S & T Income Tax Aid Specialists Pty Ltd Trading as Alpha Tax Aid and Tax Practitioners Board
[2021] AATA 161
•5 February 2021
S & T Income Tax Aid Specialists Pty Ltd Trading as Alpha Tax Aid and Tax Practitioners Board [2021] AATA 161 (5 February 2021)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2019/5061
Re:S & T Income Tax Aid Specialists Pty Ltd Trading as Alpha Tax Aid
APPLICANT
AndTax Practitioners Board
RESPONDENT
DECISION
Tribunal:Senior Member A Poljak
Date:5 February 2021
Place:Sydney
The Tribunal DIRECTS:
the stay of the decision under review, granted on 9 October 2019, is discharged on the date of this decision; and
the decision under review is affirmed.
...............................SGD.........................................
Senior Member A Poljak
Catchwords
TAX AGENT – termination of registration – whether the applicant failed to comply with subsection 30-10(7) of the Code of Professional Conduct - where the applicant repeatedly failed to render tax agent services in a competent manner - where the applicant failed to make sufficient enquiries and failed to substantiate work-related deductions on numerous occasions – where the applicant failed to take reasonable steps to ensure that taxation laws were applied correctly in the circumstances – where the applicant failed to have knowledge of when deductions were allowable under the taxation laws - whether termination was the appropriate sanction – whether termination of registration in the public interest – decision under review affirmed
Legislation
Income Tax Assessment Act 1997 (Cth)
Tax Agent Services Act 2009 (Cth)
Cases
Re Su and Tax Agent’s Board (SA) (1982) 13 ATR 192
Secondary Materials
Law Administration Practice Statement 2001/6
Law Administration Practice Statement 2005/7
Taxation Ruling 95/13
Taxation Ruling 98/5
Taxation Ruling 2004/6Taxation Ruling 97/12
REASONS FOR DECISION
Senior Member A Poljak
5 February 2021
S&T Income Tax Aid Specialists Pty Ltd, the applicant, was incorporated on 18 February 1976. Mr Sarwat McGuid is the managing director of the applicant. He has been a tax agent in Australia for over 40 years, operating through the applicant for most of that time. At the time of hearing, the applicant had around 600 clients.
In respect of the income year ended 30 June 2016, the Australian Taxation Office (“ATO”) conducted an audit of eight of the applicant’s clients (eight subject taxpayers). All eight subject taxpayers had work-related expense claims reduced and/or disallowed. On average, the ATO allowed only 18% of the work-related expense deductions claimed. In addition, the ATO imposed penalties on six of the audited clients personally. Following the audit, the ATO lodged a complaint with the Tax Practitioners Board (“the Board”) on 25 May 2018.
On 21 June 2019, the applicant received a submission to a Board Conduct Committee from the Board alleging that the applicant failed to ensure that a tax agent service that it provided, or that was provided on its behalf, was provided competently by preparing and lodging income tax returns (“ITRs”) on behalf of eight subject taxpayers for the financial year ending 30 June 2016, without taking adequate steps to ensure that the ITRs contained accurate information that was supported by appropriate substantiation.
On 11 July 2019, the Board found that the applicant had failed to comply with subsection 30-10(7) of the Code of Professional Conduct (“Code of Conduct”) in the Tax Agent Services Act 2009 (Cth) (“the Act”). As a result, the Board terminated the applicant’s registration as a tax agent, effective 26 August 2019, pursuant to section 30-30 and subsection 60-125(2)(b)(i) of the Act. The applicant has sought review of this decision (“decision under review”).
On 9 October 2019, the Tribunal granted, with conditions, a stay of the decision under review until the determination of these proceedings or until further order of the Tribunal.
ISSUES
The issues to be determined in these proceedings are:
(a)whether the applicant failed to comply with subsection 30-10(7) of the Code of Conduct and failed to render tax agent services competently regarding the eight subject taxpayers for the 2016 income tax year; and if so,
(b)what sanction ought to be imposed under the Act.
In determining whether the applicant failed to comply with s 30-10(7) of the Code of Conduct and failed to render tax agent services competently, consideration should be had as to whether, in 2016, Mr McGuid:
(a)had knowledge of when deductions were allowable under the taxation laws;
(b)took reasonable steps to ascertain the eight subject taxpayers’ state of affairs;
(c)took reasonable steps to ensure that taxation laws were applied correctly in the circumstances; and
(d)took reasonable steps to ensure that the ITRs contained accurate information that was supported by appropriate substantiation.
RELEVANT LEGISLATIVE PROVISIONS
The object of the Act, as stated in section 2-5, is to ensure that tax agent services are provided to the public in accordance with appropriate standards of professional and ethical conduct. This is to be achieved by (amongst other things):
(a)establishing a national Board to register tax agents, BAS agents and tax (financial) advisers; and
(b)introducing a *Code of Professional Conduct for *registered tax agents, BAS agents and tax (financial) advisers; and
(c)providing for sanctions to discipline registered tax agents, BAS agents and tax (financial) advisers.
Deductions taxpayers can claim are allowable if they fall within the general deduction provisions in section 8-1 of the ITAA. Section 8-1(1)(a) allows a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing assessable income.
Part 3 of the Act contains the Code of Conduct. Section 30-10 sets out the Code of Conduct, which includes relevantly:
(7) You must ensure that a *tax agent service that you provide, or that is provided on your behalf, is provided competently.
Section 30-15 provides that if the respondent is satisfied, after conducting an investigation under Sub-Div 60-E, that a tax practitioner has failed to comply with the Code of Conduct, then the respondent may do one or more of the following things:
(a)give the tax practitioner a written warning;
(b)give the tax practitioner an order under section 30-20;
(c)suspend the tax practitioner’s registration under section 30-25; or
(d)terminate the tax practitioner’s registration under section 30-30.
The Explanatory Paper TPB 01/2010 of the Tax Practitioners Board as to the Code of Professional Conduct deals with the meaning of ‘competency’ under the Code of Conduct and details a non-exhaustive list of circumstances that suggest a lack of competence. It relevantly includes circumstances such as not making sufficient enquiries about a client’s affairs to be reasonably satisfied the documents they prepare and lodge on behalf of their clients are correct.
THE APPLICANT’S CONDUCT IN RESPECT OF THE EIGHT SUBJECT TAXPAYERS
Notices of Amended Assessments
As a result of the audit conducted by the ATO of the eight subject taxpayers in respect of the income year ended 30 June 2016, the notices of amended assessment can be summarised as follows:
Taxpayer
Original deductions claimed ($)
Allowable deductions ($)
Penalty ($)
Tax shortfall ($)
1
14,846.00
150.00
1,377.45
5,509.91
2
18,826.00
5,996.00
+809.67
6,805.67
1,669.50
-76.85
1,592.65
5,705.40
-396.41
5,308.99
3
13,425.00
6,001.00
0.00
1,014.29
4
14,762.00
8,134.00
0.00
2,600.52
5
11,560.00
1,076.00
1,089.15
4,356.66
6
10,590.00
0.00
935.20
3,740.91
7
13,037.00
0.00
1,173.15
4,692.68
8
7,857.00
0.00
766.05
3,064.23
Total
104,903.00
22,166.67
6,933.65
30,288.19
Pursuant to the Taxation Administration Act 1953 (Cth), Sch 1, s 350-10(1), each of the notices of amended assessments is conclusive evidence that the amended assessment is properly made and that the amounts and particulars of each amended assessment are correct.
Taxpayer 1- Crane Operator and Rigger
Taxpayer 1 was a crane operator and rigger during the 2016 income tax year. The applicant claimed, on his behalf, deductions for work-related car expenses, clothing, laundry and dry-cleaning expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. The ATO imposed an administrative penalty on Taxpayer 1 in the amount of $1,377.45 on the ground that he had failed to take reasonable care when he prepared his 2016 ITR. The findings of the ATO, and evidence of Mr McGuid’s conduct regarding each deduction claimed are summarised as follows:
D1- Work Related Car Expenses
Taxpayer 1 claimed $11,461 for work-related car expenses. The ATO decided to reduce the claim to $0 on the ground that he had not provided a letter from his employer to support the claim that he was required to use his personal vehicle in the course of his employment. The ATO was not satisfied that Taxpayer 1 was required to use his car for work purposes.
