Australia: Part III - Anti-Avoidance

Future of Financial Advice
Last Updated: 9 June 2014
Article by Cristean Yazbeck
This article is part of a series: Click Part II - Prohibited Payments for the previous article.

3.1 What is the "anti-avoidance" regime?

Section 965 of the Corporations Act provides as follows:

"(1) Subject to subsection (2), a person must not, either alone or together with one or more other people, enter into, begin to carry out or carry out a scheme if:

  1. it would be concluded that the person, or any of the people, who entered into, began to carry out or carried out the scheme or any part of the scheme did so for the sole purpose or for a purpose (that is not incidental) of avoiding the application of any provision of Part 7.7A (which includes the conflicted remuneration provisions) in relation to any person or people; and
  2. the scheme or the part of the scheme has achieved, or apart from this section, would achieve, that purpose."

This will be referred to as anti-avoidance.

Anti-avoidance came into effect on and from 1 July 2012. That is, it is not subject to any transitional arrangements (which apply, for example, in relation to the prohibitions on payment/receipt of conflicted remuneration and receipt of volume-based shelf-space fees).

What if anti-avoidance is breached?

Anti-avoidance is a civil penalty provision41. Breaching anti-avoidance can expose an AFS licensee and its authorised representatives to one of more the following:

  1. "Declaration of contravention" by a Court.
  2. Following the above, ASIC can seek pecuniary penalty orders of up to $200,000 per offence.
  3. ASIC can also order "disqualification orders" against, say, directors of an AFS licensee.

Operation of anti-avoidance

Anti-avoidance is very broad in its operation. It has three main elements:

  1. "scheme";
  2. "purpose"; and
  3. "avoiding the application of any provision of Part 7.7A".

Anti-avoidance, and the elements above, raises the following issues:

  1. What is a "scheme"?
  2. What is meant by "purpose"?
  3. What does it mean to "avoid the application of any provision of Part 7.7A"?
  4. Are schemes carried out between 1 July 2012 and 1 July 2013 subject to "anti-avoidance"?
  5. Are schemes carried out before 1 July 2012 subject to anti-avoidance? How can far back can anti-avoidance apply? Does anti-avoidance therefore have retrospective effect?
  6. What is ASIC's position on anti-avoidance?

An analysis of each of these issues is provided as follows.

What is a "scheme"?

"Scheme" is not defined in the Corporations Act. However, it is generally accepted that "scheme" has a very broad application, in that it will encompass any transaction, event, or course of conduct designed to bring about a particular outcome.

What is meant by "purpose"?

"Purpose" can essentially be equated with motive. For anti-avoidance to apply, the "purpose" of the "scheme" has to be the avoidance of the FOFA prohibitions, however that avoidance must be more than "incidental". This last part is crucial: without it, every transaction which has the effect of avoiding a FOFA prohibition would be caught by anti-avoidance. This is not the intention of the provision, however. Rather, anti-avoidance looks to the motive of a transaction, and whether the outcome (ie avoidance of a prohibition) was driven by that motive. More will be said about this below.

What does it mean to "avoid the application of any provision of Part 7.7A"?

This appears straight-forward on its face. Clearly, a scheme which has the effect of avoiding the application of the ban on say, conflicted remuneration, would be an example of avoiding the application of a provision of Part 7.7A.

What if a scheme was entered into for the purposes of, say, falling within an exception to a prohibition? Would this be seen as "avoiding the application of Part 7.7A"? The industry position appears to be that the answer should be "No". That is, entering into a scheme for the purposes of falling within an exception to a prohibition, would not fall foul of anti-avoidance. This is on the basis, presumably, that an express exception to a prohibition is of itself within Part 7.7A.

Are schemes carried out between 1 July 2012 and 1 July 2013 subject to anti - avoidance? Are schemes carried out before 1 July 2012 subject to anti - avoidance? How can far back can anti-avoidance apply? Does anti-avoidance therefore have retrospective effect?

Each of the above questions raises similar issues, so they will be considered together.

FOFA is (deliberately) silent on the commencement period from when a new arrangement is at risk of breaching anti-avoidance. In one of the last series of iterations to the FOFA Bills (mid 2012), the Coalition (whilst in opposition) proposed an express amendment that only arrangements entered into on and from 1 July 2012 should be subject to anti-avoidance, however this was rejected in the final reforms.

In theory, then, any new arrangement entered into from when the FOFA reforms were first announced (around 2009-2010) could constitute anti-avoidance if it meets the threshold requirements outlined above.42

It needs to be asked, however, whether anti-avoidance will be applied so strictly. What about transactions such as entering into a new dealer agreement, or varying existing agreements, which are within the normal commercial operations of a platform operator / fund manager etc...? Query whether such transactions of themselves would fall under the microscope of anti-avoidance. This of course needs to be assessed on a case-by-case basis. Other, more radical, transactions such as product restructures would likely be scrutinised in any event.

What is ASIC's position on anti-avoidance?

ASIC, in its Regulatory Guide 246 (RG 246), provides some examples of schemes which would give rise to anti-avoidance risks.

As a broad proposition, ASIC comments that: 43

"The anti-avoidance provision is designed to ensure that the policy intent of the FOFA Acts, including the conflicted remuneration provisions, is not avoided through industry or transaction restructuring."

It also provides that: 44

"In administering the anti-avoidance provision, we are less likely to scrutinise schemes that are normal commercial transactions conducted in the ordinary course of business."

On one view, it might be suggested that ASIC will only scrutinise restructures as such for anti-avoidance, meaning that transactions such as entering into new agreements or amending existing agreements will be less likely to be scrutinised by ASIC. AFS licensees, however, should caution against adopting this position.

What is clear from the above is that any changes to existing arrangements, or the entry into new arrangements, which have the outcome of avoiding the application of any FOFA provision, must be assessed from an anti-avoidance perspective.


41 Section 1317E.
42 "Anti-avoidance" would only kick in from 1 July 2012 however, as this is when the regime came into effect. Putting it another way, "anti-avoidance" does not have retrospective effect.
43 RG 246.17.
44 RG 246.227.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Part II - Prohibited Payments for the previous article.
This article is part of a series: Click Part IV - Other Matters for the next article.
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