Allen J Middlebrook & Associates And Tax Practitioners’ Board
[2010] AATA 622
•20 August 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 622
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2009/5321
GENERAL ADMINISTRATIVE DIVISION ) Re Allen J Middlebrook & Associates
Pty LtdApplicant
And
Tax Practitioners’ Board
Respondent
DECISION
Tribunal M D Allen, Senior Member Date20 August 2010
PlaceSydney
Decision The decision under review is SET ASIDE and the Tribunal substitutes its decision that the registration of the Applicant as a tax agent, and that of Allen John Middlebrook as its nominee, is suspended for the period 30 September 2009 to 30 March 2011.
The decision of the Tribunal is to take effect as and from 1 September 2010.
...................[sgd]...................
M D Allen, Senior Member
CATCHWORDS
TAX AGENTS: Employee of Applicant submitted false returns and appropriated resulting tax refund. Applicant concedes lack of supervision. Submissions to Tax Agents’ Board factually inaccurate and no explanation offered as to reason for inaccuracies. Penalty of cancellation reduced to suspension for 18 months.
LEGISLATION
Income Tax Assessment Act 1936, section 251K
Tax Agent Services Act 2009, subdivision 60A
Tax Agent Services (Transitional Provisions and Consequential Amendments) Act 2009 Schedule 2 section 19
CASES
Davies v Australian Securities Commission (1995) 59 FCR 221
Ebser v The Commonwealth of Australia (1991-2) 174 CLR 430
Repatriation Commission v Keeley (2000) 98 FCR 108
REASONS FOR DECISION
20 August 2010 M D Allen, Senior Member 1. The Applicant on 5 November 2009 lodged an application with the Administrative Appeals Tribunal (“AAT”) to review a decision of the then Tax Agents’ Board (NSW) to cancel its registration as a tax agent.
2. Pursuant to the Tax Agents’ Services (Transitional Provisions and Consequential Amendments) Act 2009 (“the Transition Act”), the various state Tax Agents’ Boards were abolished. A new body, the Tax Practitioners’ Board was established by the Tax Agents’ Services Act 2009. Section 19 of Schedule 2 of the Transition Act substitutes the Tax Practitioners’ Board for the Tax Agents Board (NSW) in these proceedings.
3. Although Part VIIA of the Income Tax Assessment Act 1936 (“ITAA”) was repealed in its entirety by the Transitional Act the parties to this application were agreed that proceedings should be conducted according to the law in force at the time the decision under review was made cf Ebser v The Commonwealth of Australia (1991-92) 174 CLR 430 at 440 and Repatriation Commission v Keeley (2000) 98 FCR 108 at 123 and 131.
4. At all relevant times the Applicant has been registered as a company tax agent. The sole director, secretary and registered nominee of the Applicant company was Mr Allen John Middlebrook. As director and secretary of the Applicant, Mr Middleton was its executive officer.
5. On 30 September 2009 the Tax Agents’ Board (NSW) determined that the company tax agent Allen J Middlebrook & Associates Pty Ltd had neglected the business of a principal and was guilty of misconduct as a tax agent, and further that Mr Allen J Middlebrook as sole executive officer of that company was not a fit and proper person to prepare income tax returns and resolved to cancel the tax agent’s registration pursuant to s251K(2)(b)(i) and (ii); (2)(c) and (f)(ii) of the ITAA.
6. So far as is relevant those sections of the ITAA read:
“(2) A board may suspend or cancel the registration of any tax agent upon being satisfied that:
(a)…
(b) the tax agent:(i) has neglected the business of a principal
(ii) has been guilty of misconduct as a tax agent; or
(c) a registered nominee of the tax agent is not a fit and proper person to prepare income tax returns and transact business on behalf of tax payers in income tax matters; or …
(f) if the tax agent is a company – an executive officer of the company:(i) …
(ii) is not of good fame, integrity and character”.