Taxation Ruling TR 95/34 (titled “Income tax: employees carrying out itinerant work- deductions, allowances and reimbursements for transport expenses”) (TR 95/34) set out the following relevant principles:
(a)it is only if the job requires a taxpayer to travel that his or her expenses of that travel can be deducted;
(b)for this doctrine to apply, the taxpayer must be required by the nature of the job itself to do the work of the job in two places; and
(c)the mere fact that the taxpayer may choose to do part of it in a place separate from that where the job is objectively located is not enough.
At hearing, Mr McGuid agreed that at the time of preparing the 2016 ITR for Taxpayer 1 he was aware that in order to be satisfied that a car was truly work-related, the ATO required some form of objective evidence. Without objective evidence supporting a connection between the use of the car and earning the assessable income, Mr McGuid agreed that the ATO would be unlikely to accept the claim. He accepted that Taxpayer 1 did not provide objective evidence in the form of either a letter from his employer, or a position description, or a written direction from his employer, advising that he was required to travel for work. Mr McGuid accepted that a competent tax agent would have advised Taxpayer 1, before he lodged his ITR, that without objective evidence it was likely that the ATO would reject his claim for work-related car expenses.
There is no contemporaneous evidence, such as a file note, recording that Mr McGuid advised Taxpayer 1, prior to lodgement of the ITR, that he needed objective evidence to substantiate his claim for work-related car expenses.
Written responses from Taxpayer 1’s wife, an authorised contact, on 6 February 2019 disclose that at no stage before the audit was Taxpayer 1 told that he may need a letter from his employer to substantiate work-related car expenses.
During cross-examination, Mr McGuid identified Taxpayer 1’s PAYG Payment Summaries as evidence to support the claim for work-related car expenses. The PAYG Payment Summaries identifies expenses for “travel” and are for far smaller amounts (only $360 and $5,985 respectively). There is nothing on the face of the documents about the nature of the travel expenses sufficient to support the claimed deductions.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses
Taxpayer 1’s claim for work-related clothing, laundry and dry-cleaning expenses comprised protective gear in the amount of $210; safety shoes in the amount of $300; hard hats for $60; rigger gloves in the amount of $150 and laundry expenses of $288.
Taxation Ruling TR 98/5 (Titled “Income tax: calculating and claiming a deduction for laundry expenses”) (TR 98/5) set out the rules for calculating and claiming a deduction for laundry expenses. Laundry expenses fall within the definition of 'work expenses' (at [8]). Laundry expenses are those expenses to do with washing, drying or ironing clothes but not dry cleaning. Expenses such as washing detergent, water and electricity may be claimed as a deduction. TR 98/5 addresses separately the situations where total laundry expenses incurred for the income year are up to $150; and are more than $150. In relation to substantiating laundry expenses, TR 98/5 relevantly provides at [19] - [22] (Note: Act refers to the Income Tax Assessment Act 1997 (Cth) (ITAA)):
Laundry expenses up to $150
19. Where the total amount of laundry expenses incurred in the income year is up to $150, there is no need to retain written evidence of each laundry expense - subsection 900-40(1) of the Act (formerly subsection 2-6(1) of Schedule 2B of the old Act).
20. However, a taxpayer may calculate their laundry expenses by keeping written evidence. See paragraph 8 for an explanation of what is written evidence.
21. Where a taxpayer does not keep written evidence of their laundry expenses, the Commissioner will allow a claim of $1 per load (which covers washing, drying and ironing) in situations where only work related clothing is being laundered, and 50 cents per load where both private and work related clothing is being laundered at the same time. This is hereafter referred to as the 'Commissioner's estimate'. If the Commissioner's estimate is used, a taxpayer should keep details of the number of washes that were done during the year, and what type of clothes (work related, private or both) were included in each wash.
Laundry expenses more than $150
22. Where the total amount of work expenses incurred in the income year is $300 or less, there is no need for written evidence to be kept for laundry or other work expenses even if the laundry expenses are more than $150 - section 900-35 of the new Act (formerly section 2-5 of Schedule 2B of the old Act). A taxpayer may use the Commissioner's estimate of laundry expenses or calculate their laundry expenses by keeping written evidence. However, where the total amount of work expenses is more than $300, then to claim laundry expenses that total more than $150, a taxpayer must keep written evidence of all their laundry expenses (not just the amount above $150).
Section 900-35(1) of the ITAA provides:
(1)If the total of all the *work expenses (including *laundry expenses but excluding *travel allowance expenses and *meal allowance expenses) that you want to deduct is $300 or less, you can deduct them without getting written evidence or keeping travel records.
Note 1: If the total is more than $300, you need to substantiate all the work expenses, not just the excess over $300.
Note 2: Whether or not your work expenses total $300 or less, for certain expenses that are each $10 or less and total $200 or less you can get written evidence by making your own record, instead of getting a document from the supplier: see section 900‑125.
Taxpayer 1’s claim for “work expenses” in his 2016 ITR exceeded $300.
At audit, the ATO allowed an amount of $150 for laundry expenses, consistent with section 900-40(1) of the ITAA. As the laundry expenses were $288, the exception in section 900-125 of the ITAA does not apply.
At hearing, Mr McGuid confirmed that in 2016, he understood that if the total amount of laundry expenses amounted to more than $150, it was necessary to retain written evidence. No written evidence was provided to substantiate the part of the claim for laundry expenses, even though it exceeded $150. Mr McGuid agreed at hearing that at the time he lodged Taxpayer 1’s 2016 ITR, he knew that he had not been given written evidence substantiating a claim for more than $150 for laundry expenses. He stated that at the time he completed the 2016 ITR, he was not aware of taxation ruling TR 98/5. Mr McGuid advised that he was relying on a conversation he had with the tax office about the $150 limit for laundry expenses. He said, “…it’s only the word from the Tax Department told me, “We’ll accept up to 150, no need for” – and then my whole life is on that. I’m trusting the person in the Tax Office telling me, “Sam I don’t go more than 150”, so I claimed no more than 150…”
Mr McGuid accepted at hearing that a competent tax agent in his position should have told Taxpayer 1 that he should not be claiming for more than $150 for laundry expenses in the absence of written evidence and that he should not have lodged the claim without seeing written evidence from Taxpayer 1 to support the higher amount claimed.
At hearing, Mr McGuid advised that it was his usual approach in 2016, where a taxpayer did not have written evidence of laundry expenses, to make a claim of $1 per load, based on the estimated number of loads for the year, and that this was consistent with the ‘Commissioner’s estimate’, whereas provision is made to claim $1 per load to cover washing, drying and ironing in the circumstance where written evidence is not available (TR98/5 at [21]). This is what he appeared to do with Taxpayer 1.
An unsigned letter dated 15 January 2018 was sent to the ATO in response to the audit conducted on Taxpayer 1’s 2016 ITR providing an explanation for the work-related deductions claimed. Mr McGuid confirmed at hearing that he had drafted the letter, although it is in written in first person narrative. Regarding laundry expenses, it explains:
“I did the laundry myself using washing powder from Woolworths, using water and electricity for the washing machine and dryer on a daily basis as the work environment is very dirty.
6 washes per week calculated @ $1 per wash x 48 weeks = $288”
The available evidence does not support a finding that Taxpayer 1 kept details of the number of washes that were done during the year, and what type of clothes (work related, private or both) were included in each wash.
Mr McGuid confirmed at hearing that the claim was based on his understanding and asking questions of the taxpayer. Mr McGuid’s affidavit, sworn 27 August 2019, records the details of a meeting he had with Taxpayer 1 on 8 October 2016 regarding the preparation of Taxpayer 1’s 2016 ITR (A2). There is no record in A2 of questions asked of Taxpayer 1 regarding the number of washes done during the year and what type of clothes were included in each wash. Mr McGuid stated at [22], “Based on my experience of many years, I calculated a conservative laundry expense of $1 per day to cover electricity, laundry powder and water expenses,” [emphasis added]. This calculation of Mr McGuid is also recorded in his handwritten notes of the assessment. No further details regarding the laundry expenses are included in the notes.
