Whenever you recommend a client dispose of an asset you must consider whether the disposal will give rise to a capital gain computation. If you are unsure, get expert advice, or recommend your client get expert advice. We have received a complaint from a client on just this sort of thing: a share portfolio was transferred to a related trust and this transfer triggered a capital gain computation. The adviser had actually done the right thing and recommended independent tax advice be sought before his advice was acted on. The client did not get this advice, so we believe the buck stops there, ie with the client who chose not to follow the adviser’s clear recommendation. But it’s a timely reminder of the need to consider income tax, including capital gains tax, and to make sure your client is advised appropriately before your advice is implemented. We have up-dated our standard “Incorporation by Reference” client obligation materials to include the following paragraph:

Income tax implications You acknowledge that your adviser has not advised on the income tax implications of any proposed transaction. You undertake to get separate written advice from a registered tax agent or solicitor regarding the income tax implications of any proposed transaction before implementing that transaction. You indemnify and release each of the adviser and Dover from any responsibility for any loss caused to you or any related person as a result of any failure to get this advice.

And watch those disclosures An adviser received a letter from an insurer this week advising that a claim was being rejected and a policy voided due to a client’s non-disclosure of prostrate cancer when he applied for the policy. The insurer says it would not have accepted the proposal had it known of the insured’s cancer history. A contract of insurance is a contract of the “utmost good faith”. This means the applicant insured has to disclose all things which may influence the insurer’s decision to accept or reject the application. This obviously includes health issues such a bout of cancer. If an adviser knowingly conceals a relevant matter from an insurer it can comprise a fraud. If an adviser inadvertently fails to disclose a matter from an insurer it can comprise a negligence. So, make sure you tell your clients in writing to disclose everything, to complete every application thoroughly and diligently, honestly and completely, and never conceal anything from an insurer. A good rule of thumb is “if in doubt, disclose”. There is no penalty for over-disclosing. There can be serious penalties and other consequences for under-disclosure. You should also check with the insurer if you are unsure whether a particular fact needs to be disclosed, or is otherwise relevant to their decision to accept the risk, or not. Record everything. You can read a good summary of the law of disclosure here: Extract from SA Legal Services Commissioner’s website. We have up-dated our standard “Incorporation by Reference” client obligation materials to include the following paragraph:

Disclosure under risk insurance contracts You acknowledge that any risk insurance contracts are contracts of utmost good faith and this requires you to disclose to the insurer all information that may be relevant to a decision to accept your insurance application including your medical history. You undertake to disclose in writing to the insurer all such information. You indemnify and release each of the adviser and Dover from any responsibility for any loss caused to you or any related person as a result of any failure to disclose this information to an insurer.