Middlebrook and Tax Practitioners Board

[2020] AATA 3698

Middlebrook and Tax Practitioners Board [2020] AATA 3698 (18 September 2020)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2019/8210

Re:Allen Middlebrook

APPLICANT

AndTax Practitioners Board

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe

Date:18 September 2020

Place:Sydney

The decision to cancel the applicant’s registration as a tax agent is affirmed. The decision to prohibit the applicant from applying for registration is varied from five years to four years.

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Deputy President Bernard J McCabe

CATCHWORDS

TAX AGENT – termination of registration – reasons for misconduct/breach of Code of Professional Conduct – applicant found not to be fit and proper person – termination the correct form of regulatory action – reduction of ban from reapplying – decision varied

LEGISLATION

Tax Agents Services Act 2009 (Cth) ss 20-5, 20-15, 20-45, 30-10, 30-20, 30-25, 40-5, 40-25, 60-125

CASES

Re Allen J Middlebrook & Associates Pty Ltd and Tax Practitioners’ Board [2010] AAT 622

Re Li and Tax Practitioners Board (2014) 141 ALD 201
Rent to Own (Aust) Pty Ltd and Australian Securities and Investments Commission [2011] AATA 689
Re Tung and Tax Practitioners Board (2012) 90 ATR 480

Ridden and Tax Practitioner Board [2020] AATA 422

REASONS FOR DECISION

Deputy President Bernard J McCabe

18 September 2020

1. Allen Middlebrook was a registered tax agent for around 25 years. He carried on a small practice in the western suburbs of Sydney through his company. All that came to an end when the Tax Practitioners Board decided to (a) cancel his registration and (b) thereafter prevent him from seeking (re)registration for a period of five years. Mr Middlebrook was told of the cancellation decision on 31 October 2019 and the decision took effect on 30 November 2019.

2. Mr Middlebrook asked the Tribunal to revisit the decisions to cancel and preclude him from seeking registration for five years. By the time of the hearing, the grounds of the review had narrowed.

3. Mr Middlebrook did not dispute the findings of fact that were made against him by the Board as it made the reviewable decisions. Mr Middlebrook acknowledged the Board was justified in finding he had contravened a number of provisions of the Code of Professional Conduct that forms part of the Tax Agents Services Act 2009 (Cth) (the TAS Act). He agreed those contraventions justified regulatory action being taken against him. But in written submissions lodged in advance of the hearing, Mr Middlebrook insisted he was a fit and proper person, and that his registration should not be cancelled. He argued his registration should be suspended instead for a period of time, and that lifting the suspension might depend on him satisfying conditions the Tribunal imposed.

4. At the hearing, Mr Middlebrook sought to put his mental health at the forefront of his case. He argued his misconduct was affected by his mental state, and that his mental health had now improved. The argument about his mental health was signalled in his statement dated 9 April 2020 and in the applicant’s written outline of submissions. In Mr Middlebrook’s statement, he referred to a number of stressful events that had occurred around or before the relevant time which triggered the onset of depression and anxiety. These stressors included a bad business deal that resulted in destabilising losses, a car accident that resulted in court proceedings, concerns over his marriage, and bad legal advice from a former lawyer.

5. While the argument about mental health was signalled in advance, the applicant did not actually produce an expert report from a mental health practitioner until the morning of the hearing. The report was dated 19 June 2020. The Board did not have the time to obtain its own report or prepare adequately for cross-examination. Mr Woods, counsel for the applicant, sought leave to rely on the report anyway. This unsatisfactory state of affairs was compounded by the fact the psychologist who authored the report was not available for meaningful cross-examination at the hearing. Mr Woods said the applicant would have difficulty securing the attendance of the witness at a resumed hearing if the matter were adjourned: I gather the applicant could not afford the expense of a resumed hearing. I deferred the question of whether I should admit the report over the Board’s objections until later in the hearing, once Mr Middlebrook gave evidence.