D5 - Other Work-Related Expenses
Taxpayer 1’s claim for other work-related expenses comprised mobile phone and mobile modem recharge expenses ($1,331), tools ($182.55), depreciation on work items ($800) and stationary ($336).
The Law Administration Practice Statement PS LA 2001/6 (PS LA 2001/6) sets out principles for ATO officers to apply when examining taxpayer claims for deductions for home office running expenses and electronic device usage expenses. It is an internal ATO document and is an instruction to ATO staff. The PS LA 2001/6 concerns acceptable verification approaches for reviewing claims for home office running expenses and electronic device expenses to establish that expenditure has been incurred and the extent of deductibility. It relevantly provides that:
(a)the pre-requisites for deductions include the conditions that the taxpayer has actually incurred the expenses and has not been reimbursed (section 3) and there is a real connection between the use of the home office or device and the taxpayer's income-producing work (section 4).
(b)If the taxpayer uses their home office or device for work purposes and private purposes, only the expense related to the work usage can be claimed as a deduction. Invoices in the name of the homeowner or service recipient represent evidence that an expense has been incurred. Where invoices are not available, corroborating evidence may be accepted to demonstrate the expense has been incurred. Bank and credit card statements may be acceptable to establish that a taxpayer has incurred an expense.
(c)Taxpayers can calculate their device usage expenses by keeping records and written evidence to determine their work-related proportion of actual expenses or claiming up to $50 in total for all device usage charges (being phone calls, text messages and internet use for all devices) with limited documentation. This approach is appropriate where their device usage is incidental.
(d)Evidence is required to demonstrate how the taxpayer has calculated their deduction based on a proportion of the total expense incurred. For mobile phone expenses, in determining a work-related proportion, elements that can be considered include the number of work calls compared to private calls; time used for work calls compared to private calls; time used in different functions for work-related purposes compared to private purposes; the time spent using the mobile telephone for work-related and private purposes each day; any employer requirements or restrictions, for work use of the mobile phone for work purposes, and work-related and private use proportions of data usage.
In A2, it is recorded that Taxpayer 1 advised Mr McGuid that his employer did not provide him with a mobile phone, and that he used his mobile phone 100% for work. Mr McGuid stated, “Based on the instructions provided to me by Taxpayer 1, I claimed 90% of Taxpayer 1’s mobile phone expenses.” It does not appear from A2 that Mr McGuid asked question of Taxpayer 1 testing how he arrived at 90% usage for work purposes and whether his employer reimbursed him for the mobile phone usage. Regarding tools, it is recorded in A2 that Taxpayer one provided receipts to substantiate the purchase of tools.
There is no documentary evidence in A2 which demonstrates that the claimed expenses for the mobile phone, modem, tools, depreciation on work items and stationery were work-related and not for private use. When tested in cross-examination about what documentary evidence he had to substantiate the claimed deductions, Mr McGuid referred to a “telephone bill” but accepted that the telephone bill alone could not establish which calls were work-related. When questioned about his approach in 2016 to making claims for mobile phone deductions, he was asked if it was based solely on a copy of a mobile telephone bill, to which he responded, “…and common sense.” He accepted that he did not obtain any documentary evidence from his employer establishing a requirement for Taxpayer 1 to use his personal mobile phone for work. Mr McGuid referred in cross examination to a letter provided by Taxpayer 1 which is understood to refer to the letter dated 15 January 2018, addressed to the ATO, which outlined an explanation from Taxpayer 1 for each claimed deduction. This is of little assistance as the letter was prepared during the audit process and as noted earlier, Mr McGuid confirmed at hearing that he authored the letter.
Taxpayer 2- Engineer manager and school rowing coach
Taxpayer 2 was an engineer manager and a school rowing coach during the 2016 income year. The applicant claimed, on his behalf, deductions for work-related car expenses for two vehicles, clothing, laundry and dry-cleaning expenses, coaching fees and other work-related expenses.
Following an audit, the ATO made several decisions regarding the claimed deductions. The amount Taxpayer 2 claimed for work-related car-expenses was reduced from $12,764 to $3,300; the claim for work-related clothing, laundry and dry-cleaning expenses was reduced from $748 to $150; other work-related expenses were reduced from $5,314 to $2,546. The ATO imposed an administrative penalty on Taxpayer 2 in the amount of $1,669.50 on the ground that he had failed to take reasonable care when he prepared his 2016 ITR. An amended assessment on 12 March 2018 which increased Taxpayer 2’s assessable income for the 2016 income year from $174,187 to $187,017 and required payment of an outstanding amount of $5,968.33.
On 27 March 2018, Taxpayer 2 lodged an objection against the amended assessment in accordance with section 14ZU of the Act.
The ATO provided reasons for the objection outcome on 30 August 2018 (objection outcome). It was noted in the reasons that Taxpayer 2 provided the ATO with further receipts for work-related expenses including, vehicle expenses, meal allowances and work-related clothing expenses. The findings of the ATO in the objection outcome are summarised as follows:
(a)Any deductions for work-related car expenses for the Hyundai Tuscon were disallowed;
(b)A further amount of $809.67 in deductions was allowed for work-related car expenses for the Subaru Imprezza;
(c)The claimed deduction for Asics running shoes and laundry expenses were disallowed;
(d)The claimed deduction for massages was disallowed; and
(e)The penalty imposed on Taxpayer 2 was reduced based on the allowed deductions.
On 6 September 2016, the ATO issued an amended assessment to Taxpayer 2 reflecting the objection decision, resulting in a credit in favour of Taxpayer 2 in the amount of $414.35.
Each deduction claimed is summarised as follows:
D1- Work Related Car Expenses
In the 2016 financial year, Taxpayer 2 used two vehicles.
The objection outcome records that Taxpayer 2 advised that in 2016 financial year he used a Subaru Imprezza and a Hyundai Tuscon. He purchased the Subaru Imprezza in 2011 and the Hyundai Tuscon in February 2016. He advised that he used the Subaru Imprezza from July 2015 until February 2016 and the Hyundai Tuscon from March 2016 until June 2016. He provided to the ATO audit team a logbook from 2012 which was used for the Subaru Imprezza.
Based on documentation provided by Taxpayer 2 to the ATO at audit, it was confirmed that The Hyundai Tuscon was a car provided by his employer under a novated lease as part of Taxpayer 2’s salary package. Pursuant to Div 28 of the ITAA, an individual is not entitled to a deduction for car expenses for a vehicle provided by an employer under a novated lease as part of a salary package.
On 13 February 2019, the Board sought a response form Taxpayer 2 about several queries regarding his 2016 ITR and the audit undertaken by the ATO (T2 Response to Board). Taxpayer 2 provided a written response to the Board on 22 February 2019. Regarding the work-related car expenses, Taxpayer 2 advised that he did not provide Mr McGuid with a copy of his logbook for the 2016 financial year. He said that during the audit, he provided to the ATO receipts, insurance papers, registration papers, a copy of his logbook and a letter from his employer supporting the need for him to use his personal car for work purposes. Taxpayer 2 advised that he prepared his response to the audit himself and had no involvement with Mr McGuid.
An affidavit of Mr McGuid sworn 25 October 2019 (AO1), records details of a meeting he had with Taxpayer 2 on 3 August 2016 regarding the preparation of Taxpayer 2’s 2016 ITR. Interestingly, he makes no reference of a Subaru Imprezza but records that Taxpayer 2 told him that from July 2015 to December 2015, he drove a Nissan and from January 2016 to June 2016, he drove a Hyundai. This is inconsistent with the information that the ATO obtained. Regarding the work-related car expenses, Mr McGuid stated:
18. During my meeting with Taxpayer 2, he gave me copies of his registration and logbook. He gave me copies of his insurance papers for only one of his cars and not the other. Taxpayer 2 also gave me a document tilted “Your single asset decline in value report” which was prepared by the ATO…
19. During the meeting, Taxpayer 2 always referred to the two vehicles as his personal car. I believed him. He never said to me that the cars belonged to his employer or that they had been provided to him under a novated lease.
