Re Li and Tax Practitioners Board
[2014] AATA 299
[2014] AATA 299
Division GENERAL ADMINISTRATIVE DIVISION File Numbers
2013/3896 & 2013/4154
Re
Cheng Cheng Li
APPLICANT
And
Tax Practitioners Board
RESPONDENT
DECISION
Tribunal Ms J L Redfern, Senior Member
Date 14 May 2014 Place Sydney The decision under review is affirmed.
.........................[sgd]...............................................
Ms J L Redfern, Senior Member
CATCHWORDS
Registration as tax agent – Termination of registration and prohibition on applying for registration for 3 years – Refusal to renew registration - Whether “fit and proper person” – Breaches of the Code of Professional Conduct – Unwitting involvement in fraud by third parties - Failure to keep client information confidential - Failure to take reasonable care in establishing client’s circumstances - Failure to provide tax agent services competently – Decision under review affirmed
LEGISLATION
Tax Agent Services Act 2009 (Cth): ss 20-5, 20-20-15, 20-25, 20-50, 30-10, 30-15, 30-20, 40-5, 40-25, 50-20, 50-35, 60-95, 60-125.
CASES
Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321
Australian Securities and Investments Commission v Adler and ors (2002) 42 ACSR 80; [2002] NSWSC 483
ReSu v The Tax Agents Boardof South Australia (1982) 61 FLR 1
Rich v Australian Securities and Investments Commission (2004-5) 220 CLR 129
Stasos v Tax Agents’ Board (1990) 21 ALD 437
Tung and Tax Practitioners Board [2012] AATA 615REASONS FOR DECISION
Ms J L Redfern, Senior Member
14 May 2014
Background
Mr Cheng Cheng Li (also known as Tom Lee) conducted business as a registered tax agent from November 2010 until his registration was terminated by the Tax Practitioners Board (the Board), effective from 20 August 2013. The Board also disqualified Mr Li from re-applying for registration as a tax agent for a period of three years.
These decisions were made by the Board following an investigation into Mr Li’s apparently unwitting involvement in fraud by third parties, which resulted in the tax file numbers of over 450 taxpayers being compromised. The Board found that Mr Li had breached the Code of Professional Conduct for registered tax agents, was not of good fame, integrity and character and had failed to meet the registration requirements that he be a fit and proper person. The Board also found Mr Li had breached certain provisions of the relevant regulatory legislation by preparing and lodging tax returns for 370 taxpayers for the 2011 financial year in respect of which he was reckless as to whether the statements made in those tax returns were false, incorrect or misleading. The Board commenced proceedings in the Federal Court against Mr Li for pecuniary penalties in respect of these alleged breaches. These proceedings have not yet been determined and are not the subject of review.
After the investigation had commenced but before it had concluded Mr Li made an application for renewal of his registration on 4 March 2013. This application was rejected by the Board on 5 August 2013. But for the cancellation, Mr Li’s registration would have been due for renewal on 1 December 2013.
Mr Li made an application to this Tribunal for review of the decisions to terminate his registration, disqualify him from reapplying for three years and to reject his application for renewal. He applied for a stay pending the outcome of the review on 9 September 2013. The stay was refused. It is common ground Mr Li has not operated as a registered tax agent since 20 August 2013.
Mr Li contended that there were fraudulent intermediaries who held themselves out as representatives of well-known recruitment agencies, and who claimed to have been engaged by a number of clients to lodge tax returns on their behalf. Mr Li prepared and lodged tax returns for the purported clients, which resulted in tax refunds being paid into a bank account nominated by the intermediaries. Mr Li further contended that he notified the Australian Taxation Office (ATO) of the fraud as soon as practicable, and cooperated with the investigation of the Board. He did not deliberately disclose any information about client's affairs to these representatives and otherwise prepared the returns with due diligence and care. He was the “innocent victim of an extremely well-planned, well executed and very clever scheme”. Mr Li also asserted that he is a person of good fame, integrity and character; that he satisfies the requirements for registration as a fit and proper person, and that the circumstances that surrounded the fraud, particularly his unwitting involvement, did not warrant the termination of his registration. On that basis Mr Li contended that the decision of the Board should be set aside, and expressed his willingness to submit to a plan of supervision if the Tribunal considered it appropriate.
The Board contended that the conduct of Mr Li resulted in serious contraventions of the Code. The primary contravention resulted in the tax file numbers of over 450 taxpayers being compromised in circumstances where Mr Li ought to have realised there was a fraud being perpetrated. The Board asserted that Mr Li did not discharge his obligations as a registered tax agent competently, and does not appreciate or accept the significance of these breaches. Mr Li’s failure to appreciate the significance demonstrates Mr Li is not a fit and proper person. The Board also contended that any plan for supervision would be inappropriate given the seriousness of the breaches alleged, particularly in light of Mr Li’s lack of appreciation for the gravity of his conduct. In the Respondent’s view, the decisions of the Board to terminate Mr Li’s registration and disqualify him from applying for registration for three years were both appropriate outcomes in the circumstances the case. These decisions, and the decision not to renew Mr Li’s registration, should therefore be affirmed.
The issues for determination were: first, whether Mr Li breached the various provisions of the Code alleged; second, whether the decisions to terminate his registration, ban him from reapplying for registration for a period of three years and refuse his application for renewal were warranted in the circumstances of the case; and third, whether, notwithstanding these breaches, Mr Li was a “fit and proper person”, and therefore eligible to be a registered tax agent. A further issue arose as to whether the Tribunal should accept a plan of supervision as an alternative outcome.