7. The term “fit and proper person” in relation to tax agents was explained by Hill J in Davies v Australia Security Commission (1995) 59 FCR 221 at 223. In that case, which was referred to with approval by the High Court in Albarran v Members of the Companies Auditors and Liquidators Disciplinary Board & Anor (2007) 234 ALR 618 at 624, His Honour said:
“…
The phrase fit and proper person is a familiar one in the context of qualifications for offies or vacations. Discussing the phrase in a context of licenses to use vehicles for the purposes of inter-state trade, Dixon CJ, McTiernan and Webb JJ said in Hughes and Vale Pty Ltd v The State of New South Wales (No 2) (1995) 93 CLR 172 at 156-7:
‘But their very purpose is to give the widest scope for judgment and indeed for rejection. Fit (or idoneus) with respect to an office, is said to involve three things, honest, knowledge and ability: honesty to execute it truly, without malice, affection or partiality; knowledge to know what he ought duly to do; and ability as well in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it – Coke. When the question was whether a man was a fit and proper person to hold a license for the sale of liquor it was considered that it ought not be confined to an inquiry into his character and that it would be unwise to attempt any definition of the matters which may legitimately be inquired into: each case must depend upon its own circumstances…’
As I observed in Stasos v Tax Agents’ Board of NSW (1990) 90 ATC 4950 at 4959 the content of which is necessary to constitute a person a fit and proper person to occupy a particular office or pursue a particular vocation will vary having regard to the office or vocation under consideration. Thus the characteristics required to show fitness as a tax agent were expressed by Davies J in Re Su and Tax Agents’ Board of South Australia (1982) 82 ATC 4284 at 4286 as requiring that person to be:
…
‘A person of good reputation, has proper knowledge of taxation laws, is able to prepare income tax returns competently and is able to deal competently with any queries which may be raised by officers of the taxation department. He should be a person of such competence and integrity that others may entrust their taxation affairs to his care. He should be a person of such reputation and ability that officers of the taxation department may proceed upon the footing that the taxation returns lodged by the agent have been prepared by him honestly and competently.’…”.
8. The evidence of Mr Middlebrook is that in or about August 2008 he was introduced to Mr Shafeel Mohammed Sahaaly. Mr Sahaaly told Mr Middlebrook that he was an accountant but not a registered tax agent. Mr Middlebrook agreed to employ Mr Sahaaly in his company. It would appear that Mr Sahaaly prepared tax returns for his own clients then lodged those returns through the Applicant.
9. I am uncertain as to Mr Sahaaly’s exact status as an employee of the Applicant. In evidence Mr Middlebrook stated that Mr Sahaaly was paid by allowing him to live in his home.
10. It is now incontrovertible that whilst employed by the Applicant, Mr Sahaaly committed fraud by lodging false tax returns for the 2007 and 2008 tax years for Mr Herbert Jaure.
11. As a result of the false returns a cheque was paid to the Applicant on behalf of Mr Jaure and this cheque in the sum of $19,757.07 was deposited into the Applicant’s trust account. At the request of Mr Sahaaly, Mr Middlebrook drew a cheque for $19,000.00 in favour of Mr Sahaaly who had represented to Mr Middlebrook that he would pay that sum to Mr Jaure.
12. By letter dated 27 May 2009 a firm of solicitors acting for Mr Jaure, in a letter which can only be described as unprofessionally offensive, notified the Applicant of the fraud and demanded the Applicant pay into their trust account the sum of $19,757.07. At the same time that firm of solicitors lodged a complaint on behalf of their client with the Tax Agents’ Board of NSW.
13. On 10 June 2009 the Tax Agents’ Board wrote to the Applicant regarding the complaint of Mr Jaure. The Applicant, by its director Mr Middlebrook replied to that letter stating inter alia that the 2007 2008 returns were prepared by Mr Sahaaly and that Mr Sahaaly had taken the refund cheque to pass on to the client.
14. In that letter, Mr Middlebrook did not state that Mr Sahaaly was employed by his firm. He stated:
“The business relationship between Allen J Middlebrook & Associates Pty Ltd and Mr Shafeel Sahaaly is that he is a friend and he asked my firm if I couuld [sic] lodge some returns for his clients which I was paid for, I will not be lodging any further retrns [sic] for Mr Sahaaly as his is not residing in Sydney.”
