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The proposed changes to section 15 of the Code of Conduct instrument make some improvements to the former wording but cannot be claimed as a victory for the profession.
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Amended version of section 15 still problematic for profession
04 October 2024
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Recently, an exposure draft of the Tax Agent Services (Code of Professional Conduct) Amendment (Measures No. 2) Determination 2024 was released for comment. Comments are due by 2 October 2024.
The changes are in response to the backlash from the accounting profession, particularly in relation to sections 15 and 45 of the Determination. The proposed changes to section 45 are a big improvement in relation to what must be advised to all current and prospective clients by tax agents and BAS agents (‘tax practitioners’). I won’t comment on the section 45 changes here. I want to focus on the changes to section 15.
Before
The previous proposed section 15 would have required tax practitioners to notify the ATO or TPB in situations where a client did not correct a false, incorrect or misleading statement (usually to the ATO) within a reasonable time. This was a direct challenge to the client confidentiality pact that tax practitioners have with their clients.
Now
What is now proposed is a significant improvement regarding when notification must be given to the TPB or the ATO. Among other things, before notification is required, you must have reasonable grounds to believe your client’s actions have caused, are causing, or may still cause substantial harm to the interests of others. That will happen, but it won’t happen a lot.
Difficulties remain
But let’s not conclude that the new proposed section 15 will be easy for tax practitioners. It won’t.
The new subsection 15(2) is a much longer provision that requires tax practitioners to form views about technical terms in the tax law that both the ATO, the AAT/ART and the courts struggle with. Further, the provision continues to use terms that tax practitioners will be in a quandary about.
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Except in the most egregious of situations, every time a tax practitioner has to consider the application of proposed section 15, they will need to give considerable thought to what certain terms mean and whether they will apply to the client matter they are considering. This is going to be difficult and those who have drafted the proposed subsection 15(2) seem to think that all tax practitioners will be able to easily make decisions about unclear technical terms. This is not the case.
Terminating an engagement
Item 3 in the table of proposed subsection 15(2) requires a tax practitioner to ‘withdraw from the engagement, and professional relationship, with your client (including no longer providing any further tax agent services to your client’. This is the provision that will provide the most severe conflicts and intense thought for tax practitioners. It is the provision that will give tax practitioners the most problems.
Before arriving at the situation where a tax practitioner must terminate their engagement with a client (Item 3), the process in Item 2 of the table must have first been followed. This requires the tax practitioner to have advised their client all the following about a statement a client has made:
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That the statement should be corrected;
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The possible consequences of not taking action to correct the statement;
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The tax practitioner’s responsibilities and the taxation law relating to false or misleading statements, and what steps the tax practitioner may be required to take in order to fulfil those responsibilities.
But before the Item 2 process, the tax practitioner must have decided that the client, in relation to the particular statement had:
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Failed to take reasonable care in connection with the statement; or
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Been reckless as to the operation of a taxation law; or
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Had intentional disregard of a taxation law.
Further, in relation to the particular statement, the tax practitioner must, within a reasonable period of time, come to believe that the statement made by the client was materially false or misleading.
Note that the above does not include an honest mistake.
Withdrawing from an engagement is only required when the tax practitioner is of the belief that there was recklessness as to the operation of a taxation law or intentional disregard of a taxation law.
The difficult decisions
The hard part will be when a tax practitioner is confronted with a decision as to whether they should withdraw from the engagement. To put it bluntly, in what circumstances will the tax practitioner decide to lose a client and earn less money?
I envisage that consideration of, at least, the following, will be problematic for tax practitioners:
Reasonable care, recklessness, intentional disregard – These terms already exist in the taxation law. They were introduced in the early 1990s and are used to determine the level of penalties that apply to taxpayers when they get their tax return wrong. You might think that these terms would be well understood by now, but that is not the case. Even the ATO gets decisions about these terms wrong. Tax practitioners will have difficulty determining how bad their client’s behaviour has been. They may need to seek legal advice about this before disengaging with a client or, where applicable, reporting the client to the ATO.
Client – The term ‘client’ is not defined. Who is the client? On its face, this seems to be one taxpayer that has made a statement that is reckless or with intentional disregard of the law. However, in many client engagements there is more than one taxpayer involved. I note the requirement to withdraw from the ‘professional relationship’ as well as ‘from the engagement’.
The reading of the ‘reasonable steps’ a tax practitioner must take in Item 3 seems to infer that all professional contact with the offending taxpayer must cease. Is that what it is intended to mean?
Taxation law – Item 3 refers to recklessness in relation to the operation of a ‘taxation law’ or intentional disregard of a ‘taxation law’. The term ‘taxation law’ is a defined term. What interests me is whether, in practice, statements about the taxation laws by the ATO will be considered to be, by the TPB, within what it considers to be the taxation laws.
For example, the ATO publishes practical compliance guidelines. These state, broadly, what the ATO likes and doesn’t like often without any clear legislative basis for its views. Will not following what the ATO says in a PCG be regarded by the TPB as being ‘reckless’ or ‘intentional disregard’ of a taxation law?
Material – A tax practitioner must determine whether a particular statement was ‘materially false or misleading’. What does ‘material’ mean? There is some discussion in the draft explanatory statement about this concept, but it is not of much help. My opinion of the comments in the draft explanatory statement is that it sets a ‘low bar’ for what constitutes materiality.
A reasonable time – What is a reasonable time? Proposed subsection 15(2A) mentions a number of matters to which regard should be had when making a decision about ‘a reasonable time’. In practice, it doesn’t help tax practitioners to understand this unclear term.
Belief versus suspicion – I want to draw the distinction between the requirement coming ‘to believe’ a statement was materially false or misleading versus a suspicion that this is so. Tax practitioners can have a suspicion that their clients are not telling them the whole truth. This is not enough to engage the proposed subsection 15(2). The tax practitioner must ‘believe’ the statement was materially false or misleading. To me this suggests that there is strong evidence supporting the belief.
Conclusion
The new proposed section 15 is an improvement on the former wording. However, there is no room for claiming some sort of victory for the tax profession with the new wording. In practice, it will be problematic.
Let us not forget that this is all part of a legislative instrument that, in my opinion, should never have come into existence in the first place. The legislative instrument ‘enacts’ eight obligations determined by the Minister on tax practitioners that are unnecessary.
John Jeffreys provides tax training and produces tax information for tax professionals. He is a director of John Jeffreys Tax.
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