6. After hearing from Mr Middlebrook, it became apparent the evidence of the psychologist would be important. The applicant referred in detail to a stressor that he had not previously mentioned: the death of his young child. The matter was obviously deeply distressing, and Mr Middlebrook confirmed his wife continued to experience deep anguish. He indicated he had come to terms with the loss but his evidence before me suggested that was not so. He was unable to answer questions about the timing of this terrible event; his inability to do so suggested to me that he was having difficulty processing what happened. The applicant was obviously experiencing some sort of impairment as he gave evidence. He insisted he was fine but presented in a way that raised serious questions over his health. He exhibited diminished affect. He was poorly dressed in a way that raised questions over his self-care. His memory was poor: he was unable to remember dates or the timing of significant events that one would expect him to remember.

7. I am not in a position to provide a diagnosis of an individual’s mental health condition in the absence of expert opinion. But I know what I saw. There are serious questions over the health and impairment of this individual. I wanted to put those questions to an appropriately credentialed expert to obtain an opinion as to:

   ·the nature and extent of any impairment and – in particular – its impact on cognitive function and judgment;

   ·its causation;

   ·the level of insight the applicant might have into his behaviour;

   ·the current treatment (if any); and

   ·the likely prognosis and the prospect of recurrence.

8. Mr Woods confirmed as the hearing proceeded that the psychologist was not available. He asked that I take the expert report into account in any event, acknowledging it would have limited weight.

9. The thrust of Mr Middlebrook’s case shifted as the hearing proceeded. Mr Woods’ argument came to this: the applicant is obviously impaired, even if one is unsure of the precise medical or psychiatric explanation. Mr Middlebrook is not fit to practice at the moment and will remain in difficulty until he obtains proper treatment. He would be able to undertake that treatment during the life of a period of suspension that was imposed as an alternative to cancellation. Once Mr Middlebrook’s condition resolved or stabilised appropriately and after he served out the period of suspension, he should be able to resume his practice and put all this behind him. Mr Woods even proposed some conditions that would (amongst other things) require the applicant to undertake treatment and establish to the Board’s satisfaction in due course that:

   ·there is expert evidence that the misconduct identified by the Board is attributable to the applicant’s mental health condition that was present at the time; and

   ·the expert evidence establishes that the mental health condition had since resolved so that the Board should be comfortable in permitting him to resume practice.

10. Ms Ensor doubted the Board (or the Tribunal, standing in the Board’s shoes) had the power to order a suspension on condition. Mr Woods suggested the power to require the applicant to undertake medical treatment and submit himself for evaluation in due course was found in s 30-20 of the TAS Act. That section includes the power to order an applicant to undertake training courses, submit to supervision or limit his practice – or do other things. Mr Woods agreed the suspension would not be conditional in a strict sense, but he argued Mr Middlebrook could be required to do a number of things under s 30-20 that would have substantially that effect.

11. I suggested to Mr Woods that I was uncomfortable with the proposal that Mr Middlebrook’s registration be suspended while his mental health issues were addressed because that entailed me finding, at least by implication, that the mental health condition was the likely cause of the misconduct. While Mr Woods assured me I would not be doing that, I see it as a real difficulty. In the absence of reliable evidence about the applicant’s mental health, I would not have any basis for making a finding about causation or the appropriateness of a particular regulatory response.

    FINDINGS OF FACT

12. Before I deal with the form of the regulatory action, I should detail the findings I have been asked to make about the applicant’s conduct which brought us to this point. Most of those findings are uncontroversial in the sense the applicant has acknowledged the conduct and expressed shame and remorse at the hearing.

13. The applicant was engaged to act by three taxpayers. He did not take proper steps to verify their identity. He subsequently agreed to lodge in excess of 100 tax returns on their behalf and on behalf of their associates in the 2017 year of income. It turns out a number of those returns were fraudulent. The applicant is not accused of being a knowing participant in the scheme, but his sloppiness inadvertently facilitated the frauds.

14. That is a serious matter. Tax agents are, to some extent, the guardians of the self-assessment system. They are expected to make proper enquiries about the identity of their clients (amongst other things) to reduce the risk of fraud. A tax agent who does not take care invites trouble for himself or herself, but also places the integrity of the system at risk. Mr Middlebrook had no good explanation for his failure to engage with his clients on these matters. But the problems did not stop there.