In AO1, Mr McGuid stated that he told Taxpayer 2 that because no receipts were provided for petrol for the full year, he was going to claim an average of $70 per week and that he was only going to claim insurance on one vehicle because no other documents were provided. He said that during the meeting he advised Taxpayer 2 that if he didn’t obtain letters from his employers stating that he was to use his private vehicle for work purposes, there was a risk of his claim being disallowed. Despite Taxpayer 2 only providing documentation that he paid insurance on one vehicle, there is no reference in AO1 to Mr McGuid questioning Taxpayer 2 about his ownership of the two vehicles or querying the absence of insurance documentation for one of the vehicles. He said he relied on the depreciation schedule provided and Taxpayer 2’s comments in making the work-related car expenses.
The Single Asset Decline in Value Report attached to AO1 describes the asset as “Nissan 2” which was acquisitioned on 3 March 2014. There are no identifying details contained in the report confirming that it relates to Taxpayer 2. In 2016, the depreciation value is recorded as $9,916. This is the same amount as the depreciation value claimed in Taxpayer 2’s 2016 ITR. Also attached to AO1 is a copy of Taxpayer’s 2 manual tax return. Under the heading “Motor Vehicle”, next to “Vehicle Type” (at 9), there is a handwritten note, “Nissan to Dec. then Hyundai to June 16”. Under “depreciation” a handwritten note includes, “(unclear) 4958 + Hyundai 4958”. On page 15 of the manual tax return, a handwritten note appears to record:
Nissan to Dec loan then given to ex.
Hyundai on lease.
At hearing, Mr McGuid’s evidence was that, generally speaking, if a vehicle is provided by an employer under a novated lease, he does not claim a deduction. In cross-examination, he accepted that he did not specifically ask Taxpayer 2 whether he owned both cars in respect of which he was making deduction claims. He said he didn’t ask whether either car was provided by his employer under a salary package because it was not on the group certificate.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses
Taxpayer 2’s claimed deductions in respect of work-related clothing, laundry and dry-cleaning expenses comprised 4 pairs of work clothing ($220), 2 pairs of “safety footwear” ($240) and laundry ($288). In AO1 Mr McGuid advised that he claimed $240 for two pairs of safety footwear at $120 each. One pair for Taxpayer 2’s electrical work and a pair of Asics shoes for his coaching job.
The objection outcome records that Taxpayer 2 provided the ATO with a receipt for the Asics running shoes in the amount of $199 and indicated that the shoes were used for his coaching job. It was found that the shoes were not protective in nature and were considered conventional clothing. Taxation Ruling TR 97/12 (TR 97/12) relevantly provides that:
Expenditure on conventional clothing is often not an allowable deduction under section 8-1 of the ITAA 1997. This is because there is not usually a sufficient connection between expenditure on clothing and the income earning activities of the taxpayer. Whether such a connection exists, and the essential character of the expense, are matters to be determined by reference to all the circumstances of the particular case.
The approach taken by the ATO regarding Taxpayer 2’s Asics shoes is consistent with an example in TR 97/12 at [64] which states:
Example: Warren is a sports teacher. He claims deductions for the cost of purchasing track suits, T-shirts, shorts and socks. These are conventional clothes which do not form part of a uniform, do not protect Warren and are not distinctive of Warren's particular occupation or employer. Expenditure on clothing of this type is generally private in nature and is not deductible.
At hearing, Mr McGuid accepted that in 2016, he knew that shoes which were not protective in nature and that conventional footwear would usually not be deductable. He also accepted that a competent tax agent should have told Taxpayer 2 that his running shoes were not protective in nature, were conventional, and therefore not deductable. Mr McGuid however maintained that the Asics shoes claimed by Taxpayer 2 were not running shoes and were protective in nature. He said, “because he was a rowing coach, so he’s involved in the water and non-slippery, and not something that you wear during the day or normal work, it’s only for that purpose…” Mr McGuid further explained that he only claimed $120 for each pair of shoes and not $199. When asked why, he said, “I always give a proportion to the client (indistinct) and protection because the ATO is always greedy. So, I give a chance.” Mr McGuid was challenged on what his answer actually meant and when asked if it was proper to merely discount the amount of the deduction claim when a particular expense was not truly deductable. He responded: “Well if he agrees, its ok. A layer of protection. If they’re confused by the tax department, at least its – he wont lose 199, he’ll be losing 120 so it’s lighter on him.” Mr McGuid accepted that for a piece of conventional clothing which is not deductable, it is not the proper thing for a registered tax agent to discount the amount of the claim and submit the claim for a lower amount. He however maintained that in 2016, he considered that Taxpayer 2 faced a danger of slipping so he “took it as protective”.
In AO1, Mr McGuid recorded that Taxpayer 2 told him he needed “specific clothing for my rowing coaching” and “protective clothing for my engineering work”. There is no further evidence provide which demonstrates that Mr McGuid sought further clarification about the specific items of clothing and their protective nature. Specifically, regarding the Asics shoes, there is no objective evidence supporting the claim that they are protective in nature, non-conventional and not a private expense.
As with Taxpayer 1, Mr McGuid claimed $288 for laundry expenses for Taxpayer 2 based on his calculation of $1 per load. At hearing, Mr McGuid stated that he never asked for receipts for laundry because “I always have stuck in my brain one dollar”. AO1 does not contain any reference to a discussion with Taxpayer 2 about the frequency of which he laundered his clothes and the proportion in each wash of work-related clothing.
In the T2 Response to Board, Taxpayer 2 advised that no receipts were shown to Mr McGuid to substantiate the claim for deductions for work-related clothing, laundry and dry-cleaning expenses.
D5- Other Work-Related Expenses
Taxpayer 2 claimed deductions for several other work-related expenses. They comprised a work bag ($150), coaching fees ($960), overtime meals ($2,580), sunglasses ($60), sun cream ($100), stationary ($336), depreciation of laptop ($500), internet use ($528) and a USB stick ($100). In the T2 Response to Board, Taxpayer 2 advised that no receipts were shown to Mr McGuid to substantiate the claim for deductions for other work-related expenses. It is accepted that Taxpayer 2’s total work-related expense claim exceeded $300.
The Law Administration Practice Statement PS LA 2005/7 (PS LA 2005/7) describes what documentary or other evidence is acceptable substantiation of an individual's work-related expenses. PS LA 2005/7 is an internal ATO document and an instruction to ATO staff. It provides that if a taxpayer's total work-related expense claims exceed $300, they must provide written evidence for the entire amount (not just the amount over $300). Part 2 sets out the requirement that substantiating documents, such as receipts and invoices, must contain sufficient detail to be acceptable evidence of expenses. Where the documents are insufficient, the ATO also accepts bank statements, credit card statements, BPay reference numbers, combined with tax invoices.
While Mr McGuid stated in AO1 that Taxpayer 2 advised that he had some receipts to support his expenses, nowhere in AO1 does Mr McGuid advise that he saw or reviewed the receipts to substantiate the claims.
At hearing, in cross-examination, Mr McGuid confirmed that during his meeting with Taxpayer 2, as detailed in AO1, he was not shown did not show him any receipts in support of the claim for overtime meal expenses or protective items. He had no recollection of seeing receipts for the laptop. Mr McGuid stated that he would have seen receipts for the coaching fees and work bag, however, in AO1 there is no record of Mr McGuid seeing receipts for these items. He instead indicated that Taxpayer 2 kept receipts and he “believed him”.
No copies of receipts are in evidence.
Regarding Taxpayer 2’s claim for stationary in the amount of $336, Mr McGuid recorded in AO1 that Taxpayer 2 did not have receipts for this expense. He advised that he would “only claim an average of $1 a day for stationary”. At hearing, Mr McGuid said that $1 a day was reasonable. He said, “I have logical reason to believe that his job, he have to spend some money on stationary so I went the lowest that can be which is a dollar a day. So if I have sinned I’m sorry”. Mr McGuid ultimately accepted that it was wrong, at the time, to claim a deduction for stationary without receipts.
