For our younger viewers, ‘trees’ is a (pejorative) term for agricultural ‘investments’ that were popular in the 90’s and the 00’s. The idea was that people gained an immediate tax deduction for amounts ‘invested’ in various agricultural projects run by expensive managers. The scheme sometimes even lent the client the money to invest, meaning that there was no immediate out-of-pocket expense.
To the uninitiated, it looked like a sure thing: you simply agreed to borrow money to finance an investment, and you got an immediate return in the form of a tax deduction. A nod and a wink from the promoter assured you that the loan could be repaid when the trees started to grow.
The problem was that the tax deduction was often the only money the client ever got back – and sometimes even these were knocked back by the ATO. The trees either never grew, or were worth very little if they did. But the loans remained the same, and the promoters had no qualms about calling in those loans as they fell due. People were left with negative net assets: a very real debt and an imaginary asset. Money does not grow on trees, after all.
No prizes for guessing that these programs were spruiked by promoters who earned huge commissions on any money they could stooge their clients into handing over.
A good adviser will tell you that for some clients it was not so bad. The amount lost was not that big, and it was a lesson well learned. Two lessons, really: (i) do not trust anyone with your money; and (ii) if it sounds too good to be true, it probably is. These clients got over it, and were immunized for life against shonky operators. It may have been a blessing in disguise. It’s better to lose a little while young, than to lose a lot while old.
But he/she will also tell you that for others it was a financial wipe out. A road to ruin. Stress, distress, divorce and even bankruptcy. Sign in haste and repent in drawn-out slow-motion. The deductions denied but loans confirmed, at penalty interest compounding for years, and now even decades.
The anger remains.
Some of the worst cases involved immigrant clients in their first few years in Australia. They naively trusted their accountants (and it was pretty much their accountants) when they said “this is what wealthy people do in Australia”. Income tax was literally a foreign concept. So intelligent wealth and tax planning was even more foreign. They did what they were told, and paid a heavy price.
But there is some good news.
Clients of financial advisers have a right to complain to something called an External Dispute Resolution Service (EDRS). An adviser has recently been involved in a case in which the Financial Ombudsman Service (FOS) found an accountant and a financial planner liable for more than $200,000 of losses on trees. The losses harked back all the way to 2004. The client was a doctor, originally from India, who trusted his accountant, bought the trees and paid a very heavy price. $200,000 down the drain and, as he thought, no way to get it back. 2004 was a long time ago.
Welcome to Australia.
But there was a glimmer. The ‘trick’ was the six year limitation period that typically applies to claims of this sort. Most dispute resolution bodies require people to lodge their complaint within six years of the day the claimed negligent action or omission occurred. So if the bad deed was done in 2004, nothing could be done after 2010. But FOS has a different clock. The FOS clock starts on the day a reasonable client first realizes something is wrong. If this happens say six years after the original negligent action or omission, then that’s when the FOS clock starts. And that’s what happened here. The doctor proved he first became aware of the problem after 2010, which was within the last six years, and FOS agreed that this meant that he was still inside his six year period.
So it was ‘game on’ at FOS.
The client bears the burden of proof at FOS. The doctor was able to prove, on the balance of probabilities, that his accountant and financial planner failed to exercise the skill expected of a reasonable professional. To be frank this was not that hard. The facts spoke for themselves.
The next step was proving damages. That was not that hard either. The doctor’s 2004 ‘investment’ was for “two hundred thousand dollars”. It was written in words and figures. So that was the amount of damages. Plus interest.
The final step was proving causation. This was a bit trickier because, somewhat unbelievably, the financial planner argued there was no causation because, he said, the doctor would have bought the trees any way.
FOS did not believe the financial planner either.
There was a weak final argument about contributory negligence and the duty to mitigate. But this got nowhere. The doctor knew nothing about trees and tax, and that was that. He 100% relied on the skill and judgment of the financial planner. That’s what being a client is all about.
A good adviser will tell you it feels great telling a client they are getting their $200,000 back, plus interest.
FOS is an administrative body, not a judicial one. FOS is not too formal, and is not strictly bound by the rules of evidence, the law, the contract between the parties or its own prior decisions. The parties do not appear in person; their documents do the talking.
FOS is all about getting a fair result. FOS is good. And, best of all, FOS is free.
If you think that you have an issue that FOS could help with, please let us know.