Relevant statutory framework
The relevant legislation is the Tax Agent Services Act 2009 (Cth) (the TAS Act), which provides for the regulation of tax agents through a regulatory regime of registration, a statutory Code of Professional Conduct (backed by sanctions) and a flexible regime of remedies, which includes pecuniary penalties. The Board has oversight of the scheme.
The registration of tax agents is governed by Part 2 of the TAS Act. Section 20-5(1) provides that an individual is “eligible” for registration as a tax agent if the individual is aged 18 years or more and the Board is satisfied that:
(a) the individual is a fit and proper person; and
(b) the individual meets the requirements prescribed by the regulations (including, but not limited to, requirements relating to qualifications and experience) in respect of registration as a registered tax agent.
Section 20-15 provides as follows:
Criteria for determining whether an individual is a fit and proper person
In deciding whether it is satisfied that an individual is a fit and proper person, the Board must have regard to:
(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.
It was common ground that none of the matters referred to in s 20-15(b) are relevant in this case. .
Section 40-5(1) provides that the Board may terminate the registration of a tax agent if the agent ceases to meet one of the eligibility requirements, namely if the tax agent is not a fit and proper person. Section 20-50(1) provides that the Board may renew registration under s 20-25 on application by a tax agent, but only if the agent meets the eligibility requirements, otherwise the application must be rejected (s 20-25(1)).
Section 30-5 of the TAS Act establishes a Code of Professional Conduct (the Code) which applies to registered tax agents. The Code is set out at section 30-10. It is alleged Mr Li failed to comply with subs 30-10 (6), (7), and (9), which provide as follows:
(6) Unless you have a legal duty to do so, you must not disclose any information relating to a client's affairs to a third party without your client's permission.
…………
(7) You must ensure that a tax agent service that you provide, or that is provided on your behalf, is provided competently.
…………
(9)You must take reasonable care in ascertaining a client's state of affairs, to the extent that ascertaining the state of those affairs is relevant to a statement you are making or a thing you are doing on behalf of the client.)
The Board may impose sanctions on a registered tax agent for failure to comply with the Code comprising: a written caution, an order under s 30-20 requiring the agent to do the things set out in the order (which may include education or training), suspension or termination (s 30-15). The Board may also apply to the Federal Court for the payment of a pecuniary penalty if a tax agent contravenes a civil penalty provision (s 50-35).
If the Board conducts an investigation under s 60-95 (which it did in this case) and finds that the conduct breaches the Act, it must either take no further action or take one or more of the actions set out in s 60-125(2)(b): to impose sanctions, terminate registration or apply to the Federal Court for payment of civil penalties or for an injunction (s 60-125(2)(b)).
Section 40-25 provides that if the Board terminates the registration of a tax agent, it may also determine a period, of not more than 5 years, during which the agent may not apply for registration.
Thus, the registration of a tax agent may be terminated for breach of the Code, as a result of an investigation under s 60-95 or because the tax agent no longer satisfies the “fit and proper” requirement for registration set out in s 20-5(1) of the TAS Act. Given the use of the word “may” in each of the relevant provisions, it is clear this remedy is discretionary. In contrast, there is no such discretion when registration is being renewed. If an applicant is not fit and proper their registration must not be renewed.
Counsel for the Board submitted, and I accept, that the key issue for determination was whether the decisions of the Board to terminate Mr Li's registration and disqualify him from reapplying for registration for three years are correct and preferable. If so, the rejection of Mr Li’s application for renewal necessarily follows from the earlier decisions and all decisions should be affirmed. If not, Mr Li would be properly be reinstated as a registered tax agent and all decisions, including the decision to reject his application for renewal, would be set aside.
The Evidence
Mr Li commenced trading as a registered tax agent on 24 November 2010 from an office in Parramatta under the name “Accountant Professional Services”. He was a sole trader and was the only person with access to his ATO portal. The ATO portal is a web based system for tax agents, which gives the agent online access to information about taxpayer records and other tax agent services. Prior to this, Mr Li worked for a number of years preparing tax returns as an employee.
In August 2011, a man claiming to be “Mr Saiful Islam” attended Mr Li's business premises - without any prior appointment or referral - and asked him to prepare a large number of tax returns for clients. Mr Islam represented himself as an employee of a recruitment agency, and produced a business card from “Kelly Services”. According to Mr Li, Mr Islam wore a suit, conducted himself professionally and was very convincing. Mr Li noted that there was a website for Kelly Services at the time that was consistent with Mr Islam's representations, and for that reason Mr Li accepted the legitimacy of the request. He did not question the instructions at this time.
Mr Li requested that Mr Islam provide him with details for the taxpayers relating to their name, date of birth, address, bank account details, occupation and PAYG payment summaries. Mr Li did not seek to verify Mr Islam’s employment with Kelly Services and did not meet or request to meet or make direct contact with any of the clients referred by Mr Islam.
Mr Islam told him another man would make contact with him, “Sam”, in the near future. Sam attended at his office about a week later with documentation for the returns. Sam attended his office a few times with bundles of documents.
A person who identified himself as “Mr Sunny Rahman” attended Mr Li’s business premises a few weeks later. He said that he was from “Sunny Employment Services” but presented no business card or other identification. Mr Rahman provided documentation for the preparation of tax returns. Mr Li did not meet any of the clients referred by Mr Rahman, nor did he seek to verify his employment or the existence of Sunny Employment Services.