15. In 2018, while all this was coming to light, the Commissioner commenced an audit of the applicant’s own affairs in the 2016 and 2017 years of income. Following that audit, the Commissioner issued amended assessments that said the applicant had derived much greater assessable income than he had declared each year. The Commissioner also imposed administrative penalties in respect of the shortfall. That shortfall was over $660,000. Mr Middlebrook explained at the hearing his debt to the Commissioner now stood at $700,000 while the company’s debt stood at around $300,000. (He said in his evidence the Commissioner had garnisheed around $100,000 from the company’s accounts which reduced its debt.) Mr Middlebrook confirmed he has recently instructed his accountant to lodge objections to the amended assessments notwithstanding the fact those objections will be made out of time. The applicant says he confidently expects the objection process will lead to a reduction in his personal debt to under $100,000.  In the meantime, he does not have a payment arrangement in place with respect to any of the debts, and the Commissioner has now issued a bankruptcy notice which the applicant is unlikely to satisfy given the state of his personal finances. Those finances were already in a parlous state as a result of a bad investment made at the behest of an erstwhile friend. The applicant said he is currently surviving on the JobKeeper allowance.

16. The audit turned up other misdeeds. The applicant received significant drawings or wages from the company’s accounts during the relevant periods. The company failed to properly account for those payments or withhold Pay As You Go (PAYG) amounts as required under the taxation laws. The applicant and the company had also received refunds on behalf of taxpayers which were paid into the company’s accounts. Those funds were not promptly remitted. They were mixed with the applicant’s own funds and used for other purposes.

17. The Board commenced an investigation into all of this following a referral from the Commissioner. The applicant failed to respond in a timely and cooperative way to the Board’s correspondence as detailed in the Board’s statement of facts, issues and contentions. That is a significant problem. The Board’s efficacy as a regulator is undercut if registered agents do not cooperate. Delayed and drawn out processes are also costly.

18. I note Mr Middlebrook also made incorrect statements on his application for re-registration in July 2019. He failed to accurately disclose the overdue tax debts. That is also a serious matter. The Board must be able to trust what it is told by agents in connection with registration.

19. The Board made findings to this effect, and the reviewable decisions took those matters into account. Mr Middlebrook has now acknowledged the accuracy of these findings in his evidence. He said he was ashamed and sorry. I accept the findings contained in the reviewable decision that I have summarised here. I also accept Mr Middlebrook is sorry about what occurred.

20. Ms Ensor also asked Mr Middlebrook about six income tax returns that were filed by or on behalf of his former clients after his registration was terminated towards the end of 2019. Each of the returns quoted the applicant’s tax agent number. Mr Middlebrook said a number of the returns were filed by the taxpayers independently using his number; they were aware of the number, he explained, and he was not responsible for what they did. He denied signing the returns. He reluctantly accepted he had played a role in the filing of up to five of the returns. He agreed he knew he was not allowed to do that because his registration had been cancelled. When pressed why he agreed to do it, he offered lamely: “I wasn’t thinking at the time”.

21. That is completely unacceptable. Mr Middlebrook knew he was not allowed to provide tax agent services following the reviewable decision. He has flouted the law.

22. Mr Middlebrook was also unable to offer a good explanation of why his firm’s website continued to advertise tax agents’ services for some time after the applicant’s registration was cancelled. The applicant said he did not know how to take the website down or change its content. He only managed to take action when it was brought to his attention by the Board. The applicant’s failure to take down the website seems more sinister in light of the finding that he was continuing to provide some tax agent services after he was deregistered.

23. It is a lamentable record, and it reflects badly on Mr Middlebrook. But there is a further matter I should mention to provide context. Mr Middlebrook and his firm have been in trouble before. In 2009, the Board concluded Mr Middlebrook was not a fit and proper person and the company’s registration was cancelled. The Board found an employee had committed fraud when lodging tax returns. The refunds went through the firm’s accounts. Mr Middlebrook’s correspondence with the Board in relation to the affair was found to contain material errors of fact. The Board decided the misstatements were wilful. On review, the Tribunal set aside the decision and concluded Mr Middlebrook’s misstatement was not intentional – but confirmed it was negligent. The registration was suspended for just short of 18 months: Re Allen J Middlebrook & Associates Pty Ltd and Tax Practitioners’ Board [2010] AAT 622. The fact Mr Middlebrook has been the subject of regulatory action before is not an encouraging sign when he offers an assurance that he will change his ways and avoid getting into trouble again.

    Is Mr Middlebrook a fit and proper person?