15. The Tax Agents’ Board wrote to Mr Middlebrook on 9 July 2009 requiring him as the sole registered nominee and qualified executive officer of the tax agent to show cause why the company’s registration as a tax agent, and his registration as the tax agent’s nominee should not be suspended or cancelled.
16. In a document prepared by his solicitor Mr Middlebrook made submissions regarding the ‘show cause’ notice of 9 July 2009.
17. As Mr Middlebrook conceded in cross examination this reply to the show cause notice contains material errors of fact. In particular there is a specific denial that the tax refund cheque was banked into the Applicant’s trust account. This is contrary to fact.
18. Contrary to Mr Middlebrook’s letter of 16 June 2009 the submission states:
“Mr Middlebrook agrees that Mr Sahaaly was at all times an employee of Allen J Middlebrook & Associates Pty Ltd”.
19. So far as the fraud committed by Mr Sahaaly is concerned the Applicant and Mr Middlebrook have conceded in these proceedings:
· On 13 November 2008 a cheque for $19,757.07 was deposited into the Applicant’s bank account.
· There is no issue that Mr Middlebrook failed to exercise proper supervision and control over Mr Sahaaly, who was the Applicant’s employee.
· There is no issue that Mr Middlebrook failed to ensure that Mr Jaure, who was at the time both in fact and in law the Applicant’s client, had authorised it to submit his 2008 income tax return.
· There is no issue that Mr Middlebrook failed to ensure that Mr Jaure’s 2008 income tax return had been prepared in accordance with information supplied by him. Indeed the Applicant does not dispute that no information was supplied by Mr Jaure with regard to same.
· There is no issue that Mr Middlebrook failed in his duty to Mr Jaure to ensure that he received either his 2007 income tax refund monies or the monies paid by the Commonwealth in respect of his 2008 income tax return.
· There is no issue that Mr Middlebrook failed to ensure that there was any proper review of information supplied by Mr Jaure.
· There is no issue that Mr Middlebrook failed to carry out checks on the interview techniques of Mr Sahaaly.
· There is no issue that proper records in respect of Mr Jaure were not kept by the Applicant.
· The Applicant recognises that all of the above were serious matters, displayed an unprofessional standard and plainly warranted censure by the board.
· The Applicant concedes that information furnished by it, and on its behalf, to the Board was incorrect in a number of material respects.
20. Although consistent with the above admissions the Applicant, and hence Mr Middlebrook, are deserving of censure by the Respondent, a more egregious offence by the Applicant (and its nominee Mr Middlebrook) is the incorrect statements of fact as contained in the submission to the Tax Agents Board of 6 August 2009.
21. I agree with the submissions by the Respondent’s counsel that if the wrongful statements of fact in the submission were wilful then by that fact alone Mr Middlebrook has demonstrated that his is not a fit and proper person. On the other hand if the submissions were in error then Mr Middlebrook must give some explanation of how the error occurred otherwise the Respondent can have no confidence in his ability to prepare tax returns honestly and competently.
22. Mr Middlebrook was unable to give any explanation of how the incorrect information came to be incorporated in his submission to the Tax Agents’ Board.
23. Having seen and heard Mr Middlebrook give evidence I am not satisfied that the material provided to the Board was deliberately false.
24. I do accept that Mr Middlebrook gave insufficient attention to the preparation of the submission. Early in his cross examination he referred to his inattention to his affairs caused by his travelling between Sydney, Hong Kong and the Philippines at the time. When asked at the conclusion of his cross examination whether that was his reason for his errors he rejected this as an explanation.
25. Previously, in examination in chief, the Mr Middlebrook referred to having been married in the Philippines in early 2009 and his wife coming to Australia in July 2009. He also referred to Sahaaly helping him with obtaining a visa for his wife. I am therefore not convinced that personal matters distracted Mr Middlebrook from the seriousness of the complaint against him.
26. Whilst giving evidence Mr Middlebrook left me with the distinct impression that he had been overwhelmed by events to the extent that he was really incapable of applying logical thought patterns to the dilemma he was in.