Mr Li was asked to prepare 454 income tax returns by Mr Islam and Mr Rahman. There is no contest about the following matters:
(a)The two intermediaries did not advise how they became aware of Mr Li’s practice. Mr Li did not enter into letters of engagement with the intermediaries, nor did he receive letters of authorisation from the taxpayers;
(b)Mr Li did not contact or speak directly to any of the taxpayers;
(c)Mr Li had never prepared so many tax returns before at any one time, and the preparation of the tax returns comprised two thirds of his practice for the 2011 financial year;
(d)The majority of the taxpayers had high levels of tax withheld relative to their income, and were, in the face of the returns, entitled to refunds. A number of the taxpayers claimed deductions of about $300. Mr Li queried the level of tax withheld and was advised that many of the taxpayers were overseas residents and/or students;
(e)Mr Li charged $60 for each of the tax returns and was paid $22,200 in fees for preparation and lodgement of the returns. He spent about 30 minutes on the preparation of each return;
(f)As part of his process for preparing and lodging returns, Mr Li printed out two pages of the unsigned returns on recycled paper (being the first page and the second last page containing the taxpayer declaration) and handed these copies to the intermediaries for them to have signed by the relevant taxpayer. The copying on recycled paper was done by Mr Li to save money;
(g)Mr Li lodged the completed tax returns after Mr Islam, Sam or Mr Rahman had returned the signed copies to his office ;
(h)Mr Li did not use the ATO portal to check information and did not use the pre-filling function to assist with lodging returns;
(i)Between about mid-August 2011 and about 19 September 2011, Mr Li prepared and lodged, or attempted to lodge, 454 tax returns for the taxpayers on the instructions of Mr Islam, Sam or Mr Rahman;
(j)Of these 454 returns, Mr Li was unsuccessful in the lodgement of 60 returns. The ATO did not process these 60 returns and they were stopped for review. Mr Li was aware the returns were not processed at the time he attempted to lodge them;
(k)The 454 taxpayers did not authorise the two intermediaries to arrange for tax returns to be prepared and lodged on their behalf; the intermediaries were perpetrating a scam to obtain access to refunds from the ATO. The PAYE summaries were not legitimate and the nominated employers, occupation and bank details were incorrect;
(l)Kelly Services is a recruitment company but Mr Islam was not employed by the company;
(m)As part of an investigation by the ATO, an ATO compliance officer reviewed internal records for returns lodged by Mr Li for the 2011 tax year. He found that there were about 400 returns lodged by Mr Li where the salary, wages and tax instalment deductions did not match those recorded on the payment summary details as reported to the ATO by the respective taxpayers’ employers;
(n)There were different bank accounts nominated for the majority of the taxpayers, but in some instances the same bank accounts were nominated for multiple unrelated taxpayers;
(o)33 of the returns which had been printed on ‘recycled’ paper contained information about 85 other taxpayers, of which two were taxpayers unrelated to the scam. The use of recycled paper involved printing two of the pages for the clients (the first and the second last pages) on the reverse side of copy or original draft returns for other clients which were, in some cases, signed and/or included TFN details for the other clients;
(p)After investigation, the ATO found that 454 tax file numbers for returns prepared and lodged, or sought to be lodged, by Mr Li had been compromised. The ATO cancelled the tax file numbers, requiring the taxpayers to attend the ATO to provide identification and apply for a new tax file numbers. The ATO also cancelled the returns, although tax refunds were deposited into bank accounts apparently unrelated to the taxpayers;
(q)On 11 January 2013 the Board commenced investigations into Mr Li’s conduct with respect to the lodgement, or attempted lodgement, of 454 income tax returns for the 2011 financial year. As part of that investigation, investigators interviewed Mr Li, inspected and analysed documents, issued notices to third parties and interviewed a number of the taxpayers for whom returns were lodged. Mr Li co-operated with the investigation;
(r)Other than the issues raised in the Board’s submission to the Board Conduct Committee following the investigation, there have been no other compliance issues regarding Mr Li’s tax agent practice;
(s)Prior to consideration of the matter, Mr Li was given the opportunity to respond to a draft submission to the Board Conduct Committee, which he did by letter dated 14 June 2013.
One of the matters in dispute was the information provided to Mr Li by the intermediaries and whether this information was adequate for him to complete and lodge tax returns to claim the relevant deductions and refunds for each of the 454 taxpayers.
The second issue in dispute was the nature and extent of Mr Li’s communications with the ATO about the returns, when he first became suspicious about the legitimacy of the claims and the action he took in response to those suspicions.
A third issue was the extent to which confidential information of other taxpayers was disclosed to the intermediaries.
Mr Li gave evidence about these matters and was granted an adjournment to search his records and provide further evidence to the Tribunal about the information he said he received from the intermediaries about the taxpayers.
Ultimately there was no significant contest about the key facts.
According to the evidence from Ms Allison De Audney, an investigator for the Board, she reviewed all of the files produced by Mr Li to the ATO as part of the investigation, and prepared a schedule summarising the results of her analysis. Ms De Audney recorded that, of the 454 files she reviewed, there were no “client details” documents for 450 clients and in the four cases where there were written client details, the documents were not signed by the clients. Ms De Audney further noted that there were handwritten notes in respect of 253 files recording the taxpayer’s name, TFN and nominated bank accounts and, in most cases, the nominated occupation. She recorded that although deductions were claimed in 52 cases there were no written instructions about deductions.
In his evidence, Mr Li said he had further documents recording client instructions but that he had not appreciated Ms De Audney was making the assertion that there were only four cases where client details were recorded in the files. This evidence emerged during cross-examination at the resumed hearing. Counsel for the respondent sought to make a submission that the Tribunal should draw a negative inference from the failure of Mr Li to produce documents to support this assertion. Given the significance of this controversy between the parties and Mr Li’s obvious difficulties in understanding and communicating in English, the proceedings were adjourned to give him the opportunity to search his records and provide further documents in support of his contention about the information he had received in respect of the 454 clients.