24. The Board concluded Mr Middlebrook’s conduct contravened a number of provisions of the Code of Professional Conduct in s 30-10 of the TAS Act. Specifically, the Board concluded Mr Middlebrook contravened:

    ·Section 30-10(1), which says: “You must act honestly and with integrity”. The Board relied on the finding about the misstatement contained in the registration application in 2019 when Mr Middlebrook denied he had any outstanding liability to the Commissioner;

    ·Section 30-10(2), which says: “You must comply with the taxation laws in the conduct of your personal affairs”. The Board relied on the fact the applicant failed to declare assessable income in the 2016 and 2017 years of income, and failed to pay his outstanding tax liabilities;

    ·Section 30-10(14), which says “You must respond to requests and directions from the Board in a timely, responsible and reasonable manner.” The Board relied on the failure to respond in a timely way to at least two of its letters.

25. The applicant does not dispute those contraventions, and they are clearly justified given the findings of fact I have made. But the Board went further. It referred to those specific contraventions and similar contraventions by the company to conclude the applicant was not a fit and proper person within the meaning of s 20-5(1)(a). Being a fit and proper person is one of the registration requirements. Having concluded the applicant no longer met one of the requirements for registration, the Board decided to cancel his registration pursuant to s 40-5. (The Board also has the power to terminate in the event of contraventions of the Code of Professional Conduct under Part 3, but it did not rely on that power here. As a technical matter, the reviewable decision was made under Part 4, which deals with registration requirements, and it was the outcome of an investigation process pursuant to s 60-125.)

26. While the applicant reluctantly accepted the findings in relation to ss 30-10(1), (2) and (14), there was some doubt over whether he accepted the finding that he was not a fit and proper person. I am satisfied the finding was justified, for reasons I will explain.

27. Section 20-15 includes criteria for deciding whether someone is a fit and proper person. The section requires that the decision-maker consider:

    (a)whether the individual is of good fame, integrity and character; and

    (b)without limiting paragraph (a):

    (i)     whether an event described in section 20-45 has occurred during the previous 5 years; and

    (ii)    whether the individual had the status of an undischarged bankrupt at any time during the previous 5 years; and

    (iii)   whether the individual served a term of imprisonment, in whole or in part, at any time during the previous 5 years.

28. I should say at once that the applicant has not served any term of imprisonment. He is not an undischarged bankrupt although there is a reasonable prospect of bankruptcy  in the future, according to Mr Woods. There are no other events of the kind referred to in s

    
    

    20-45.

29. I was not provided with evidence about the applicant’s fame, but there are questions over his integrity and character in the circumstances. Mr Middlebrook has now been the subject of regulatory action on two occasions in the course of a decade. In both cases he has, at a minimum, been duped by fraudsters. In each case, he was taken in because of his own carelessness and failure to do his duty. He has also shown a casual attitude towards the truth in his dealings with the regulator. He has shown a lamentable disregard for the rules – most recently, he has continued to provide services after he was disqualified from doing so. He has failed to deal scrupulously with his clients’ funds. He has mismanaged his relationship with the Commissioner.

30. While there is no direct evidence of dishonesty, the applicant’s lack of rigour in the conduct of his affairs and his apparent disregard for the duties of his role adds up to something that is almost as bad, and which certainly reflects poorly on his integrity and character. He may not be dishonest, but he has not demonstrated the commitment to competent and conscientious behaviour that one would expect of a tax agent.

31. Mr Woods encouraged me to hold off on making that judgment because he said there was likely to be medical or psychiatric evidence which might cast the applicant’s behaviour in a more benign light. That evidence is not before me. The applicant had the opportunity to provide the evidence in a way that was procedurally fair, but that did not occur. It may be that his misconduct might be partly explained by his mental health, but that is speculation given the state of the evidence.

    WHAT FORM SHOULD THE REGULATORY ACTION TAKE?

1. It follows I am satisfied the discretion to deregister the applicant under Part 4 is enlivened. I would add my findings suggest the discretion to take action under Part 3 has also been enlivened in light of the acknowledged breaches of the Professional Code of Conduct. The applicant urges me to suspend him for a period of time instead, as I have explained. The power to suspend is contained in s 30-25, which is in Part 3.

