EXPLANATORY STATEMENT for
ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307
and
ASIC Corporations (Repeal) Instrument 2017/308
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 (the Instrument) and ASIC Corporations (Repeal) Instrument 2017/308 (the Repeal Instrument) under paragraph 992B(1)(a) of the Corporations Act 2001 (the Act).
Section 992B(1)(a) provides that ASIC may exempt a person or a class of persons from Part 7.8 of the Act.
Under subsection 33(3) of the Acts Interpretation Act 1901 (as in force as at 1 January 2005 and as applicable to the relevant powers because of section 5C of the Act), where an Act confers a power to make, grant or issue any instrument (including rules, regulations or by-laws), the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.
- Background
Subsection 989B(1) of the Act provides that Australian financial services (AFS) licensees must, in respect of each financial years, prepare a true and fair profit and loss statement and a balance sheet. Where the AFS licensee is a natural person, these statements and balance sheets may include expenses and revenues that are unrelated to their financial services businesses, such as income from other sources and personal expenses.
In September 2003, ASIC issued Class Order [CO 03/748] Reporting requirements under s 989B ([CO 03/784]). [CO 03/748] was issued to address concerns around the disproportionate burden placed on AFS licensees who are natural persons. [CO 03/748] limits the operation of subsection 989B(1) of the Act by relieving AFS licensees who are natural persons from the requirement to include in a profit and loss statement or balance sheet any revenues and expenses that do not relate to the financial services businesses carried on by the licensees.
The relief [CO 03/748] provides is confined to the preparation of profit and loss statements. An AFS licensee who is a natural person must still prepare a balance sheet, which discloses all of their assets and liabilities, including personal assets and liabilities, and the assets and liabilities of any other businesses; per subsection 989B(2) of the Act. An AFS licensee who is a natural person must still with the statement and balance sheet, lodge an auditor's report with ASIC containing the information and matters required by the regulations, per subsection 989B(3) of the Act.
2. Purpose of the instrument
The purpose of the Instrument is to preserve the effect of [CO 03/748] beyond its sunset date of 1 October 2017 in substantially the same form. But for the Instrument, the relief in [CO 03/748] would cease to have effect from 1 April 2017 under the Legislation Act 2003.
The Repeal Instrument is made to repeal the relief provided by [CO 03/748].
3. Operation of the instrument
Part 1 – Preliminary
Section 1 provides that the name of the Instrument is to be ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307.
Section 2 provides that the Instrument is to commence the day after it is registered on the Federal Register of Legislation.
Section 3 provides that the instrument is made under subsection 992B(1) of the Act.
Section 4 outlines the relevant definitions for key terms used in the instrument. 'Act' is defined as meaning the Corporations Act 2001.
Part 2 – Exemption
Section 5 provides that a financial services licensee who is a natural person does not have to comply with subsection 989B(1) of the Act to the extent that the licensee is required to include in a profit and loss statement any revenues and expenses that do not relate to a financial services business carried on by the licensee.
Section 5 reflects ASIC's general intention regulate only the revenues and expenses included in include in profit and loss statements or balance sheets that relate to the financial services businesses carried on by AFS licensees.
4. Consultation
As part of its review of [CO 03/748], ASIC released Consultation Paper 278 Remaking ASIC class order on reporting requirements for AFS licensees who are natural persons (CP 278). A draft of the Instrument was attached to CP 278. ASIC did not receive any submissions in response to CP 278.
Overview
The ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 and ASIC Corporations (Repeal) Instrument 2017/308 were enacted by the Australian Securities and Investments Commission (ASIC) under the authority of the Corporations Act 2001. The primary objective of this legislation is to address the issue of disproportionate burdens on Australian financial services (AFS) licensees who are natural persons, particularly in relation to the preparation of financial reports. Specifically, these instruments aim to preserve the effect of the relief provided by Class Order [CO 03/748], which exempted natural person AFS licensees from including non-financial services-related revenues and expenses in their profit and loss statements. Without these instruments, the relief would have ceased to apply from 1 April 2017. The repeal instrument was created to formally remove the relief provided by [CO 03/748].
Scope and Application
The ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 applies to natural person licensees of Australian financial services (AFS) who are required to prepare financial reports under the Corporations Act 2001. This Act, which has a Commonwealth reach, mandates that AFS licensees, including natural persons, must prepare a true and fair profit and loss statement and a balance sheet for each financial year. However, the Instrument exempts natural person AFS licensees from including in their profit and loss statements any revenues and expenses unrelated to their financial services business, thereby reducing the reporting burden placed on them. The Instrument is designed to continue the relief provided by Class Order [CO 03/748] beyond its sunset date, which would otherwise cease to have effect from 1 April 2017 under the Legislation Act 2003. The ASIC Corporations (Repeal) Instrument 2017/308, which complements the primary Instrument, repeals the relief provided by [CO 03/748]. Despite this exemption, natural person AFS licensees must still prepare a balance sheet that includes all assets and liabilities, and they must lodge an auditor's report with ASIC as per the Act's requirements.
Key Provisions
The main operative sections of the ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 (the Instrument) and ASIC Corporations (Repeal) Instrument 2017/308 (the Repeal Instrument) provide exemptions and repeals relating to the financial reporting requirements for Australian financial services (AFS) licensees who are natural persons. Section 5 of the Instrument (section 5) exempts natural person AFS licensees from the requirement to include in their profit and loss statements any revenues and expenses that do not relate to their financial services businesses. This is an extension of the relief provided by ASIC Class Order [CO 03/748], which had previously been in place to alleviate the disproportionate burden on natural person AFS licensees. The Repeal Instrument (section 2) is designed to repeal the relief provided by [CO 03/748], ensuring that the exemption provided by the Instrument is the only governing provision from its effective date.
The Act imposes specific obligations on natural person AFS licensees concerning their financial reporting. Despite the exemption provided by section 5, these licensees must still prepare a balance sheet that discloses all assets and liabilities, including personal assets and liabilities, and the assets and liabilities of any other businesses, as required by subsection 989B(2) of the Corporations Act 2001 (the Act). Additionally, they must lodge an auditor's report with ASIC containing the information and matters required by the regulations, as mandated by subsection 989B(3) of the Act. These obligations ensure that while the profit and loss statement may exclude certain unrelated revenues and expenses, the overall financial position of the licensee remains transparent and fully disclosed.
Breach of the requirements set out in the Act and the Instrument could result in various civil or criminal consequences. While the specific penalties are not detailed in the Explanatory Statement, breaches of the Corporations Act 2001 generally attract penalties that can include fines and imprisonment. The maximum penalties for contraventions of the Act can vary widely depending on the specific provisions breached and the circumstances of the offence. For instance, under section 13001 of the Act, individuals found guilty of serious offences can face substantial fines and imprisonment for up to five years. Companies, on the other hand, may face significant financial penalties that can extend into millions of dollars, reflecting the severity and impact of the breach on the financial system.