At the resumed hearing, Mr Li produced “client details” documents for 203 taxpayers, which he said had not been produced to the Board at the time of its investigation because these documents had not been filed. These documents were similar to the documents already produced to the ATO for the four taxpayers referred to in Ms De Audney’s affidavit. The details for the clients included the name of the taxpayer, their address, date of birth, marital status, occupation, bank account details and total deductions claimed. They were not signed and the majority were handwritten.
Mr Li said that he claimed the deductions when they were under $300 and where they appeared to be work-related, without seeking any substantiating documentation or any confirmation that the expense was incurred.. Most of the deductions related to laundry or uniforms and shoes.
Mr Li said he did not find it surprising he had been asked to prepare and lodge so many tax returns. He was satisfied with the explanation given to him about why the intermediaries had asked him to lodge the returns. He was also satisfied about the explanation given for the high level of withholding tax. Mr Li said that he was told the taxpayers were either overseas residents or students. He also said that he noticed that the bank account details were different, although he apparently did not notice that some of the accounts were common between unrelated taxpayers. Mr Li said that nothing had alerted him to the possibility there was fraud, particularly in the early stages of the process. Mr Li commenced preparing and lodging the returns from about mid-August 2011, and it was not until the second or third week of lodging the returns that he had difficulties in lodging some of the returns. Mr Li said that he was not concerned at this stage and as it was not unusual for returns to be rejected by the ATO from time to time where the information was incorrect or inconsistent with ATO records. He said that he was called by an officer from the ATO and asked certain queries about one return, to which he responded. After he responded to these queries, the return was processed.
Mr Li said that he became concerned by about the third or fourth week of lodging returns because a number of the returns had been rejected. Mr Li asked his assistant to check the details of a number of the nominated employers on the internet and obtain telephone numbers for them. Mr Li said he telephoned the employers but when he received no response he contacted the ATO. This was about the third week of September 2011. In his affidavit, Mr Li stated that he attempted to contact the ATO on a number of occasions. There was dispute about whether it was Mr Li or the ATO who had initiated contact first. In his letter to the Board dated 14 June 2013, Mr Li stated as follows;
Before Mr Gong came to see me in October, 2011 I received a telephone call from Ms Teena Walker from the ATO in about September, 2011. She said there was a problem with a return that I lodged as the taxpayer had already lodged her 2011 return.
I immediately called the Australian Taxation Office for help about what I should do. I spoke to a few different people and finally I spoke to a person called Ms Luini D’Souza who was very helpful. She gave me her direct phone number and I called her many times. I explain to her what had happened. She told me not to tell Mr Islam and Mr Rahman that there was a problem and to try and get more information from them.
I was shocked and worried that I may have being (sic) doing something wrong. I was also worried that Mr Islam and Mr Rahman were dangerous people would hurt me if I refused to lodge returns. I often work alone in my office to very late at night and anyone from the street would know I was in my office as my office light is on when I am there. I told Ms D’Souza that I was worried.
................................
I took Mr Sousa's advice and I stopped lodging returns. I told Mr Islam and Mr Rahman that I could not lodge anymore returns unless I received a copy of the taxpayers’ drivers license and a copy of the agreement they had with the taxpayer for them to lodge the returns. Mr Islam told me he was going on holiday and a person called Sam would come and see me with the information.
Mr Li produced correspondence from Ms D’Souza dated 20 September 2011. Mr Li did not lodge any further tax returns after this time.
Mr Li provided statements from over 70 clients to the effect that: he had prepared their income tax returns, he had always been careful to ask them questions about their income and expenses, and that, in their view, he was a competent tax agent. He also provided statements from former employers and co-workers to the effect that he was truthful, professional, competent and careful in his work as an accountant and tax consultant.
During the course of the hearing, Mr Li, through his legal representative, submitted a proposal that Mr Li’s registration should be renewed on the condition that he is permitted only to service existing clients for the next three years. Thereafter it was proposed that Mr Li may accept new clients but must first agree to a plan of supervision as follows:
(a)Each time Mr Li prepares a tax return he must complete a detailed matter checklist covering all practical and professional issues “that one would normally expect a competent tax agent to cover in accordance with best practice” such as new client acceptance protocols, questions to ask clients in an interview, the list of income and expense items, items of information that ought to be independently verified and checked and the method used to check them, results of any independent verification, details of any tax advice provided to the client, the timeline for preparing tax returns, obtaining signed client authority to lodge returns, practical matters in terms of opening, maintaining, invoicing and storage of client files.
(b)Before any relevant tax return is lodged, Mr Li must present the completed checklist to an independent registered tax agent of either: the Board’s choosing or Mr Li’s choosing with prior consent from the Board. The independent tax agent must then review the checklist at a weekly meeting with Mr Li and Mr Li must be prepared to submit any files relating to any such checklists.
(c)After the independent tax agent has satisfied himself or herself that the checklist has been correctly completed and all client matters represented by the checklists have been adequately performed, Mr Li may then be permitted to lodge the relevant tax returns electronically. The independent tax agent must report to the Board as to his or her findings on a monthly basis.
(d)Mr Li would bear all reasonable costs of the independent tax agent and the Board in administering the supervision program.
