ATO Safe Harbour Provisions, Tax Agent Services Act 2009

Adrian Abbott, of Sydney Tax Advisory, and Gregory Ross, of Eakin McCaffery Cox, continue their three-part series, “So, you’re facing client complaints. How do you protect yourself?” This series recaps the key points from their recent presentation for Legalwise at the Business Advisory and Client Management Seminar. Read Part 1 of the series: Complaints against Tax Practitioners: Do Promoter Penalty Provisions apply?  

The Safe Harbour Provisions were introduced to provide for appropriate ethical and professional standards. There are safe harbour from shortfall penalties, where fault can be sheeted home to the tax practitioner. There are two circumstances where the Commissioner will apply safe harbour rules.

Late lodgment

The first is the failure to lodge a return on time. Where that late lodgment was through no fault of the taxpayer and where the tax practitioner had received all the information necessary to complete the return and lodge on time, but did not do so. The Commissioner in these circumstances, will on request by the taxpayer, or the tax practitioner waive the shortfall penalty. The Commissioner does not seek to recover the penalty from the tax practitioner.

False or Misleading Statements

The second circumstance is where the tax practitioner has made a false or misleading statement that was made as a result of the tax practitioner failing to take reasonable care.

Provided the taxpayer was able to show that the tax practitioner had all the relevant tax information to enable the statement to be made correctly, the Commissioner can waive the shortfall penalty. Again, the shortfall penalty does not go to the tax practitioner for payment, but is simply remitted.

So what is Reasonable Care?

The worry is, as is obvious, that if the safe harbour provision is applied, it means that the tax practitioner failed to take reasonable care. That failure may be notified by the ATO or the taxpayer to the Tax Practitioners Board (TPB). The TPB takes responsibility for enforcement of the Code of Conduct for tax agents.

The TASA establishes 14 separate sections of the codes of professional conduct.

Code 10 is of particular note, which says: –

“You must take reasonable care to ensure that taxation laws are applied correctly to the circumstances in relation to which you are providing advice to a client.”

You can see that the waiving of the shortfall penalty, on not taking reasonable care, conflicts directly with the Code 10 of the Professional Code.

So, while it might sound attractive for the taxpayer to blame the tax practitioner in order for the shortfall penalty to be removed. However, this may nevertheless go against the tax practitioner in the defence of showing that there was reasonable care for the Tax Practitioners Board and not reasonable care to the Commissioner.

What is not generally known is that there is a very close relationship between the ATO and the Tax Practitioners Board. Prior to 2009 the ATO administered tax agents Australia wide and it was only in 2009 that the Tax Agents Services Act came into force. At that time, the Tax Practitioners Board took over the registration and control of tax agents Australia wide.

Tax Practitioner Code of Professional Conduct

It is recommended that all tax practitioners read carefully the Code of Professional Conduct and use the TPB guidance notes and discussion papers. The TPB has gives a commentary on the operation of each of the 14 paragraphs of the Codes of Conduct and gives examples of some Court cases which TPB sees as applicable.

It is worth noting that there are 14 divisions of the Code. These are as follows:

1. Act honestly with integrity.

2. Comply with taxation laws for personal “affairs“.

3. Account properly for trust monies held on behalf of clients.

4. Act lawfully in the best interests of your client.

5. Adequate management for conflicts of interest.

6. Not disclose information relating to client’s affairs to third parties.

7. Tax agent services are to be provided competently.

8. Tax practitioners must have the knowledge and skills relevant to the services they provide.

9. Take reasonable care in ascertaining a client’s state of affairs, is relevant to the statements they made.

10. Take reasonable care to ensure the taxation laws are applied correctly.

11. Not knowingly obstruct the administration of taxation laws.

12. Advise the client of their obligations under the tax laws.

13. Provide professional indemnity insurance.

14. Respond to requests or directions of the TPB in a reasonable manner.

Benefit of External Support

There is wisdom in a tax agent holding a legal opinion in support of a particular tax structure prior to recommending it to taxpayers and if a taxpayer has recommended some novel tax structure to the tax agent merely relying upon the taxpayer say so may well not be enough.

The Safe Harbour and Code of Conduct Provisions have focused more than ever on the need for Tax Practitioners to have support from third parties where statements are made to the ATO.

Example: an informed taxpayer who went along to the tax agent with a structure it wished to adopt. It was made aware of the risks. On disallowance by the ATO, the taxpayer complained to the Tax Practitioners Board putting the tax agent to considerable cost, aggravation and expense to maintain its rights and registration to practise.

Thankfully that tax agent was in possession of a relevant legal opinion, prior to entry into the arrangements queried by the ATO, which was part of what was  used to overcome the argument that the tax agent was not applying tax laws “correctly”.

The possession of the legal opinion demonstrated the tax agent’s proper regard for the law especially where, as in the particular situation, the view posited by the ATO was not one which had yet been upheld by a Court.

Reference by the ATO to Tax Practitioners Board and the ASIC

All practitioners must be aware that the ATO is now taking the role of reporting practitioners where the ATO suspects tax agents operating contrary to their obligations.

The ATO says: –

“Where we identify intermediaries who we suspect operate contrary to their obligation under the Tax Agent Services Act 2009, we will refer them to the Board for review. A breach of the law may fall within the following categories:

– There is evidence or information that a registered agent may have breached the Code of Conduct or no longer meets the “fit and proper” requirements to remain a registered agent……”

– “We may also support the Board by providing information we hold to aid investigations they may have initiated into the conduct of intermediaries. We may also use this process where we require information the Board may hold in relation to the matter we are investigating.”
(See Tax Practice Website QC 43911 page 53).

ASIC

The ASIC is responsible for the registration and licensing of some tax and financial practitioners. These include practitioners conducting a financial services business and auditors of self-managed superannuation funds.

The ATO can and does refer tax agents to ASIC.

“Where we identify intermediaries who we believe to have acted contrary to their regulatory roles, we may refer those entities to ASIC for further investigation and action. We do not undertake an enforcement role in these situations as responsibility for enforcement falls to the ASIC.”
(QC 43911 page 53).

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.

You can also connect with Adrian Abbott via LinkedIn and Gregory Ross via LinkedIn and Twitter