Advisers rebating upfront life insurance commissions may be creating tax problems for their clients, an accountant has warned.

The upfront commission would be treated as taxable income for the client if it was rebated, GMK Partners Director Taxation Chris Wookey says.

“The payment of the upfront commission to the client would not be deductible,” he told insuranceNEWS.com.au. “The alternative is to include the commission as a discount to the advisers fee.”

The issue has arisen for dealer groups and practices that are rebating commission as they switch to a fee-for-service model.

Charging for life insurance advice has been put into the “too-hard basket” for many practices and some have agreed to the keep the commission payment scheme for life insurance.

Trails paid on a policy and rebated to a client would be deductible as they can be included as part of the ongoing review of a client’s taxation affairs, Mr Wookey says.

“A review fee that could include the rebated trail commission would be deductible, but there are issues about how this applies to work involving super funds,” he said.

Industry sources have told insuranceNEWS.com.au the average upfront commission is about $2500, with the trail being 10% of a client’s annual premium.

But insuranceNEWS.com.au understands it is often larger upfront commissions that are rebated. These can be from $5000 upwards.

Mr Wookey says rebating the upfront commission is unlikely to push a client into a higher tax bracket, but it could impact areas such as Medicare and private health levies that have very closely defined income limits.

An example would be a rebated commission pushing the client’s income over the levy threshold by $1.

“The problem is the advisers will rebate the commission and create a paper trail, but the accountant might not pick it up until it is too late to stop the client being pushed over a threshold,” he said.

Industry bodies such as the Association of Financial Advisers and the Financial Planning Association have suggested advisers retain life insurance commission as a fairer way of charging the client for advice.

“Rebating commissions is perfect for the adviser, but not necessarily the best solution for the client,” Mr Wookey said.