Adrian Abbott, of Sydney Tax Advisory, and Gregory Ross, of Eakin McCaffery Cox, conclude their three-part series, “So, you’re facing client complaints. How do you protect yourself?” This series recaps the key points from their Legalwise presentation at the Business Advisory and Client Management Seminar. Read Part 1: Complaints against Tax Practitioners: Do Promoter Penalty Provisions apply? and Part 2: ATO Safe Harbour Provisions and Tax Agent Services Act 2009.
The greatest risk and exposure facing Tax and BAS Agents is to “get it all correct” by all relevant stakeholders.
Declarations on Returns
The declaration signed by tax agents on lodging returns still provide some risk to the tax agent. While it is declared that the “taxpayer has given me a declaration stating the information provided to me is true and correct”.
All relevant material may nevertheless not have been provided by the taxpayer. What level of verification should be undertaken by the tax agent to be satisfied that the return is “correct”? Could a tax agent just rely on the taxpayer? We think not.
This is brought home when the ATO make it very clear that it is interested in benchmarking and profiling accounting practices just as much as individual and business taxpayers.
The Commissioner says:
“We may have an interest in the individual client, or collective practice reporting pattern, against a specific label or collection of labels on a form and the derivation of that reporting from population average. Where we observe particular concentrations of abnormal patterns within a practice, we may approach that intermediary to understand why.” (Emphasis added).
The ATO risk management for tax agents is directed at the likelihood of non-compliance and the consequences of that non-compliance. Where there is a “clustering” of clients that appear to be different to the norm then we “may approach you to understand and work through issues”. QC 53939 page 1. The ATO has worked out “treatment strategies” for tax agents that range from “support” and “education” at the low-risk end and the “full force of the law” on the high risk end.
Phoenix Activity (QC 44726)
One area of concern that the ATO will address through tax agent benchmarking is Phoenix companies. This is a $3.2 billion loss to the economy and effects GST, PAYG, Superannuation and other State and Federal taxes.
Tax agents must be able to spot the Phoenix activity and make sure not to assist it. The question to be asked is whether such activity is to be reported.
Illegal Phoenix activity involves the creation of a new company, to take over and run the business of the old company that cannot pay its debts, meet the solvency test and attempts to avoid paying debts.
The position is even worse when the directors strip the assets from the old company and without payment use those assets in the new company.
The question and it is not an easy one, is to work out what directors do when they are faced with the position that they believe the company cannot trade and remain solvent. Do they cease trading and go into administration? Do they then register a new company and purchase the assets at market value of the old company and commence trading in that new company? These are corporate and tax issues to be resolved.
Over the years, the traditional way that accountants have dealt with the solvency matter is to recommend cessation of trading in the old company and have the new company buy the assets of the old company at market value and commence trading.
Now what will happen in ever-increasing propensity, is for voluntary administrators to be appointed to the old company and the new company acquire the assets of the old company most probably under a deed of company arrangement.
This area will become, if not already, a nightmare.
Government Action on Phoenixing
On 12th September 2017 the Government issued a media release notifying a package of reforms to address illegal Phoenixing. The comprehensive package includes a director identification number (DIN), which will allow the identification of directors much in the similar way that companies have been identified with an ACN. The Government can then “Map the relationship between individuals and entities and individuals and other people.
The range of measures to deter Phoenix operations include:
- Specific Phoenixing offences.
- Establishing a dedicated Phoenix hotline.
- Stronger power for the ATO to recover security deposits.
- Making directors personally liable for GST liabilities, as part of the extended penalty provisions.
- Preventing directors from backdating their resignations.
- Prohibiting related entities from appointing a liquidator.
- Consult on how best to identify high-risk individuals.
- Allow the ATO to retain tax refunds.
- Allowing ATO to commence recovery action following a DPN Notice.
- An offence for directors to engage in creditor defeating transfers of assets.
- Pre-insolvency advisers and facilitators will be liable to prosecution.
- Liquidator asset claw back provisions.
The consultation period for the legislation has expired and draft legislation is set out in a Bill known as the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018.
The Explanatory Memorandum that goes with that Bill is most interesting and worth reading.
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