Mr Li expressed remorse about using recycled paper containing information of other clients and said that he would no longer use this practice. He conceded that it was “negligent” to allow the intermediaries to take the two pages of the tax returns, which contained confidential information of other taxpayer out of his office. Mr Li said it was his usual practice to ensure that taxpayers signing returns copied on recycled paper signed the return in front of him. When asked about what would happen if the taxpayer turned the page over and looked at the information, Mr Li said that he would ask the taxpayer to not refer to the reverse side of the document. He said that it would be “rare” for original documents, containing the original signature of the taxpayer, to be used as recycled paper, but agreed that he would use insurance information provided by taxpayers in the recycling photocopier. Mr Li was asked about his attitude to using this information and gave the following response [at T81]:
Q: And it's not just taxpayers’ tax information that is on the back of the relevant documents, is it? There is also insurance information, for instance; do you agree?
A: Correct. I feel the insurance information is not that – that – so I put them in the recycled papers.
Q: The answer was a bit incomplete there. Did you mean to say insurance information is not as important as tax information so you put in the recycled paper?
A: No, I'm – no. It's the – I put in print – recycled printer but that was for my own copy and no one else would have viewed those documents.
Q: But people have viewed those documents, Mr Li.
A: Well, perhaps we will – maybe it's, like, my negligence, and I didn't think. So I might have been negligent when I allow the customer to take this out of my office.
Mr Li also expressed remorse about his involvement in the scam but was not prepared to concede he had made a mistake when he was questioned about the issue. This is illustrated by the following passage of transcript[at T95]:
Q: As you sit here today, do you consider that you have done anything wrong?
A: I felt I was fooled by them. I was stupid. I don't feel I have made any mistakes.
Mr Li was also questioned about a statement made to the Board in his letter dated 14 June 2013 to the following effect:
I had never received a false payment summary before and I know that if the information was incorrect the Australian Taxation Office would not approve it.
When Mr Li was asked to explain what he meant by this statement he said that there were “possible grammatical mistakes” in the letter, but when pressed he could not satisfactorily explain why he had made this statement or what he intended to convey. Mr Li was questioned about the role of the ATO and responded as follows [at T88]:
Q: So when the Australian Taxation Office received tax returns, do you think they approve them and look at them and monitor them? What do you think they do?
A: I feel in normal cases they will – they will process it.
Q: They will process it? But does that mean they approve it or look at it or form a view about it?
A: In normal cases they would approve it unless in some serious events such as when the caught me they would ask that – they would tell me the date of birth is wrong. Usually they would approve.
The Board found that Mr Li had breached subs 30–10(6) of the Code by disclosing information relating to other taxpayers’ income tax returns to third parties without permission or a legal duty to do so; subs 30–10(9) of the Code by failing to take reasonable care in ascertaining the state of affairs of 394 taxpayers in respect of which he prepared and lodged returns for the 2011 financial year and subs 30–10(7) of the Code by not ensuring that the services he provided in relation to the income tax returns for these 394 taxpayers were provided competently. The Board also found that Mr Li had breached s 50–20 in preparing income tax returns for the 2011 financial year which contain statements, which he knew, or ought reasonably to have known, were false and misleading. The Board found that Mr Li no longer satisfied the “fit and proper” requirement for registration under s 20-5(1) of the TAS Act.
Mr Li has a wife and two children. There was no dispute that the termination of Mr Li’s registration and the disqualification for a period of three years would have a negative impact on Mr Li’s ability to generate income through his own business.
Consideration
The issues for determination are whether Mr Li’s registration should have been terminated, whether he should be disqualified from reapplying for registration for three years and whether his subsequent request for renewal of his registration should have been rejected.
The Board found Mr Li had breached ss 30-10(6), (7) and (9) of the Code and s 50-20 of the TAS Act. Mr Li’s registration was terminated by the Board on the basis he no longer satisfied the “fit and proper” requirement for registration under s 20-5(1) of the TAS Act. While the Board did not terminate Mr Li’s registration for breach of the Code under s 30-30, the nature and extent of those breaches were clearly relevant to the Board’s consideration of whether Mr Li was “fit and proper”. Having made these findings, the Board also determined it was appropriate to disqualify Mr Li from applying for registration for three years and rejected his application for renewal of his registration.
I am not bound by the Board’s findings but I am nonetheless persuaded by this approach. In my view it is relevant to consider whether Mr Li is fit and proper having regard to the nature and extent of any breaches of the Code. The Code establishes professional standards for tax agents and, while a breach of the Code does not preclude eligibility, repeated or serious breach may demonstrate that the tax agent is not of good fame, integrity and character and thereby, not fit and proper.
If I find Mr Li is not a fit and proper person to be registered as a tax agent there is discretion under s 40-5(1) as to whether I terminate his registration. There is also discretion as to whether I terminate Mr Li’s registration if I find that there have been breaches of the Code. However, as already noted, if I find Mr Li is not a fit and proper person to be registered as a tax agent, there is no discretion to renew his registration. As provided by s 20-25(1) of the TAS Act, I must reject the application for renewal. As such, the issue of whether there have been breaches of the Code is relevant to, and will inform, the question of whether Mr Li is a fit and proper person to be registered as a tax agent but the critical issue in determining these various applications for review, at a practical level, is whether Mr Li satisfies the fit and proper requirement for eligibility to be registered.
The comments of Hill J in Stasos v Tax Agents’ Board (1990) 21 ALD 437, although made with reference to the former regime, remain authoritative in light of the continuing relevance of the “fit and proper” test. In that case, his Honour observed that the legislature chose to confer on registered tax agents “a virtual monopoly in the preparation for reward income tax returns and objections and in relation to the transaction of any business on behalf of the taxpayer in income tax matters for reward”. Hill J stated at [443] as follows:
The conferral of this privilege upon registered tax agents carries with it a consequent set of obligations and responsibilities. A person is required, before being registered as a tax agent to demonstrate that he is a fit and proper person to prepare income tax returns and transact business on behalf clients in tax matters and, inter-alia, that as at the date of the application he is of good fame, integrity and character.