Taxpayer 3- Police Officer
Taxpayer 3 was a Police Officer during the 2016 income tax year. The applicant claimed, on his behalf, deductions for work-related clothing, laundry and dry-cleaning expenses, and other work-related expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. A notice of amended assessment was issued on 21 February 2018, which increased Taxpayer 3’s taxable income for the 2016 income year from $104,409 to $106,178. This required payment of an outstanding amount of $1,014.29. Taxpayer 3 has not lodged an objection to the amended assessment. The findings of the ATO, and evidence of Mr McGuid’s conduct regarding each deduction claimed, are summarised as follows.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses
Taxpayer 3 claimed $1,769 for clothing in his 2016 ITR. Following an audit, the ATO reduced this claim to $0 as it found the clothes to be of a conventional nature and a private expense.
An affidavit of Mr McGuid sworn 25 October 2019 (AO2), records details of a meeting he had with Taxpayer 3 on 17 February 2017, regarding the preparation of Taxpayer 3’s 2016 ITR. Regarding clothing, Mr McGuid records that Taxpayer 3 advised that he bought business shirts, suits and other clothing which he only wore for court appearances or when undercover. Mr McGuid asked if he had receipts and they were provided. Mr McGuid arrived at the figure of $1,769, by referring to a pay slip of Taxpayer 3 which recorded the “Detective’s Special (Base) for $1,769”. It appears that Mr McGuid accepted this figure as a representation of a clothing or uniform allowance, based on information he received in 2011 from the NSW Police Force. He stated in AO2 that he sought clarification from the NSW Police Force in 2011 to make sure he was claiming deductions for police officers correctly. Annexed to AO2 is a letter dated 24 August 2011 from Mr McGuid to the New South Wales Police Force Payroll Department (2011 letter to NSW Police), seeking advice on allowanced listed in employer payslips but not in group certificates. Relevantly, he asked:
Det’s special (base)(s)- usually around $1400 mark, is this for clothing and uniform allowance?
In response, the Senior Salaries Officer at the New South Wales Police Force advised in a letter dated 19 September 2011(2011 letter from NSW Police):
Det’s special (base)(s) is Detectives Allowance and is payable to detectives in the nature of salary. This allowance is part of the officer’s superable salary (denoted by (s)).
Taxation Ruling TR 95/13 (TR 95/13) deals with work-related deductions made by employee police officers. It identifies (at [42]) five alternative grounds upon which a deduction is allowable for the cost of clothing. Relevantly:
42. A deduction is allowable for the cost of buying, hiring or replacing clothing, uniforms and footwear ('clothing') if:
(a) the clothing is protective in nature;
…
(e) the clothing is conventional, and the taxpayer is able to show that:
(i) the expenditure on the clothing has the essential character of an outgoing incurred in gaining or producing assessable income;
(ii) there is a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income; and
(iii) the expenditure is not of a private nature…
TR 95/13 provides at [65]:
65. A police officer who is required to wear conventional clothing e.g., suits, shirts, ties, jeans and shoes, is not entitled to a deduction for the cost of purchasing, cleaning and maintaining such items. Expenses on this kind of everyday clothing are considered to be private. This principle is not altered by the fact that the nature of a police officer's work can cause excessive wear or damage to his or her clothing.
At hearing, Mr McGuid advised that despite having approximately 77 clients who were employed as police officers in 2016, he was not aware at that time of TR 95/13 and was not aware of its contents or the principles stated in the document. He said that he was only made aware of TR 95/13 “about a month ago”.
During cross-examination, Mr McGuid appeared to suggest that the business shirts, suits and clothing purchased by Taxpayer 3 were actually protective in nature. He said that they “protect him from being known and maybe shot at” and “protect himself against being attacked”. TR 95/13 deals with protective clothing at [44] - [49] and is concerned with clothing that protects against some risk of physical harm. For example, safety jackets, vests for traffic control, and sunglasses worn by motorcycle patrol officers.
The clothing purchased by Taxpayer 3 was for undercover work to pass as a private civilian, and suits and shirts to be worn for court appearances. Police officers who are required to perform undercover work is addressed in TR 95/13 at [68]-[69], as follows:
68. A deduction may be allowable for the cost of additional clothing bought by police officers who are required to perform undercover work. For a deduction to be allowable, the police officer will have to establish that there is a sufficient nexus between his or her income-earning activities and the expenses incurred (Taxation Ruling TR 94/22).
69. Example: Jill is an undercover police officer who is required as part of her duties to wear clothing of a kind she doesn't normally wear to enable her to pose (in costume) as a criminal. Jill wears other clothing to and from work. Jill's expenditure on clothing worn in these activities, even though it may be conventional clothing, has a direct nexus with her income-producing activities as an undercover police officer. A deduction is allowable for the purchase and maintenance costs of the clothing used as a costume to the extent of their work-related use.
There is no evidence to suggest that the clothes claimed by Taxpayer 3 were a “costume”. Questions of this nature are not recorded in AO2 as being asked of Taxpayer 3 during the preparation of his 2016 ITR.
D5- Other Work-Related Expenses
Other work-related expenses claimed in the 2016 ITR for Taxpayer 3 comprised police association fees ($1,155); mobile telephone costs ($440); sunglasses ($140); sun cream ($80); gym membership ($760); stationary ($384); informant and witness expenses ($1,200); a computer ($725); printer ($546); iPad ($450) and overtime meal allowances ($2,496).
Regarding the claim for sun-cream and sunglasses, TR 95/13 (at [46]) provides:
A deduction is not generally allowable for the cost of items that provide protection from the natural environment (e.g., sunglasses, sunhats, sunscreen, wet weather gear and thermal underwear). The cost of these items is considered to be a private expense…
An exception to this general rule can arise if the nature of the work (rather than the natural environment) creates conditions that make it necessary for the police officer to provide protection to his or her person or clothing (TR 95/13 at [47] - [48]). There is no evidence to demonstrate that Mr McGuid sought clarification from Taxpayer 3 as to exceptional circumstances, nor is there objective evidence to demonstrate that there was a sufficient nexus with their work.
Regarding fitness expenses and gym membership fees, TR 95/13 at [109] - [111] relevantly provides:
109. A deduction is not allowable for fitness expenses as they are considered to be of a private nature. An exception to this general rule applies if a police officer's income-earning activities involve strenuous physical activities on a regular basis.
110. For example, members of special emergency squads, a diving squads, and police officers who work regularly with police dogs and train them, may be able to demonstrate that their income-producing activities demand a high level of physical fitness. Similarly, Police Academy physical training instructors may be able to prove that fitness expenses they incur are directly related to their income-producing activities.
111. A deduction is not allowable for gymnasium membership fees (section 51AB of the Act) …
At hearing, Mr McGuid accepted that in 2016 he was not aware that a deduction for gym membership fees was not allowable. There is a record in AO2 of Taxpayer 3 describing his job as “dangerous and physically demanding” and that he often had to “break up brawls” but there is no record of Mr McGuid asking Taxpayer 3 any questions about the nature and frequency of his actual income-producing activities.
Regarding the claim for computer expenses, a letter from Taxpayer 3’s employer dated 30 November 2017 states that “officers may choose to purchase and use their own laptops/similar devices, computers and data processing software…” It does not state that these expenses were a requirement of employment. There is no record in AO2 that Mr McGuid sought clarification from Taxpayer 3 about whether the purchase of his electronic equipment was a requirement of his employment.
Taxation Ruling TR 2004/6 (TR 2004/6) applies to individuals who incur work-related deductions for travel expenses or overtime meal expenses where these expenses are covered by an allowance paid by the person's employer. TR 2004/6 relevantly provides at [50 ]- [51]:
50. For overtime meal expenses to be considered under the exception from substantiation, the overtime meal allowance must be paid to enable the purchase of food or drink in connection with a specific occasion when overtime is worked. The expense must also be covered by that allowance. The overtime meal allowance must be paid or payable under a law of the Commonwealth or of a State or Territory, or an award, order, determination or industrial agreement in force under such a law: section 900-60 of the ITAA 1997.
