There is some debate about how frequently tax practitioners (tax agents and BAS agents) may need to consider the proposed subsection 15(2) of the Tax Agent Services (Code of Professional Conduct) Amendment (Measures No. 2) Determination 2024. This provision has been referred to as the client ‘dob-in’ provision.
Let me be clear that I fully support the policy behind subsection 15(2). It is intended to uphold the integrity of the tax laws and the tax profession. All good.
With the new drafting of subsection 15(2), it will be quite a rare situation where a client needs to notify either the Tax Practitioners Board (TPB) or ATO of a client’s refusal to correct a statement made that either involved ‘recklessness’ or ‘intentional disregard’ of taxation law.
However, it is my view that tax practitioners will need to refer to subsection 15(2) a good deal more than what some people are suggesting. When this occurs, accountants and bookkeepers will need to grapple with technical terms in relation to which they are not familiar. There will also be practical issues to consider.
Consider this scenario.
Alfonso is a sole practitioner accountant with three staff. His public accounting practice operates in a large provincial town in Australia. His practice generates about $500,000 of annual fees.
Alfonso has been the accountant and tax agent of the Colden family for about 15 years. The Colden family operates a small business in the town. The engagement involves preparing financial statements and tax returns. There are 7 taxpayers in the family group, including a self-managed superannuation fund. There is usually some consulting work involved with the Colden family each year. Alfonso earns around $30,000 per year from this client.
The father of the family is Phillip Colden. He is a member of the local Chamber of Commerce. Alfonso has been trying to gain more influence in the Chamber of Commerce and win more work for his practice.
The Coldens have an adult son, Charles. Charles attends university and also has a part-time job. Charles has said to Alfonso that he works from his apartment in relation to his part-time job and wants to claim 1,000 hours under the revised fixed-rate method. This is a tax deduction of $670.
Alfonso explains to Charles all of the requirements concerning using the ATO’s fixed-rate method. Charles assures Alfonso that he has complied with all of the requirements. Accordingly, Alfonso proceeds to lodge Charles’ tax return and claim the working-from-home deduction.
After talking with Charles’ father, Alfonso begins to doubt whether Charles has worked at home for 1,000 hours. He also seriously doubts that Charles has kept records as required by the ATO, so he asks Charles about his claim (again).
Charles is somewhat dismissive of Alfonso’s questions. Alfonso informs Charles of Alfonso’s obligations under the tax law and the risks Charles is taking if his claim is investigated. Alfonso advises Charles that the claim in his tax return needs to be corrected. After about four weeks, Alfonso has not received any instructions to correct the claim in Charles’ return and he is not aware that Charles has self-corrected the return.
Here is where the problematic issues begin for Alfonso.
From a technical point of view, Alfonso must consider:
1. Whether the claim by Charles is ‘material’.
2. Whether Alfonso has come to a ‘belief’, or has he merely formed a suspicion that Charles has made a tax deduction claim that he should not have.
3. Whether Alfonso has ‘reasonable grounds’ for his belief.
4. Has a ‘reasonable period of time’ passed since he came to the belief that there was an incorrect claim?
5. Has Charles, failed to take reasonable care, or been reckless, or has had intentional disregard for a taxation law? (It is only if there is recklessness or intentional disregard for a taxation law that Alfonso need consider the client withdrawal requirements).
6. Is the PCG that sets out the revised fixed-rate method a ‘taxation law’?
7. If Alfonso is to withdraw from the engagement, and professional relationship, does that mean ceasing to provide any services to the Colden family and not just Charles? Does it mean ceasing all contact with that family? What does this twin withdrawal obligation mean?
From a practical perspective, Alfonso will, no doubt also consider:
1. Whether he will lose all work from the Colden family.
2. If Alfonso loses all the work, what will the Colden family say to their friends and associates concerning Alfonso’s practice? What will that mean in a provincial town?
3. What is the lifetime cost of losing a client like the Colden family?
4. What will be the effect on Alfonso’s ability to gain more work through the Chamber of Commerce?
From the point of view of subsection 15(2), it seems clear Alfonso must (at least) withdraw from the engagement with Charles and Alfonso’s professional relationship with Charles. But, in practice, will Alfonso be able to leave the matter at that? (This is on the assumption that the $670 deduction is considered ‘material’).
My point is that the above scenario is quite likely to occur to numerous tax practitioners. Accordingly, with regard to the client disengagement requirements of new section 15, I do not think it is valid to say that tax practitioners will rarely need to consider this provision. Further, when it is considered, tax practitioners will have to make some difficult decisions about both technical and practical issues.
It will be a rare situation where a tax practitioner needs to ‘dob-in’ their client. However, I do not think it will be a rare situation where a tax practitioner needs to think hard about the twin responsibilities of withdrawing from a client engagement and also withdrawing from any professional relationship with a client.
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