27. In ascertaining the sanctions to the imposed upon the Applicant and Mr Middlebrook as its nominee I must be guided by two main principles.
28. The first of these as pointed out by Hill J in Davies supra is whether the Tax Commissioner and his officers can be satisfied that the person is of such reputation and ability that they may rely upon the returns prepared by the agent as having been prepared honestly and diligently (Tribunal emphasis).
29. Secondly, I must keep in mind that these proceedings are not disciplinary in the sense of imposing a punishment but rather are concerned with the protection of the public (which includes the Australian Tax Office and its officers).
30. Mr Middlebrook has been guilty of neglect which has cost him dearly. That neglect has had repercussions not only upon Mr Middlebrook but also upon Mr Jaure and the revenue, although the Applicant has made recompense regarding the amount fraudulently obtained by Mr Sahaaly. I am satisfied that the false information conveyed to the Tax Agents’ Board was not wilfully false, but again was an example of the Applicant lacking attention to detail. This lack of attention to detail must create doubts as to his ability to manage his client’s affairs and how much reliance the Commissioner of Taxation and his officers can place in the documents prepared by him.
31. Although I was referred to two decisions of the AAT which might be said to indicate the tariff of penalties imposed against defaulting Tax Agents, I do not consider those decisions relevant here. In relation to the fraud committed by Mr Sahaaly the Applicant is in an analogous position to a solicitor whose partner or clerk commits a defalcation against the firm’s trust account which should have been discovered by the exercise of due diligence.
32. Dal Pont in Lawyers’ Professional Responsibility, 4th edition, states at p563:
“The lawyer’s individual personal responsibility to a client has been described as ‘the essence’ of the lawyer-client relationship. Serious omissions to properly supervise employees, or be vigilant as to the activities of partners, may amount to professional misconduct. The reported cases highlight the importance of supervision and vigilance, particularly over trust funds.”
33. Of the cases cited by Dal Pont in support of the passage quoted above, are the following:
Council of the Queensland Law Society Inc v Cummings [2004] QCQ 138: where a solicitor was found guilty of professional misconduct as a result of foolishly accepting others assurances that trust account requirements were being met and was suspended from practice for 12 months and fined.
Re Mayes v Legal Practitioners Act (1974) 1 NSWLR 19: where a solicitor was found guilty of professional misconduct as a result of placing trust in his partner and not discovering the partners theft from the firm trust account.
Law Society of NSW v Foreman (1991) 24 NSWLR 238: where the solicitor was found guilty of professional misconduct by failing to supervise the activities of an unqualified clerk in his employ and was suspended from practice on his own account or as a partner for effectively 9 months.
34. To these events must be added the cavalier manner in which the Applicant’s nominee addressed the explanation of events he gave to the Tax Agents’ Board. Mr Middlebrook’s conduct in this regard, as well as casting doubts on his competence, is deserving of censure.
35. I am satisfied that the cancellation of the Applicant’s registration as a tax agent is not necessary but that a period of suspension should be imposed to demonstrate to the Applicant’s nominee that the position he holds requires more attention to detail than he has previously been prepared to either acknowledge or undertake.
36. In coming to my decision I take into account that the cancellation of the Applicant’s registration as a tax agent has been stayed as an from 15 December 2009 by direction of this Tribunal.
37. The decision under review is SET ASIDE and the Tribunal substitutes its decision that the registration of the Applicant as a tax agent, and that of Allen J Middlebrook as its nominee, is suspended as and from 30 September 2009 up to and including 30 March 2011.
38. As the cancellation of the Applicant’s registration has been stayed I assume, although no submissions were made regarding this matter, that the Applicant currently has work in hand. To permit the orderly disposition of current matters I will direct that my decision take effect on 1 September 2010.
I certify that the 38 preceding paragraphs are a true copy of the reasons for the decision herein of M D Allen, Senior Member.
Signed: .............[sgd]........................................
K. Lynch, AssociateDates of Hearing 24 June 2010 and 10 August 2010
Date of Decision 20 August 2010
Counsel for the Applicant Mr M Thompson
Counsel for the Respondent Mr B Skinner
Solicitor for the Respondent Australian Government Solicitors
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