What does your professional indemnity (PI) policy say?

By Daniel Butler, Fraser Stead on 10/07/2026 in Announcements, ATO, Audit, SMSF compliance, SMSF strategy, Taxation

Accounting firms that set up and manage complex tax structures, such as family discretionary trusts (FTs), unit trusts and self managed superannuation funds (SMSFs), should be aware of the relevant clauses of their PI policy.

The ATO’s renewed focus on certain tax issues relating to these structures, including non-arm’s length income (NALI), Division 7A loans, s 100A reimbursement agreements and family trust distribution tax (FTDT), can lead to substantial tax liabilities for clients, who may then seek to recover from their accountants, tax agents and other advisers.

Firms without an understanding of the essential terms, processes, timing and disclosure requirements contained in their PI policy can inadvertently jeopardise their insurance coverage.

In this article, we outline some of the key considerations of managing PI risk.

Are you covered?

Appropriate and active coverage

A firm should always have an active PI policy that provides appropriate coverage for its size, and services provided and potential maximum exposure. Where details of the business change, including the ownership, name and location, it is vital that the policy is updated to reflect these details to ensure that the firm remains covered.

Outside of PI insurance, additional insurance coverage may be warranted depending on the activities of the particular firm. For example, cyber insurance policies can provide protection for claims arising out of data breaches for firms that hold particularly sensitive financial information of their clients and client’s structures.

Claims or occurrence based

Many PI policies are claims based, meaning that the insured is covered for claims that arise during the policy period, even if the event that gave rise to the claim happened outside of the policy period.

Alternatively, occurrence based policies provide coverage if the relevant event happens during the policy period, despite the claim arising at a later point in time.

Retroactive Date

Confirming the retroactive date of a policy is also important. In broad terms, this is the date from which a policy provides cover for acts or omissions. Where a PI policy does not contain an unlimited retroactive date or otherwise provide coverage from the date the firm commenced, past acts or omissions prior to the retroactive date of the policy may not be covered.

In the context of a claim relating to FTDT, a retroactive date that does not extend back to the commencement of the firm can be particularly devastating. FTDT is not subject to the usual 2 or 4 year amended assessment periods contained in s 170 of the Income Tax Assessment Act 1936 (Cth) in respect of income tax assessments and liabilities can relate back as far as 1 July 1995.

The Commissioner’s view is that he does not have discretion to waive or overlook the collection of FTDT and there is no time limitation that applies to distributions made by trustees of FTs outside the family group. Naturally, this can give rise to significant amounts of FTDT and the general interest charge (GIC) liability can be substantial, in many cases exceeding the primary FTDT liability.

What happens if you suspect a claim might arise?

Notification

Many PI policies require the insured to notify their insurer or insurance broker once they become aware of an incident or circumstance that may lead to a claim. These notifications must be made during the relevant policy period and can also be subject to strict timing requirements that must be observed to preserve cover. Further, firms taking out PI policies must also disclose anything they are aware of that may give rise to a claim when first taking out the policy and prior to each annual renewal. Notification and associated requirements should be handled carefully so as not to jeopardise cover and expert legal advice should be obtained in the first instance.

Mitigation

An insured generally has a duty to mitigate potential damages once they become aware that a claim might arise. Timely notification of a potential claim to an insurer may also allow mitigation and rectification costs to be recovered. Expert advice should be obtained in relation to mitigation options as complex claims can take years to resolve and can incur very high legal fees.

Checklist

The following is a basic checklist summarising some of the key questions to have in mind when reviewing your PI policy:

What activities and services does the PI policy cover?
Are all the details of the firm correct on the policy?
Is the policy occurrence based or claims based?
How much cover does the policy provide in total and per individual claim?
What is the retroactive date of the policy?
Are there any periods, activities or services that the policy does not cover (eg, legal or financial product advice)?
When does the policy require the insurer to be notified of a potential claim?
Is there a time limit to notify the insurer?
What mitigation and rectification options are available?

Naturally, expert advice should be obtained if there is any doubt whatsoever.

Conclusions

A clear understanding of PI policy terms, notification requirements and coverage limitations is essential to managing risk. Given the potentially significant liabilities arising from structures such as FTs and SMSFs, reviewing PI arrangements and obtaining timely expert advice where a claim arises can assist with preserving coverage and mitigating exposure.

Naturally, DBA Lawyers would be pleased to assist. We have assisted a number of clients with managing potential claims related to tax and superannuation.

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