As noted by the High Court in Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 at 349, a person “who lacks a proper appreciation of their responsibilities or does not discharge them is, may be adjudged not to be, a fit and proper person”.
In ReSu v The Tax Agents Boardof South Australia (1982) 61 FLR 1, Davies J at page 4 noted:
A person is a fit and proper person to handle the affairs of a client if he is a person of good reputation, has a 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.
The assessment is to be made at the time of the decision, not the time of the wrongdoing, and a person who has been shown to be other than a fit and proper person must establish he appreciates the significance of his wrongdoing. According to Hill J in Stasos [at 445]:
...a person who has been shown to be other than a fit and proper person to be registered must satisfy the Tribunal considering his re-registration or cancellation of his registration as the case may be, that he appreciates the significance of his wrongdoing, that he regrets it and that he has rehabilitated himself such that it is truly unlikely that there will be any lapse in the future of the standards which are required of him. The more serious his dereliction from duty the longer may be the time necessary to show this. It will not be sufficient for him to merely express his contrition. The Tribunal must be satisfied on the balance of probabilities that not only is that contrition actually felt, but that he will not again deviate from the high standards required of him as a registered tax agent.
Having regard to these principles and the evidence, I am not satisfied Mr Li is a fit and proper person to continue to act as a registered tax agent.
Mr Li has demonstrated a number of failures where his conduct has not only fallen short of the Code, but where he has also failed to accept or appreciate the significance of his non-compliance.
I am satisfied Mr Li breached the confidentiality of his clients, and thereby subs 30-10(6) of the Code, by printing tax returns on recycled paper which contained confidential information on the reverse. He admitted to doing this not only for some of the 454 taxpayers but also for other clients as part of his usual practice. It was submitted on behalf of Mr Li that there were only two instances where taxpayers, other than the compromised taxpayers, were affected by the breach. In my view this submission does not adequately respond to the complaint.
There is no dispute that prior to the issue being raised by investigators, Mr Li had a practice of using recycled paper containing confidential information of taxpayers to print tax returns. He gave access to this information to other taxpayers when he handed the tax returns printed on recycled paper to them and asked them to review and sign the returns. Mr Li sought to minimise the seriousness of this practice by stating he invariably requested that taxpayers sign the returns in his office. He said that he would ask clients not to read the reverse side of the returns and would not allow them to take the returns away. He used the recycled paper to save money. On occasion, the recycled paper would include original returns signed in error.
It was not clear from Mr Li’s evidence how he could be satisfied that the information would remain confidential in these circumstances. Nor was there evidence to support Mr Li’s contention that it was his invariable practice to ensure copies remained in his office. This is particularly relevant given Mr Li agreed to release over 450 copies of such tax returns to third parties and allowed those returns to be taken from his office. While it was submitted that only two taxpayers who were not part of the scam were affected, there is no evidence Mr Li knew this was the case or that he turned his mind to the issue of what information was on the recycled paper. In other words, it was simply fortuitous that more taxpayers were not affected by the breach.
The use of the recycled paper to save money created an unnecessary risk to the confidentiality of information in Mr Li’s possession in respect of his clients’ affairs. Mr Li has been in practice as an accountant and tax consultant, both as an employee and working on his own account, since 2006. He was not inexperienced yet, apparently, did not recognise this as a risk until it was raised with him by the ATO investigators. When giving evidence, Mr Li suggested it may be appropriate to use copies of the taxpayers’ insurance information as recycled paper, but when pressed on this issue, he sought to retract this evidence without proper explanation. While Mr Li said he would no longer use this practice, having regard to his evidence and response to the Board’s investigators I am not satisfied Mr Li appreciates the significance of this breach or the importance of the confidentiality of his clients’ information.
I am also satisfied that Mr Li breached subs 30-10(7) and 30-10(9) of the Code in respect of the preparation and lodgement, and attempted lodgement, of the tax returns for 454 taxpayers.
There was initially significant dispute about the information provided to Mr Li about each of the clients. This dispute was based on the evidence of Ms De Audney that she had only identified written information for four of the taxpayers in Mr Li’s files. Mr Li produced copies of written “client details” documents for an additional 203 taxpayers. This information included details about the taxpayer’s name, their date of birth, tax file number, occupation and bank account details. However, the production of this material does not alter the critical complaint made against Mr Li, namely that he failed to verify these details or the legitimacy of the claims notwithstanding the unusual nature of his instructions. Significantly, none of the client detail documents were signed by the taxpayers and Mr Li was not provided with any contact details for the taxpayers.
Mr Li did not seek to verify that the information provided by the intermediaries was legitimate or authorised in circumstances where he ought to have made further enquiries. Mr Li did not know the intermediaries, he had never taken instructions in this manner before, the instructions represented two thirds of his business at the time, the intermediaries provided no written authority to act, Mr Li asked for no such authority and all returns involved significant refunds because of the high levels of tax withheld.
When some of the returns were rejected by about the second week of lodgement, Mr Li did not make further enquiries and asserted he was not suspicious. He stated that he only became suspicious by the third week when a number of additional returns were rejected. Notwithstanding these suspicions Mr Li continued to process the tax returns for another week and only ceased lodging returns after discussions with the ATO.
