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The AAT upheld a penalty for reckless behaviour in following seminar advice on work deductions.
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Why clients need a warning over ‘fringe’ tax advice
28 October 2022
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A taxpayer has been found to have acted recklessly in claiming income tax deductions for general living expenses based on what has been referred to as “fringe theory” advice provided at a seminar.
As a result, the taxpayer was denied work-related deductions of over $74,500 and was slapped with 50 per cent administrative penalties for displaying recklessness that amounted to more than $14,000. Ultimately, this recklessness penalty was upheld by the AAT despite the taxpayer relying upon information provided at a seminar.
In Oxby and FCT [2022] AATA 3239, the taxpayer relied upon a core teaching from a seminar that the costs associated with “sustaining the man” (i.e. general living costs) were deductible on the basis they allowed him to perform his work to generate (assessable) income.
Before the AAT, the taxpayer explained the seminar’s theory as follows:
“The theory ... is that in order for someone to raise an income or gain proceeds from their labour, they must first be sustained themselves. In a similar fashion to a business.
“A business is able to claim all operating expenses as business expenses in order for the business to be viable. And in a similar manner, as a natural-born man, we must first sustain ourselves in order to produce labour from which we can gain an income.
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“So, therefore, the expenses required to sustain an individual are not taxable.”
Another concerning principle highlighted during the seminar was that income tax was a largely voluntary obligation.
The taxpayer accepted the presented “misinformation and conspiracy-type theories about the Australian legal and taxation systems” without verification from his accountant or the ATO.
In fact, for the relevant income year in question, the taxpayer departed from his usual practice of using his accountant to prepare his income tax return and sought assistance from a person at the organisation who ran the seminar.
At the hearing, the taxpayer confirmed that he knew that the person assisting him was not a qualified tax agent. The taxpayer also confirmed the following about the person from the organisation that helped him prepare his tax return:
“He wouldn’t be a qualified tax agent because qualified tax agents wouldn’t understand how this way of presenting a tax return operates. It’s out of the realm of a normal, traditional tax accountant.”
This decision has provided a timely reminder for taxpayers seeking to claim tax deductions based on information provided at seminars without undertaking appropriate due diligence.
The AAT decision clearly illustrates that taxpayers will not be protected from substantial exposure to administrative penalties simply because they relied upon information provided at a seminar. Sadly, circumstances where taxpayers attend “fringe” seminars and then expect to claim inappropriate deductions have recently increased, and it has created a great level of frustration for tax agent members of the NTAA, according to spokesperson Andrew Gardiner.
“We believe that this recent case will provide a useful tool for tax agents when explaining to clients that blindly following advice provided at a seminar may turn out to be a very expensive exercise,” he said.
“In short, tax agents can highlight that a client is not protected, even where they rely upon advice in good faith provided at a seminar.”
Interestingly, these issues also seem to have been a recent focus for the ATO.
In August, the ATO updated its guidance in its Practice Statement PS LA 2004/10 – Tax laws claimed to be invalid, on how its taxation officers should deal with correspondence from taxpayers who claim that the tax laws are either invalid or simply do not apply to them.
The practice statement confirms that, given the courts have rejected these arguments, it is inappropriate for ATO staff to devote time and resources to producing detailed responses to these claims.
As a result, the suggested approach is to provide a short letter of rejection, with directions to the practice statement itself and a suggestion for the taxpayer to seek advice from an appropriately registered taxation professional or legal practitioner before taking legal action.
Furthermore, the practice statement includes a reminder that the courts have often found raising these arguments to be an abuse of process and have imposed punitive cost orders on taxpayers who raise them.
Rebecca Morgan is taxation manager of Corporate Seminars Australia on behalf of the NTAA.
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