In September, the writers delivered a paper entitled ‘So You’re Facing Client Complaints. How do you protect yourself?’ at Legalwise’s Business Advisory and Client Management Seminar in Sydney. This is the first of a three-part series outlining issues discussed at the seminar.
Is a Client Always Right?
Are Promoter Penalty Provisions Applicable?
Administration of tax affairs is one of the few examples where the client is not always right. In fact, most of the time the tax practitioner’s gut feel is more important than the client’s view.
Sometimes, under-resourced public sector agencies, to which clients might complain, are unable to give proper consideration to the merits of a particular complaint and will launch full enquiry/proceedings for fear of being criticised for not acting.
We have all seen that some clients have an appetite for a higher risk than others.
A practitioner doing a tax return for Sydney’s leading solicitor, in the 1980s who, when advised that the final return was about to be lodged, would say “Take $100 off the expenses just to make sure I’m not overclaiming”. That attitude has long since gone, particularly when the accountant preparing the return had gone to great lengths to ensure there was no overclaiming nor under recognition of income!
ATO Focus on Tax Agents
The ATO is focusing more now on tax agents than ever before. The focus was on business benchmarking, to see if they could find rogue taxpayers who do fall outside the benchmarking for similar businesses. Now the focus will be more and more on the tax agent. Tax agents are benchmarked against each other using labels in tax returns.
With the establishment of the Tax Practitioners Board and the current benchmarking/profiling, the ATO are warning tax agents of high-risk arrangements and tax avoidance schemes, which may increase the level of risk to which tax practitioners are exposed.
ATO warns that tax agents need to reconsider their connection with clients who:
- Insist on entering into arrangements, where the risk is one that the practitioner would not feel comfortable with.
- The ATO says “These connections are not worth the potential penalties and risks to your reputation.”
Clients should be advised that it is the tax agent’s responsibility to comply with the tax law, as well as the taxpayer’s responsibility. Gone are the days of disclaimers to protect advisors.
There is the real potential for tension between a tax agent’s duty to his client and the duty to the ATO. In some senses, it could be argued that the tax agent is now almost a quasi-agent of the tax administration for the enforcement of tax laws. That is a significant development in the law in the last 20 years or so and one in respect of which there is potential for commercial and legal conflicts of interest between a tax agent, its clients and the ATO.
An example of the ATO ramping up the rhetoric is in the promoter provisions
The ATO is encouraging taxpayers and tax agents to report avoidance schemes. ATO says:
“With your help, we can take steps to protect your clients from participating in schemes that may lead to tax debts or penalties, by challenging promoters who are attempting to entice clients away from reputable tax agents. Advising us of tax schemes with scheme promoters, helps protect the integrity of the taxation and superannuation systems.”
(QC 43911 page 26).
ATO has even published a telephone line dedicated to reporting a promoter, or a scheme on 1800 060 062.
What are schemes and who are promoters?
It is easy to tell a scheme. Simply find something that has a low level of financial risk and a large tax-free benefit. – The old story of if it’s too good to be true – it’s probably not true.
Schemes usually have round-robin funding, non-recourse loans, use of charities and of course tax haven transactions.
Be careful not to be a promoter
The Promoter Penalty Law is set out in the Taxation Administration Act 1953 Schedule 1, starting at paragraph 290 – 5. The Commissioner acknowledges that the promoter rules are not intended to obstruct tax advisers, but the objects of that division are:
“To deter the promotion of tax avoidance schemes and tax evasion schemes”.
What was thought to be the aim of the Promoter Legislation, was to catch the scheme which was widely marketed and the entry fees were high, like film and agricultural schemes and even down to the 1970s to the bottom of the harbour. But, that is not the position.
Today, the tax practitioner could be shown to be a promoter, when dealing with the transactions for just one client.
While the promoter penalty laws are not intended to obstruct tax advisers giving professional advice to their clients, they are aimed at advisers who design, market and implement schemes that claim to provide taxation benefits, where there was no reasonably arguable case orr, if relying on a Product Ruling, the scheme did not properly follow the Ruling.
The promoter legislation is designed to address the imbalance of the taxpayer bearing the risk and the penalties while the advisers earned fees and had no financial risk.
The key elements of the promoter laws are that an entity must not engage in a tax exploitation scheme.
A scheme will be a tax exploitation scheme if at the time of promotion, it would be reasonable to conclude that an entity carried out the scheme for the sole or dominant purpose of getting a benefit that ought not be available at law.
An entity will be a promoter if it markets and receives consideration in respect of marketing, or encouragement.
A good example is FC of T v. Arnold  FCA 34.
A brief outline of the scheme was that pharmaceuticals were manufactured to be sent to Africa. The cost price of the pharmaceuticals was inflated and a loss thus generated. The scheme did not succeed and the promoter was subject to the promoter penalty of $1 million plus.
The promoter in this case seemed lucky as the Federal Court could impose penalties of $900k on individuals and $4.5 on companies.
An example of a scheme where the fees were out of the normal.
A $50 million offshore commission was receivable and the adviser was offered a $500,000 fee to structure the commission payment so it was non-Australian income.
This example of fees outside of the normal would “indicate” the advice was not objective and thus more likely attract the promotor laws.
However, there are exclusions from promoter penalties, for those advisers who advise on an arrangement which later was found to be a tax exploitation scheme, but where the advisers merely provided “independent, objective advice to clients” at a proper professional fee.
The shading is not black-and-white but multiple shades of grey.
The text of the paper is only a summary and discussion of particular facts and principles. It is not to be taken as legal or commercial advice as to any particular factual circumstances.
LLB, BEc, FCIS, FGIA, FCA, CTA
Chartered Tax Advisor
Sydney Tax Advisory
LLB Accredited Specialist
Government and Administrative Law
Eakin McCaffery Cox