Mr Li did not request substantiation for the deductions claimed. He relied on the fact that the amounts claimed were below the threshold where receipts were required, and formed a view based on the occupation indicated for each of the claimants. He did not speak to any of the taxpayers to satisfy himself the expenses had been incurred. Furthermore, Mr Li did not accept that there was anything wrong with this approach.
While I accept Mr Li was not knowingly involved in the scam, I am not satisfied he was careful or prudent in accepting and processing the instructions when he ought to have made further enquiries. Mr Li conceded this was “foolish”. In my view Mr Li’s failure to enquire further and, at the least, seek proof of the identity of the intermediaries and their authority to act was negligent and unprofessional. The consequences of Mr Li’s actions were serious. He facilitated the scam and thereby assisted the intermediaries in compromising 454 tax file numbers of innocent taxpayers. Those taxpayers were forced to delay the lodgement of their tax returns for months. Mr Li had already lodged returns and in some cases tax refunds were paid into false accounts. There were affidavits from a number of innocent taxpayers affected by the scam who had been interviewed by the ATO investigators. The evidence of those taxpayers was to the effect that they were shocked their tax file numbers had been compromised and tax returns had been lodged in their names without their authority. There was not only significant inconvenience for those taxpayers in obtaining new tax file numbers but the credibility of the tax system was undermined. These taxpayers ultimately received their tax refunds but there was nonetheless a fraud on the Commonwealth as a number of refunds were paid into false accounts.
As a registered tax agent, Mr Li held a position of trust. He breached his position by lodging false tax returns and disclosing confidential information. I accept Mr Li’s evidence that his actions were not intentional but the consequences of his breach were very serious.
Mr Li does not accept responsibility for his actions. Even though he professes to be remorseful I am not satisfied he appreciates the nature and extent of his obligations as a tax agent or the seriousness of his breaches. This is evidenced by Mr Li’s failure to acknowledge he has done anything wrong.
Mr Li set out his understanding about the role of the ATO when tax returns were lodged online in his letter of 14 June 2013. Mr Li stated that if information was incorrect “he knew” the ATO would not approve the tax return. It is implicit that Mr Li believed the ATO would identify any problems and felt comforted by this. He continued to lodge returns, even though several were rejected, and only stopped lodging returns after discussions with the ATO. When Mr Li was questioned about this issue during the hearing, he initially sought to resile from the statement made in his letter but nonetheless failed to give an adequate explanation of why he had made this statement or what he intended to convey. Mr Li suggested this may have been a grammatical error. I do not accept this evidence. Relevantly, Mr Li did not, in his discussions with investigators, his submissions to the Board or his evidence to the Tribunal, acknowledge that it was his role to verify information provided to the ATO. I am not satisfied that Mr Li fully appreciates the role of the tax agent as a ‘gate keeper’ for the integrity of the tax system.
Mr Li provided character references from former colleagues, employers and existing clients. However, this evidence did not specifically address the findings of the Board. None of the clients were asked to address the issue of whether their confidential information had been disclosed to others nor was there any evidence about whether accepting instructions from third party intermediaries was prudent or common practice. The evidence of Mr Li’s former colleagues, employers and clients is to the effect that he has been diligent in the preparation of tax returns and there have been no issues raised about non-compliance with the Code or the tax legislation in the past. This may well be the case. Indeed there was no contest that there were no previous complaints or allegations of breach made against Mr Li prior to the Board’s investigations. The difficulty with the evidence is it does not take into account the significant role Mr Li had in facilitating a fraud that not only affected Commonwealth revenue but had serious consequences for 454 innocent taxpayers. This is not a case where the fraud was unavoidable. If Mr Li had asked for written signed instructions, copies of driver’s licences or if he had insisted on direct contact with taxpayers and used the pre-filling function of the ATO portal to verify the information, it is unlikely this fraud could or would have proceeded any further.
The seriousness of the breaches of the Code and Mr Li’s lack of insight into their significance have led me to conclude he is not fit and proper to be registered as a tax agent for the purposes of the TAS Act.
Mr Li’s legal representative sought to distinguish his case from another case before the Tribunal decided by Senior Member Allen of Tung and Tax Practitioners Board [2012] AATA 615. In that case Senior Member Allen affirmed a decision of the Board to terminate Mr Tung’s registration as a tax agent and disqualify him for a period of three years in circumstances where Mr Tung was involved in lodging tax returns for 346 taxpayers on instructions from six intermediaries. As with this case, those instructions were fraudulent. There was a finding that Mr Tung had adopted a “cavalier approach” to the filing of returns and was on notice that some of the returns lodged did not conform to details held in the ATO portal. According to Senior Member Allen, given the undisputed facts in the case, it was open to the Tribunal to make findings that Mr Tung was well aware the returns he was lodging were fraudulent, or that he suspected the returns were suspicious. Mr Tung decided not to make any further or better enquiries in case his suspicions would be confirmed, or that the conduct of his practice was so negligent that he could not recognise a fraudulent scheme even when it should have been apparent to any competent practitioner in the field.
Having reviewed the decision in Tung, I find little distinction. In my view, the following comments of Senior Member Allen at [31]–[34] are apposite:
31 Given the Applicant's conduct and the loss occasioned to the tax payer from the fraudulent returns, plus the affairs of genuine taxpayers being compromised by the fraudulent use of their tax file numbers, I find that disqualification is the only penalty that can properly be imposed in this case.
32 Pursuant to section 40-25 TAS Act, the Respondent applied a period of three years before the Applicant could reapply for re-registration.
33 I consider similar arguments apply to the period of disqualification as to the disqualification itself. See particularly the comparison by McHugh J in a Rich v ASIC supra between the banning orders and the law relating to sentencing.
