund. It should be noted that beneficiaries will still need to complete existing trust income labels in beneficiary income tax returns as this new trust income schedule will not replace any existing trust income labels. Individual beneficiaries who lodge via MyTax will receive prompts about the additional reporting of trust income. In addition to these reporting changes, the ATO has reminded trustees that where beneficiaries’ entitlements reflected in trust resolutions are subsequently changed by either arguing the resolution as invalid, defective or made at a different time, it should be notified as an affected party where the change triggers tax consequences. For context, to ensure that beneficiaries are presently entitled to trust income, discretionary trusts are usually required to make a resolution by 30 June of any specific income year. For those specifically entitled to a capital gain, trustees of discretionary trusts must make a resolution in respect of that capital gain by 31 August following the income year in which the capital gain is made. According to the ATO, high-risk behaviours by trustees can include altering trust resolutions after tax returns are lodged, failing to inform the ATO of errors in trust deeds or their administration, and making decisions that affect the tax liabilities of a trust, such as early vesting, without notifying the ATO. These actions can lead to disputes over entitlements, amended assessments, and the potential for tax fraud or evasion charges if the issues are not promptly and transparently addressed with the ATO. The ATO notes that it is critical for trustees of trusts to maintain open and honest communication with the ATO, as failure to do so may lead to serious consequences, including the possibility of amended tax assessments for fraud or evasion (which are not limited by the standard four-year review period) and the imposition of significant penalties. The need for trustees to promptly advise the ATO of any mistakes in the trust deed or in the administration of the trust to prevent legal and financial complications cannot be overstated.

Old ATO debts: IGTO weighs in

By Grahame Allen • 19 Apr, 2024
In response to the ATO's recent actions on re-activating or off-setting old debts, the Commonwealth Ombudsman/ACT Ombudsman, and the Inspector-General of Taxation and Taxation Ombudsman (IGTO) have jointly issued new guidelines aimed at improving how Australians are notified about government debts. The publication outlines principles designed to ensure that the process of debt notification is handled with transparency, clarity and sensitivity towards impacted individuals. Mr Iain Anderson, serving as both Commonwealth Ombudsman and ACT Ombudsman, together with Ms. Karen Payne, Inspector-General of Taxation and Taxation Ombudsman, emphasized the importance of government agencies adopting a compassionate and principled approach when dealing with debt notification. "While the law may require agencies to take certain actions, it is crucial that these actions are taken in a manner that minimizes distress," they stated. The guidelines propose five key principles for the ATO and other government departments to consider when conducting programs: Transparency and Accountability - agencies should communicate clearly why the debt has arisen, fostering trust and confidence in the process. Clarity on the Debt's Origin - individuals should understand the source and nature of the debt, tailored to the recipient's circumstances. Clear Pathways for Review - information on how to request a review of the debt, apply for waivers, and arrange repayments should be readily accessible, ensuring individuals understand their rights and options. Accessible Support - contacts for further assistance must be provided, acknowledging that people may have additional questions or need personalized support. Commitment to Improvement - the process of debt recovery should be viewed as an opportunity to learn and enhance future practices based on oversight recommendations and past experiences. Also noted was the significance of reflecting on past interactions and the recommendations from oversight bodies to continually elevate how agencies engage with the community regarding sensitive matters such as debt recovery. Taxpayers who have an unresolved complaint or dispute with the ATO are able to lodge a dispute with the IGTO to receive independent assurance. IGTO will conduct an independent investigation of the actions and decisions that are subject of the dispute and can help taxpayers better understand the actions taken by the ATO and/or independently verify whether shortcomings exist in ATO’s action or decision which should be rectified, as well as identifying other options taxpayers may have to resolve their concerns. For example, in one case study, the IGTO assisted a taxpayer to verify whether the full amount of general interest charge had been remitted on their tax debts. In another, after a taxpayer’s original request for the Commissioner to exercise his discretion to advance their refund instead of offsetting against their tax debt due to imminent risk of homelessness was denied, the taxpayer lodged a dispute with the IGTO. Following urgent discussions between the IGTO and senior ATO officers, the ATO reversed their decision, and the taxpayer received his refund. The IGTO can also intervene in cases where the ATO has used family assistance payments to offset tax debts. According to another one of IGTO’s case studies, the ATO used a Centrelink Family Assistance (CFA) payment to offset a tax debt that a taxpayer had. At the time, the taxpayer was unemployed and supported two minors along with an ageing parent and relied on the payment. After IGTO intervention, the ATO agreed to refund the offset recognising it was not appropriate to pursue debt collection given the circumstances. Taxpayers interested in lodging a dispute with the IGTO should note that they must have first attempted to resolve the complaint directly with the ATO unless special circumstances exist. Those that remain unsatisfied with the ATO response should then lodge a formal complaint with the ATO for review. If taxpayers are still unsatisfied with the outcome of the ATO review, they can then lodge a dispute with the IGTO for an independent investigation either online or via post or phone.
More Posts
Share by: