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Sweeping changes to the Code of Professional Conduct leave registered tax practitioners uncertain and confused about their new obligations.
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Decoding the changes to the Code of Professional Conduct
09 August 2024
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19 minute read
The development of the recent changes to tax practitioners’ obligations
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Tax practitioners recognise that upholding integrity in the tax system and the tax profession is essential to maintaining trust and confidence in our community. However, the profession is grappling with new obligations imposed by recent changes to the Code of Professional Conduct (Code) in the Tax Agent Services Act 2009 (Cth) (TASA) which are causing widespread concern and confusion.
Deficiencies in the TASA were identified by the 2019 Review of the Tax Practitioners Board (the James review) which made 28 recommendations proposing significant changes to the regulatory framework for tax practitioners. The Government’s response to the Final Report of the James review supported 20 of these recommendations and has so far implemented nine recommendations over two tranches of legislative changes. While many of the reforms emanated from the James review, their design has unquestionably been informed by the investigations, inquiries and media focus over the past 18 months.
The profession broadly accepts that some improvements to the regulatory framework governing registered tax agents and BAS agents (practitioners) were necessary, and change was inevitable. Policy development must involve due process to ensure the new rules are subject to proper consultation and scrutiny, and are fairly implemented without unreasonably disrupting the vast majority of practitioners who overwhelmingly conduct themselves with integrity and honesty.
Many practitioners feel overwhelmed by the rapid onslaught of new obligations. All practitioners must now navigate their way through poorly drafted law and use their best endeavours to comply with their new obligations, as they await the release of guidance from the regulator, the Tax Practitioners Board (TPB). Practitioners are understandably concerned about how they can fulfil their duties effectively, meet their new legal obligations and maintain trusted relationships with clients without passing on the costs of their additional compliance burden to clients through fee increases.
Consultation on the changes has been patchy. The professional associations (joint bodies) have had opportunities to provide meaningful feedback on some of the measures, while other measures have blind-sided the profession and were introduced without the benefit of stakeholder feedback. The Tax Institute has been working closely with the joint bodies in advocating for improvements to make the new law implementable, administrable for the regulator and workable for practitioners. The recent reprieve on the government’s insistence to require practitioners to comply with complex new rules by 1 August 2024 is welcome but has not lessened our concerns about the substantive obligations nor eased the reliance on the regulator to pragmatically administer the new law through sensible guidance.
The reforms continue with the release of another consultation paper examining the eligibility requirements for practitioners to register with the TPB, and draft guidance from the TPB on some of the additional Code items in the recently registered Ministerial Determination.
What are the major concerns?
Breach reporting rules
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The breach reporting rules are law and apply to breaches of the Code occurring on or after 1 July 2024. The rules apply only if two thresholds are satisfied:
- the practitioner must have reasonable grounds to believe that they, or another practitioner, has breached the Code; and
- that breach is a significant breach.
The rules require practitioners to report breaches of the Code to the TPB (and to the relevant professional association where relevant) within 30 days of the day on which they first have, or ought to have, these reasonable grounds. The intent of the practitioner is irrelevant in determining whether a breach is a ‘significant breach.’
The rushed passage of the breach reporting rules through parliament without the usual process of public consultation and an accompanying explanatory memorandum has hindered the design of good law which should be readily understood and free from uncertainty. The TPB’s draft guidance TPB(I) D53/2024 provides some assistance but frequently leans on the Macquarie dictionary to explain undefined terms in the law, time and again advising that ultimately the conclusion depends on the facts and circumstances of the case. This is likely to leave practitioners found wanting as to whether they have ‘reasonable grounds’ and whether a breach is a ‘significant breach.’
The primary concerns with the rules include the following:
- the use of vaguely expressed subjective terms such as ‘reasonable grounds to believe’, ‘indictable offence’, ‘offence involving dishonesty’, ‘material loss or damage’, ‘otherwise significant’ and ‘ought to have become’ that are not defined in the law means heavy reliance will be placed on the TPB’s guidance (once finalised);
- the rolling 30-day reporting period logically necessitates a reflection each morning as to whether a breach in the preceding 29 days needs to be reported that day;
- the risk of frivolous, vexatious or malicious complaints will likely draw attention to the reporting practitioner;
- while whistleblower protection is available to a reporting practitioner who is an ‘associate’ of the reported practitioner, the meaning of ‘eligible whistleblower’ does not extend to include unrelated practitioners;
- practitioners who confer with/advise other practitioners, including at tax discussion groups, may need to consider their breach reporting obligations;
- practitioners who seek legal advice on areas outside their expertise, such as criminal law, to ascertain whether an offence is an indictable offence may find it challenging to obtain a legal counsel’s opinion and file a breach report within the 30-day reporting timeframe;
- the need for a more concise framework for evidentiary requirements for practitioners to follow as varying degrees of evidentiary requirements may result in confusion and practical challenges for practitioners;
- understanding which entity has the reporting obligation or is the subject of a breach report where a registered agent operates through a company or a partnership that is also a registered agent;
- whether a practitioner who is aware of a breach by another practitioner who has self-reported is also required to report that breach;
- the consequences, appeal rights and resolution of cases where a practitioner disagrees with the TPB’s position on being required to report a breach.
At the time of writing, the TPB is yet to finalise its guidance on the breach reporting rules. The TPB continues to call for feedback and practical examples requiring clarity through the formal consultation process.
Ministerial Determination
The TASA was amended in 2023 to empower the relevant Minister (the Assistant Treasurer and Minister for Financial Services) to supplement the existing Code with additional obligations. The joint bodies raised concerns in its submission on the draft law that granting the Minister the authority to unilaterally modify the Code obligations could potentially bypass thorough parliamentary scrutiny.
The Minister’s first legislative instrument using this power, the Tax Agent Services (Code of Professional Conduct) Determination 2024 (Determination), was registered on 2 July 2024 and commences on 1 August 2024. The Determination introduces eight new Code obligations, including further obligations within the primary obligations that were not in the draft instrument released for consultation.
The Determination’s commencement date of 1 August 2024 was unrealistic and unachievable for many practitioners who are already operating under heavy workloads. Extensive advocacy efforts by the joint bodies (including an open letter to the Minister on 15 July 2024) and others across the profession urged the Minister to defer the start date of the Determination, as well as withdraw it to allow further consultation and a reconsideration of its impact so there are no unintended consequences for practitioners or the TPB.
On 31 July 2024, the joint bodies received a response from the Minister advising a transitional rule would be inserted into the Determination to delay the start date. This was succeeded by a media release issued on 1 August 2024 which described the new obligations as ‘modest’ and advised:
The Government will insert a transitional rule into the Determination that will provide firms with 100 employees or less until 1 July 2025 and larger firms with 101 employees or more until 1 January 2025 to bring themselves into compliance with these new obligations, so long as they continue to take genuine steps towards compliance during this period.
The Minister also said in his letter to the joint bodies that:
Should it become clear to the government during the process to finalise guidance that it is critical that changes be made to the Determination I will engage constructively with you and other stakeholders.
While it is pleasing that the Minister responded to our advocacy efforts by allowing additional time for important consultation and guidance and a more sensible implementation period for practitioners, the deferral is conditional. We are yet to understand the meaning of the term ‘so long as they continue to take genuine steps towards compliance during this period.’
We hope that the Assistant Treasurer’s indication of his willingness to make critical changes to the Determination — should that be considered appropriate after further consultation regarding the implementation of the new obligations — leaves the door ajar to addressing the most concerning parts of the Determination.
The Determination requires practitioners to:
- uphold and promote the ethical standards of the tax profession (section 10);
- not make false or misleading statements to the TPB or the Commissioner (section 15);
- take any reasonable steps to identify and avoid any material conflicts of interest in relation to any activities undertaken for an Australian government agency and disclose the details of any such material conflicts of interest as soon they become aware of the conflict (section 20);
- maintain confidentiality in dealings with Australian government agencies (section 25);
- keep proper client records regarding the tax agent services provided to clients, including former clients, for five years after the service was provided (section 30);
- ensure that those providing tax agent services on behalf of practitioners maintain the relevant knowledge and skills and are appropriately supervised (section 35);
- establish and maintain a system of quality management designed to ensure compliance with the Code and document and enforce the policies and procedures of the quality management system (section 40); and
- keep clients informed of all relevant matters (section 45).
While we welcome the deferral of the start date, of greatest concern are the obligations in:
- paragraph 15(2)(c) which requires practitioners to report clients to the Commissioner if they do not correct false or misleading statements within a reasonable time; and
- section 45 which requires practitioners to notify current and prospective clients of ‘any’ matter that may significantly influence a client’s decision to engage or continue to engage the practitioner to provide tax agent services.
The obligation in paragraph 15(2)(c) is tantamount to a client ‘dob-in’ rule and was not in the draft instrument. Practitioners will breach Code item 6 if they disclose information relating to a client’s affairs to a third party without their permission – unless the practitioner has a legal duty to do so. The Determination imposes a legal duty to disclose client information in circumstances covered by section 15, so it does not override or seem to be inconsistent with the existing Code. However, it challenges, even undermines, the important agency relationship of trust that exists between a practitioner and their client.
The tax law acknowledges mistakes are made and usually, they are honest mistakes. The tax system’s design allows for honest mistakes, voluntary disclosures and amendments. Yet the new Code obligation in paragraph 15(2)(c) raises the intolerance bar to an unacceptably high level.
The requirement in section 45 to disclose ‘any’ matter is an overreach. The scope of this wording is so broad that the TPB will need to read down the wording in the law to avoid disclosures of personal matters infringing on practitioners’ privacy rights and to uphold anti-discriminatory behaviour. The scope of section 45 should be practically confined to keeping clients informed of matters relating to whether a practitioner is a fit and proper person to provide tax agent services to their clients without imposing an unreasonable compliance burden on practitioners – or worse, constitute an invasion of privacy for tax professionals. The TPB’s indication that it will take a ‘pragmatic and practical’ approach in implementing the new rules in the Determination is sensible and welcome, but even pragmatic guidance does not carry the weight of law. The impossibly broad wording surely leaves open the possibility that a court could interpret ‘any matter’ as written.
As an aside, a transitional rule that modifies the standard 30-day notification period to 90 days for matters arising on or after 1 July 2022 will need to be revisited in light of the deferral announced by the Minister.
As practitioners digest their new obligations, they will need to consider updating their engagement letters and websites to notify clients of all relevant matters, the manner in which they will record the tax agent services provided to each client, and how they will document and enforce the policies and procedures of their systems of quality management.
Final thoughts
The breach reporting rules and the new Ministerial power to supplement the Code are significant changes that understandably have the tax profession and the joint bodies concerned. The lack of clarity and consultation on some of these measures as well as pending TPB guidance has created enormous challenges for practitioners.
We will continue to engage with the government, our members, the profession and the TPB to ensure that any changes to the TASA and related guidance are made and developed in a transparent and consultative manner. We encourage practitioners to continue to provide feedback so your voice is heard. Upholding the integrity of the tax system and the tax profession needs to be balanced with the reasonable design and sensible implementation of the measures.
Robyn Jacobson, Senior Advocate, The Tax Institute
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