51. An amount for overtime meals that has been folded-in as part of normal salary or wages, for example under a workplace agreement, is not considered to be an overtime meal allowance.
Taxpayer 3’s PAYG payment summary for year ending 30 June 2016, identified gross payments in the amount of $118,546. It did not list separately any allowances, particularly, any overtime meal allowance. TR 2004/6 provides (at [12]) that if an allowance is not shown of the employee’s payment summary, then a deduction for the expense cannot be claimed.
A payslip annexed to AO2 for Taxpayer 3 for the fortnightly period ending on 30 June 2016, recorded an amount of $4,046 for “Det’s SDA (Base for OT)”. In the 2011 letter to NSW Police, Mr McGuid asked:
Sda (Base for OT)(s)- usually is around the $3000 to $3300 mark, is this for working after hour/overtime meal?
In response, the letter from NSW Police provides:
Sda (Base for OT)(s) is Detectives Special Duties Allowance and is payable to detectives in the nature of salary. This allowance is part of the officer’s superable salary (denoted by (s)).
The correspondence from the NSW Police does not specifically advise that the amount is an overtime meal allowance but it is plain that the allowance recorded in the payslip for this allowance is “in the nature of salary” or in the words of TR 2004/6 at [51], “folded-in” as part of Taxpayer 3’s normal salary or wages. This would account for the payment summary not recording allowances other than the gross payments.
At hearing, Mr McGuid agreed that in 2016, he did not have any understanding, that in order to be deductable, an overtime meal allowance had to be shown separately on the PAYG payment summary. He also conceded that in 2016, he was not aware of TR 2004/6. In cross examination, Mr McGuid was shown [51] of TR 2004/6. He accepted that it was the first time he was made aware of the ATOs position that an amount for overtime meals that had been folded in as part of a normal salary or wages, was not considered to be an overtime meal allowance. His understanding was that if it is contained within a larger amount of gross payments but not separately identified, then a deduction may still be claimed. When asked if he accepted that appropriate practice required him to advise the taxpayer that if an overtime meal allowance was not shown separately on the payment summary, then it would likely be knocked back, he said, “I did not know because I could see it on the payslip so I was convinced he was paid for overtime meal in there but because it’s not on that box I tell him there’s always a danger taxation refuse him because its not there so talk to your boss”. There is no record of this advice in AO2.
Regarding the claim for mobile telephone expenses, Mr McGuid accepted at hearing that a taxpayer should be advised that the ATO would only accept the claim for the actual percentage of work-related use. There is no record in AO2 of Mr McGuid providing this advice to Taxpayer 3, although I note that there are records of mobile phone bills, some itemised, annexed to AO2. The itemised supplier records are acceptable evidence to prove the proportion of usage, consistent with Part 4 of PS LA 2001/6. Following audit, the ATO reviewed the itemised evidence and apportioned 63% usage as work-related. The original claim in Taxpayer 3’s 2016 ITR was for 80%.
Taxpayer 4- Solicitor
Taxpayer 4 was a solicitor during the 2016 income year. The applicant claimed, on his behalf, deductions for work-related car, travel, clothing, laundry and dry-cleaning expenses, and other work-related expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. A notice of amended assessment was issued on 20 February 2018, which increased Taxpayer 4’s taxable income for the 2016 income year from $90,210 to $96,878. which required payment of an outstanding amount of $2,716.34. Taxpayer 4 has not lodged an objection to the amended assessment.
The findings of the ATO on audit, and evidence of Mr McGuid’s conduct regarding each deduction claimed are summarised as follows:
D1- Work Related Car Expenses
Following audit, the ATO reduced the amount claimed by Taxpayer 4 in her 2016 ITR for work-related car expenses from $7,530 to $4,689 in accordance with receipts provided.
An affidavit of Mr McGuid sworn 25 October 2019 (AO3), records details of a meeting he had with Taxpayer 4 on 19 August 2016, regarding the preparation of Taxpayer 4’s 2016 ITR. AO3 records that during the meeting, taxpayer 4 gave Mr McGuid copies of her logbook, insurance statements, petrol receipts, car servicing and parking receipts. He states that he viewed the documents and recorded the figures in Taxpayer 4’s manual tax return (which is annexed to AO3). Mr McGuid has not provided copies of receipts to substantiate the full amount claimed for work-related car expenses. At hearing he advised that it was not his practice in 2016 to keep copies of receipts unless they contained “something important”, or to keep copies of logbooks.
D2- Work-Related Travel Expenses
Following audit, the ATO reduced the amount claimed by Taxpayer 4 in her 2016 ITR for work-related travel expenses from $2,524 to $246 in accordance with receipts provided.
AO3 records a conversation Mr McGuid had with Taxpayer 4 regarding work-related travel expenses. It records that Taxpayer 4 advised she “spent at least $20 a week on parking and at least $20 a month on tolls”. AO3 details a general examination as to how Mr McGuid ascertained the amount claimed but there is no evidence to quantify those expenses or to justify the full amount claimed by Mr McGuid.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses
Following audit, the ATO reduced the amount claimed by Taxpayer 4 in her 2016 ITR for work-related clothing, laundry and dry-cleaning expenses from $1,115 to $0.
The amount claimed by Taxpayer 4 included a deduction of $750 for suits. TR 97/12 relevantly provides:
19. Expenditure on conventional clothing is often not an allowable deduction under subsection 51(1). This is because there is not usually a sufficient connection between expenditure on clothing and the income earning activities of the taxpayer.
20. Whether such a connection exists, and the essential character of the expense, are matters to be determined by reference to all the circumstances of the particular case.
21. The mere fact that a taxpayer's employer requires or expects the taxpayer to wear a particular type or style of conventional clothing does not make the cost of that clothing deductible…
22. Similarly, the fact that a taxpayer may perceive that it is important to his/her success in his/her occupation or profession to wear a particular type or style of conventional clothing does not make the cost of that clothing deductible…
According to AO3, Taxpayer 4 told Mr McGuid that she bought three suits which cost $500 each (totalling $1500) and that she only wore the suits to court and to see clients in prison. AO3 records that Mr McGuid said to Taxpayer 4 words to the following effect:
Just to be safe as the ATO can be difficult in allowing deductions for ordinary clothes even though you are telling me you only wore them for court and seeing clients in prison, I will only claim 50%, which is $750.
At hearing, Mr McGuid was asked a series of questions about deducting the claim by 50%. He was asked if he accepted that it was not appropriate practice to simply discount the amount of a claim by 50 per cent if the claim is not truly deductable to which he responded:
But I told her and she agreed”. She said that the deduction of 50% was for “safety reasons” because “I was not convinced 100 per cent but there’s a big probability that could be legit…” I was 50 per cent certain.
On 7 February 2019, the Board sought a response from Taxpayer 4 regarding the preparation of her 2016 ITR by the applicant. On 8 February 2019, Taxpayer 4 provided a written response to the Board. She relevantly disclosed:
…he asked if I had purchased any work clothes and I said I had suits for court and he asked if I only wore them to court and I said yes and then told him the cost of them by looking through online banking and how often I dry-cleaned them. I had some dry-cleaning receipts but not all. He did not provide me with advice on what could be claimed.
On the available evidence there is no indication that the applicant warned Taxpayer 4 about the risk that the claim may be denied. Rather, it was only when Taxpayer 4 “saw a different taxation expert that she realised some of the claims are unlikely to be approved by the ATO auditor”.
Taxpayer 5- Police Investigator
Taxpayer 5 was a Police Investigator during the 2016 income year. The applicant claimed, on his behalf, deductions for work-related car, clothing, laundry and dry-cleaning expenses, and other work-related expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. A notice of amended assessment was issued on 15 March 2018, which increased Taxpayer 5’s taxable income for the 2016 income year from $102,648 to $113,132, which required payment of an outstanding amount of $4,551.49. The ATO imposed an administrative penalty on Taxpayer 5 in the amount of $1,089.15 on the ground that he had failed to take reasonable care when he prepared his 2016 ITR. Taxpayer 5 has not lodged an objection to the amended assessment.
