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The definition of what constitutes a material loss or damage remains an unresolved issue with the significant breach reporting requirements.
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Further guidance needed on material loss issue
24 January 2025
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8 minute read
The implementation of the significant breach reporting requirements for tax and BAS agents under the Tax Agent Services Act has sparked considerable debate within the profession. A key issue, which remains unresolved, is the ambiguity surrounding what constitutes a "material" loss or damage to another entity—particularly the Australian Taxation Office (ATO).
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Effective from July 1, 2024, tax and BAS agents are obligated to report significant breaches of the Code of Professional Conduct to the Tax Practitioners Board (TPB). A breach is considered significant, among other things, if it results in, or is likely to result in, material loss or damage to another entity, including the Commonwealth. However, the term “material” remains undefined in the legislation.
The recently finalised TPB Information Sheet TPB(I) 43/2024 acknowledges that materiality depends on the specific facts and circumstances of each case. Paragraph 70 of the document states that materiality involves a subjective element—the significance of the loss or damage is relative to the affected entity. This means that what one entity considers material may not be viewed the same way by another.
Yet, the TPB has refrained from providing clear guidance on what constitutes a material loss for the ATO. This lack of specificity could lead to interpretations inconsistent with the policy objectives of the breach reporting requirements.
Consider this scenario: A tax practitioner obtains a new private company client and discovers that the prior accountant has failed to recognise a deemed unfranked dividend under Division 7A, resulting in an underpayment of $10,000 in tax. In this case, the loss is borne solely by the ATO. The question arises—is $10,000 a material loss for the ATO?
The ATO collects billions of dollars annually, and many practitioners might argue that $10,000 is negligible in this context. However, such interpretations could undermine the intended enforcement of the Code of Professional Conduct, as practitioners might set the threshold for materiality too high, effectively exempting smaller breaches from reporting.
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Paragraphs 72 and 82 of the TPB Information Sheet provides further guidance. These suggest that materiality should be assessed based on whether a reasonable tax practitioner would consider the loss substantial in its impact or consequence. It also directs practitioners to consider:
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The amount and scale of the revenue loss.
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The number and type of clients involved.
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The potential risk to future revenue if the breach is unreported.
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The broader impact on public trust in the Commonwealth’s tax system.
Even with these considerations, practitioners are likely to conclude that $10,000—or similar amounts—does not meet the threshold of substantial consequence to the ATO.
The absence of clear guidance from the TPB creates uncertainty. Without defined thresholds for materiality, practitioners may assume that only very large losses to the ATO require reporting. This could result in significant underreporting of breaches, contrary to the policy intent of the legislation.
The TPB’s reluctance to comment on materiality thresholds is understandable, given the complexity of assessing revenue loss to the ATO. However, providing even a general framework or indicative guidance would benefit all parties. Such guidance would:
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Ensure consistent interpretations of materiality across the profession.
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Align practitioners’ actions with the policy objectives of the breach reporting requirements.
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Strengthen trust in the TPB and the integrity of the tax system.
The issue of materiality in breach reporting is critical regarding losses by the ATO. Without clear guidance, tax practitioners are left to navigate subjective and potentially inconsistent interpretations, which could lead to outcomes at odds with the legislative intent.
It is in the best interests of practitioners, the TPB, and the ATO for the TPB to address this matter decisively. Clearer guidance would enhance compliance and ensure the robust functioning of Australia’s tax system.
John Jeffreys provides tax training and produces tax resources for tax professionals. He is a director of John Jeffreys Tax Pty Ltd.
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