34 In this matter there is a need not only for general deterrence to make it clear to other tax agents that wilful blindness to fraudulent schemes will be met by condign punishment, but also individual deterrence to this Applicant taking into account the severity of his conduct.
Senior Member Allen concluded that, given Mr Tung’s conduct, it was unlikely he could satisfy the Board in the immediate future that he was a fit and proper person to prepare taxation returns. He noted as follows at [36]:
A definite period of deregistration allows a degree of certainty and nominates the period in which the applicant may take steps to restore his reputation. The period in this matter, namely three years, is to my mind entirely appropriate.
In Rich v Australian Securities and Investments Commission (2004-5) 220 CLR 129 at 155, McHugh J commented on the nature of disqualification proceedings and noted that the jurisdiction under the Corporations Act 2001 (Cth) could not be properly characterised as “purely protective”. While the central issue in the case was whether the privilege against exposure to penalties and forfeitures was available to the defendant in civil penalty proceedings, McHugh J cited with approval the principles set out in the decision of Santow J in Australian Securities and Investments Commission v Adler and ors (2002) 42 ACSR 80; [2002] NSWSC 483 at [55]–[56]. In that case, Santow J helpfully set out the guiding principles to be taken into account when the disqualification of a director is being considered. These principles have subsequently been adopted in a number of disqualification cases unrelated to directors’ duties.
In ASIC v Adler Santow J identified the factors relevant to disqualification. I am of the view that these matters are similarly relevant to my consideration of whether termination is appropriate in the circumstances of this case and, if so, whether disqualification of Mr Li from re-applying for registration for a period of three years is also appropriate. The factors referred to by Santow J, that would also be relevant to this case, can be summarised as follows:
(i)Banning orders are designed to protect the public from the harm;
(ii)The banning order is protective against present and future breach;
(iii)A banning order has a motive of personal deterrence, though it is not punitive;
(iv)The objects of general deterrence are also sought to be achieved;
(v)In assessing the fitness of a person to be permitted to provide tax agent services, they have an understanding of their role and obligations;
(vi)In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public;
(vii)Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty;
(viii)It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct;
(ix)A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming;
(x)It is necessary to assess matters such as the character of the person, the nature of the breaches, risks to others from the continued registration of the person;
(xi)Factors which lead to the imposition of the longest periods of disqualification include large financial losses, high propensity for the person to engage in similar conduct and lack of contrition or remorse.
Findings and Conclusion
Having regard to the guiding principles in ASIC v Adler, the objects of the TAS Act, my findings about Mr Li’s conduct and his breaches of the Code and Mr Li’s failure to accept the gravity of the breaches or to satisfy me they will not reoccur, I find Mr Li is not a fit and proper person to continue to be registered as a tax agent and his registration should be terminated.
I am not satisfied the proposed plan of supervision is an acceptable alternative to termination and disqualification for a period given the circumstances of the case. First, there is no rationale for excluding Mr Li’s existing clients from the plan of supervision. As noted by Counsel for the Board in his written submissions, Mr Li’s existing clients require protection from improper tax agent practices and there is no reason why existing clients should be treated differently from new clients. Secondly, there is no evidence as to how the proposed plan for supervision would be implemented. Thirdly, the plan would be difficult to monitor and would be costly and impractical. In this regard, it should be noted that Mr Li provided no evidence as to how he would implement and pay for the supervision, the cost of which is likely to vastly exceed Mr Li’s usual fee for preparing and lodging returns. Finally, Mr Li has not demonstrated a good understanding of the gravity and serious consequences of his breaches. As such, a plan which allows his continued practice as a tax agent, albeit under supervision, does not address the significant regulatory concerns raised by the Board’s investigations.
There have been numerous breaches of the Code. Those breaches are serious and there has been loss and inconvenience to taxpayers. While there is no evidence of dishonesty, there is evidence of incompetence and negligent, if not wilful, breach. Mr Li has expressed remorse but has also sought to minimise his role and the extent of his responsibility for the fraud. Specific deterrence is therefore a relevant consideration in this case. General deterrence and the importance of maintaining standards are also relevant. Against this, it should be noted that Mr Li will suffer hardship if he is unable to practice as a registered tax agent and is disqualified from re-applying for three years. Mr Li was employed as a tax consultant from 2006 until 2010 and one of his character witnesses was a former employer. It is possible, and there was no evidence to suggest otherwise, that Mr Li will be able to find alternative employment until his period of disqualification expires in just over two years’ time. As stated by Santow J, it is necessary to balance the personal hardship of the person against the public interest.
In this case, the public interest is in favour of termination and a sufficiently lengthy disqualification to ensure Mr Li properly reflects on his conduct, the public is protected from harm and other tax agents are deterred from engaging in similar conduct.
I am therefore satisfied that termination and disqualification from re-applying for registration for three years, which is in the mid-range of the potential prohibition period, is appropriate. Given my finding that Mr Li is not a fit and proper person to be registered, his registration cannot be renewed.
I therefore affirm the decisions of the Board to terminate Mr Li’s registration as a tax agent, to disqualify him for reapplying for a period of three years and to reject his application to renew his registration.
I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of Ms J L Redfern, Senior Member
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Associate
Dated 14 May 2014
Dates of hearing 20 December 2013 and 21 January and 18 February 2014 Solicitors for the Applicant Mr Brian Hor, WillWorks Pty Ltd, Lawyers Solicitors for the Respondent Australian Government Solicitor Counsel for the Respondent Mr M Bennett
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