The findings of the ATO, and evidence of Mr McGuid’s conduct regarding each deduction claimed are summarised as follows:
D1- Work Related Car Expenses
The applicant claimed, on Taxpayer 5’s behalf, an amount of $1,320 for work-related car expenses. This claim was later reduced by the ATO to $0 on the ground that he did not provide a letter from his employer to support the claim that he was required to use his personal vehicle in the course of his employment duties.
An affidavit of Mr McGuid sworn 25 October 2019 (AO4), recounts details of a meeting he had with Taxpayer 5 on 30 August 2016, regarding the preparation of Taxpayer 5’s 2016 ITR. AO4 records that Mr McGuid advised Taxpayer 5 of the requirement to obtain a letter from his employer in support of his claim for work-related car expenses and that there was a risk of his claim being disallowed. It also records that Mr McGuid advised Taxpayer 5 that a logbook was required to substantiate the claim. This evidence however is contrary to Taxpayer 5’s response to the Board on 13 February 2019. Taxpayer 5 advised the Board orally that Mr McGuid never asked or told him about the need for a letter from him employer.
At hearing, Mr McGuid conceded that he knew Taxpayer 5 didn’t have a letter form him employer to support the claim that he was required to use his personal vehicle in the course of his employment duties.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses
Taxpayer 5’s claim for work related clothing comprised clothing purchased from St Vincent de Paul in the amount of $2,250. AO4 records that Taxpayer 5 advised Mr McGuid that he used his credit card to purchase the clothing and that he showed him receipts which showed he purchased the clothing from St Vincent de Paul. No receipts are in evidence.
In the reasons for decision following the ATO audit, it is noted that the bank statements provided to substantiate the claim showed a cash transaction and that this was not sufficient evidence that the expense was incurred. This reasoning is consistent with Ps LA 2005/7.
At hearing, Mr McGuid accepted that, generally speaking, it was consistent with his experience of the ATO that bank statements alone would not be accepted unless they contained some description of the nature of the item purchased.
Regarding laundry expenses, Mr McGuid claimed, like he did for Taxpayer 1 and 2, an amount of $288 without receipts.
D5- Other Work-Related Expenses
Taxpayer 5’s claims for other work-related expenses totalled $7,690 which comprised several large expenses, such as $1,920 for informant refreshments, $1,248 for overtime meals, $336 for stationary and $750 for newspapers. AO4 records that Taxpayer 4 showed Mr McGuid receipts to substantiate some of the claims. In regard to stationery and informant refreshment expenses, it is noted that Taxpayer 4 did not have receipts for the whole year, so Mr McGuid “took an estimate”. No receipts are in evidence.
On audit, it appears that the only claim accepted was for Australian Federal Police association fees in the amount of $1,076. It is unclear whether the ATO was provided a receipt for this expense, but I note that the deduction is recorded in Taxpayer 4’s PAYG payment summary for the year ending June 2016.
Taxpayer 6- Warehouse Assistant and Storeman
Taxpayer 6 was a warehouse assistant and storeman during the 2016 income tax year. The applicant claimed, on his behalf, deductions for work-related car, travel, clothing, laundry and dry-cleaning expenses, and other work-related expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. A notice of amended assessment was issued on 2 March 2018, which increased Taxpayer 6’s taxable income for the 2016 income year from $60,843 to $71,433, which required payment of an outstanding amount of $3,912.57. The ATO imposed an administrative penalty on Taxpayer 6 in the amount of $935.20 on the ground that he had failed to take reasonable care when he prepared his 2016 ITR. Taxpayer 6 has not lodged an objection to the amended assessment.
The findings of the ATO, and evidence of Mr McGuid’s conduct regarding each deduction claimed are summarised as follows:
D1- Work-Related Car Expenses
An affidavit of Mr McGuid sworn 25 October 2019 (AO5), recounts details of a meeting he had with Taxpayer 6 on 28 September 2016, regarding the preparation of Taxpayer 6’s 2016 ITR. It is recorded in AO5 that Taxpayer 6 advised Mr McGuid that he did not keep a logbook, but travelled between 100 and 120 kilometres per week. Mr McGuid states in AO5 that Taxpayer 6’s PAYG payment summaries noted two branch numbers (000 and 001) which indicated that there were two branches. He said he calculated the distances between the branches to confirm that Taxpayer 6’s estimate was reasonable. At [15], Mr McGuid records that he used the “rate per kilometre method” to claim a deduction of $3,300 for work-related car expenses.
The ATO publication titled “Car expenses: What’s under the bonnet?” states in relation to the cents per kilometre method that “you don’t need written evidence but you need to show how you worked out the business kilometres (for example, by producing diary records of work-related trips)”.
Mr McGuid told Taxpayer 6 to keep a logbook but did not tell him that he should keep some record, such as a diary recording work-related trips, in order to be able to show the ATO how he worked out his business kilometres.
At audit, the ATO tried to contact Taxpayer 6 to provide requested information. Taxpayer 6 did not reply. The claim for work-related car expenses was reduced to $0.
D2- Work-Related Travel Expenses
Taxpayer 6 claimed $480 in his 2016 ITR for tolls. Mr McGuid states in AO5 that because Taxpayer 6 could not provide receipts to substantiate the use of tolls when he travelled between warehouses and headquarters, he “only claimed $10 per week”.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses
Taxpayer 6 claimed $200 for protective clothing and $280 for safety footwear in his 2016 ITR. In AO5, Mr McGuid recorded that he could not recall whether Taxpayer 6 gave him copies of receipts or credit card statements to verify the claims.
Regarding laundry expenses, Mr McGuid claimed, like he did for Taxpayer 1 and 2, an amount of $288 without receipts.
D5- Other Work-Related Expenses
Taxpayer 6 claimed a total of $6,042 for other work-related expenses in his 2016 ITR. The claim comprised of expenses relating to overtime meals, mobile telephone expenses, tools, stationery and iPad and internet expenses. Following audit, the ATO reduced this claim to $0.
There is no evidence that Mr McGuid had copies of receipts or bank statements to verify the amounts claimed nor are any provided in evidence.
Taxpayer 7- Truck Driver and Earth Mover
Taxpayer 7 was a truck driver and earth mover during the 2016 income tax year. The applicant claimed, on his behalf, deductions for work-related car, clothing, laundry and dry-cleaning expenses, and other work-related expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. A notice of amended assessment was issued on 26 February 2018, which increased Taxpayer 7’s taxable income for the 2016 income year from $53,672 to $66,709 which required payment of an outstanding amount of $4,905.51. The ATO imposed an administrative penalty on Taxpayer 7 in the amount of $1,173.15 on the ground that he had failed to take reasonable care when he prepared his 2016 ITR. Taxpayer 7 has not lodged an objection to the amended assessment.
The findings of the ATO, and evidence of Mr McGuid’s conduct regarding each deduction claimed are summarised as follows:
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses and D5- Other Work-Related Expenses
Taxpayer 7’s claim comprised of $180 for protective clothing, $240 for safety footwear and $288 for laundry, $528 for mobile telephone expenses and $336 for stationary. There is no evidence that Taxpayer 7 provided receipts to Mr McGuid to verify the amounts claimed. Regarding laundry expenses, Mr McGuid claimed, like he did for Taxpayer 1 and 2, an amount of $288 without receipts. He stated at hearing that “from now on” he will not make such claims unless he is shown receipts totalling the amount claimed.
Taxpayer 8- Personal Assistant
Taxpayer 8 was a personal assistant during the 2016 income tax year. The applicant claimed, on her behalf, deductions for work-related car, clothing, laundry and dry-cleaning expenses, and other work-related expenses. Following an audit, the ATO made several decisions regarding the claimed deductions. A notice of amended assessment was issued on 27 February 2018, which increased Taxpayer 8’s taxable income for the 2016 income year from $94,237 to $102,094, which required payment of an outstanding amount of $3,254.07. The ATO imposed an administrative penalty on Taxpayer 8 in the amount of $766.05 on the ground that she had failed to take reasonable care when she prepared her 2016 ITR. Taxpayer 8 has not lodged an objection to the amended assessment.