2. I am not satisfied that suspension is appropriate in the circumstances. I should explain from the outset that the principle objective of all these powers is protective. Tax agents are trusted with an integral role in the financial affairs of ordinary people and businesses. Clients and the Commissioner must be able to trust agents to do their work competently, diligently and honestly. The powers in the TAS Act (the ones the Tribunal is administering, at any rate) are not intended for punitive purposes.

3. Suspending the applicant will incapacitate the applicant for the life of the suspension. To that extent, the public will be protected. There is also some prospect that a suspension would have a salutary effect on the applicant, although he has been suspended before. The fact he has not learned his lesson calls into question whether a suspension will, on its own, have a specific deterrent effect. I also have concerns that a suspension would be seen by other tax agents as a weak response to serious misconduct. That is particularly worrying in circumstances where the applicant simply failed to engage with the Board or accept the fact of his deregistration.

4. Mr Woods said a suspension would afford the applicant an opportunity to obtain the medical help he probably requires. If the applicant were able to persuade the Board after a period of time – say two years – that the misconduct was attributable to the health problems which were, by then, successfully treated, the suspension could be lifted. That approach is unsatisfactory. Leaving aside for a moment the fact the proposal appears to conflate the powers in s 30-25 and 30-20, I am not satisfied it delivers the sort of certainty that the tax agent community is entitled to expect in regulatory action. It also tends to go against the advice of Downes J and Hack DP in Rent-To-Own (Australia) Pty Ltd [2011] AATA 689 at [47] to the effect that the Tribunal should not be overanxious to permit regulated activity. The applicant has been found not to be a fit and proper person, which is the standard required of somebody in this important regulated occupation. That finding suggests he is not entitled to the benefit of the doubt, much less heroic intervention to protect him from the consequences of his misconduct.

5. The more appropriate course is for the applicant to be deregistered. He should also be prevented from applying for registration for a fixed period. He should not be permitted to apply in the interim because he is unlikely to pull his life together and gather evidence of his fitness for some time. In those circumstances, it makes no sense to give him false hope (and require expenditure of resources by the Board) by permitting him to apply. Once the period has passed, he is free to make a fresh application with supporting evidence about his fitness including any medical evidence.

6. How long should that period of disqualification last? The Board said five years would be appropriate. That is the maximum time permitted under the TAS Act: s 40-25(1). I was referred to a number of cases, including the decisions in Re Li and Tax Practitioners Board (2014) 141 ALD 201 and Re Tung and Tax Practitioners Board (2012) 90 ATR 480 where the applicant was subject to a three-year waiting period. While there are some similarities in the facts of those cases, the Board pointed out the applicant in this case had been involved in more contraventions, so his case was worse – and presumably merited a longer period of restriction. Mr Woods suggested that this was not on any analysis the worst case that could be imagined, so it would be wrong to impose the maximum period of disqualification. He said a much shorter period was appropriate.

7. I observed in Ridden and Tax Practitioner Board [2020] AATA 422 at [40] that consistency is a virtue in administrative justice but there is a danger that unsystematic comparisons between cases will be unproductive. I am mindful of the seriousness of the applicant’s conduct, and the fact he has not learned from earlier experiences. I am also mindful that he may well experience serious ill-health – although that is of no comfort to a client if the applicant is rendered incapable of doing his job. I am also mindful of the applicant’s personal circumstances, which are pitiable. His financial affairs are in dire straits, he is trying to hold his family together and he is in his sixties. That will make finding a fresh line of work much harder. I am also conscious of the need for general deterrence.

8. After weighing all these things together, I am satisfied the applicant should not be permitted to apply for registration for a period of four years. I would vary the decision under review to that extent.

   CONCLUSION

9. The decision to cancel the applicant’s registration as a tax agent is affirmed. The decision to prohibit the applicant from applying for registration is varied from five years to four years.

I certify that the preceding 40 (forty) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe

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Associate

Dated: 18 September 2020

Date(s) of hearing:	24 August 2020
Date final submissions received:	24 August 2020
Counsel for the Applicant:	Mr T Woods
Solicitors for the Applicant:	Mr J Pope, Pope & Spinks Solicitors
Counsel for the Respondent:	Ms C Ensor
Solicitors for the Respondent:	Mr J Kim and Ms J Mills, Tax Practitioners Board