The findings of the ATO, and evidence of Mr McGuid’s conduct regarding each deduction claimed are summarised as follows:
D1- Work-Related Car Expenses
Mr McGuid used the “cents per kilometre method” to calculate Taxpayer 8’s claimed deduction of $3,800 for work-related car expenses. At hearing, Mr McGuid confirmed that he made the claim based on verbal evidence given by Taxpayer 8 when preparing her 2016 ITR. She did not give him any other record to verify how she worked out the number of business kilometres claimed.
D3- Work-Related Clothing, Laundry and Dry-Cleaning Expenses and D5- Other Work-Related Expenses
Taxpayer 8’s claim comprised of $200 for protective clothing, $270 for safety footwear and $288 for laundry, $2,496 for overtime meals, $336 for stationery and $467 for internet. There is no evidence that Taxpayer 8 provided receipts to Mr McGuid to verify the amounts claimed. Regarding laundry expenses, Mr McGuid claimed, like he did for Taxpayer 1 and 2, an amount of $288 without receipts. He stated at hearing that “from now on” he will not make such claims unless he is shown receipts totalling the amount claimed.
COMPETENCY
Pursuant with section 8-1 of the ITAA, when considering the issue of deductions, a competent tax agent would turn their mind to whether the expense which a taxpayer has claimed as deductions were incurred “in the course of” gaining or producing assessable income of that there existed the relevant nexus with the taxpayer’s employment. It is necessary that some link or nexus be established between the loss or outgoing incurred and the production of assessable income. The taxpayer must show a real connection between the expenses and the employment activities for the expenses to be deductable; Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 at 586.
The conduct of the applicant in respect to the preparation and lodgement of the ITRs for the eight taxpayers, as detailed above, demonstrates that in 2016, the applicant failed to ensure that a tax agent service it provided, or that was provided on its behalf, was provided competently. The applicant repeatedly claimed work-related expense deductions without first obtaining or satisfying itself that there was appropriate evidence to support the claims; the applicant failed to properly ascertain through its own enquiries and failed to obtain sufficient evidence to support the required nexus between the expense claimed and earning assessable income; and the applicant incorrectly applied the relevant tax law with respect to several of the taxpayers.
In Re Su and Tax Agent’s Board (SA) (1982) 13 ATR 192 at 195, Davis J held:
The function of a tax agent is to prepare and lodge income tax returns for other persons… 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 footing that the taxation returns lodged by the agent have been prepared by him honestly and competently.
Mr McGuid prepared the 2016 ITR’s for the eight subject taxpayers. At the time that he met each of the eight subject taxpayers, they were relying on his advice regarding what deductions would properly be claimed and what deductions were likely to be allowed by the ATO. At hearing, Mr McGuid agreed that in respect of each of the ITR’s lodged, the deductions were claimed based on his advice and recommendation and that if a deduction was included in the 2016 ITR, it was done because he believed at the time that it was a proper claim and a deduction that the ATO would likely allow.
The evidence shows that for a significant number of the work-related expense deductions claimed for the eight subject taxpayers, Mr McGuid did not obtain documentary evidence sufficient to substantiate the expenses claimed nor did he have sufficient evidence to support the required nexus between the expense and the taxpayer’s income earning duties. It appears in the evidence that Mr McGuid “believed” his client’s verbal claims and often estimated expenses when receipts were not available. Mr McGuid’s evidence at hearing was that even on occasions when he was not convinced an expense was deductable, he would claim it anyway, often with some small reduction “for protection”. He was of the mind that if the client was happy to take the risk, then he would claim the deduction.
In the course of meeting with Taxpayers 1-8 for the purposes of preparing their 2016 ITRs, Mr McGuid presented each with several documents which were allegedly discussed and then signed in Mr McGuid’s presence. These included:
(a)S & T’s standard Engagement Agreement Individual Income Tax Return which relevantly stated at [2]:
The client acknowledges responsibility for maintaining records as required under Income Tax Law and the Self Assessment Rules.
(b)S & T’s standard 2016 Client Substantiation Declaration which relevantly requires the taxpayer to declare at [C] and [D]:
C. I confirm that I have all receipts and documentation including logbooks, diaries and other records necessary to substantiate the above claims and I will make them available if required to the Tax Office, and
D. That you have clarified what written evidence (including car/travel records) will be required during an audit and penalties, (including prosecution) that may be applied if incorrect claims are identified in an audit situation; and…
(c)S & T’s standard Declaration by Taxpayer which relevantly declares that the taxpayer has “kept receipts and supporting documents or all expenses in my Tax Return” and has “incurred the expenses claimed”.
Despite the eight taxpayers receiving and signing the above declarations and agreement letter, it does not absolve Mr McGuid and the applicant from their obligations in providing tax agent services competently. The affidavit evidence of Mr McGuid shows that on occasions when a taxpayer said receipts were not complete or available, he advised that he could claim anyway; either based on an estimate or with some form of deduction. As a tax agent, Mr McGuid ought to have know that his clients were relying on his advice, knowledge and expertise in this regard.
Mr McGuid also provided each taxpayer with a “prior client letter” for the 2015-2016-year income year. This letter was sent out prior to meeting with clients for the purposes of preparing their 2016 ITR. Mr McGuid advised in the letter:
…let’s talk about tax changes-not scary if you kept the invoices and receipts of every dollar you want to claim then, more refund, no invoice = no claim…log book must be on hand to show how many kilometres for business you travelled from site to site and carry tools, and materials, not from home to work, work to home, only, for out for business, any other expenses you think of, get the invoices and will talk about it and teach you which is and which one is not.
We need all documents of income, PAYG, and if possible your last week of June 2016 payslip, and all other income, interest, dividend, rental property income and expenses, forget about Medicare rebate, unless you are on a wheelchair, and don’t forget any income from overseas including foreign pension and any Centrelink, if you are a subcontractor, all the BAS and income and expenses receipts, invoices…
Despite the “prior client letter” specifying the documentation required for deduction claims, Mr McGuid was still required to satisfy himself that the claims for deductions were appropriate and substantiated and provide advice accordingly. As a registered tax agent, this was the service his clients paid him to provide. In any event, the prior client letter is not written in a clear and concise manner and in a way that clients could read and understand what was required of them specific to their individual circumstances.
The evidence shows that Mr McGuid often failed to make sufficient enquiries of the taxpayers in order to substantiate the work-related deductions claimed. His affidavit evidence for each taxpayer detailed a basic record of an interview he had for the purpose of preparing each 2016 ITR for the eight subject taxpayers. However, the evidence does not show that Mr McGuid sought further clarification and detail when necessary.
The evidence before me demonstrates that in 2016, Mr McGuid had a flawed understanding of relevant taxation law and ATO requirements regarding work-related expense deductions, nexus and substantiation; and he incorrectly applied the relevant tax law to the taxpayer’s circumstances. Mr McGuid was unfamiliar and/or unaware of key Taxation Rulings and Law Administration Practice Statements published by the ATO pertaining to the making and substantiation, of work-related expense claims made by the eight taxpayers, namely PS LA 2001/6, PS LA 2005/7, TR 98/5, TR 95/13, TR 2004/6 and TR 97/12.
Viewed collectively, the failure of the applicant and Mr McGuid to ensure that tax agent services provided was provided competently in contrary to s 30-10(7) of the Code of Conduct. The effect of this failure was serious as it exposed the eight subject taxpayers to stress, inconvenience and losses in the form of adjustments and penalties. While there is no evidence of dishonesty, there is evidence of incompetence.
APPROPRIATE SANCTION
The Tribunal’s power to issue sanctions arises under section 30-15 of the Act. The imposition of a sanction is not to punish an individual but to protect the public and maintain proper standards within the regulated industry.
Consistent with the objects of the Act, there is a public interest in maintaining appropriate standards of conduct and behaviour within the tax profession and ensuring the community’s confidence in such standards. As such, it is in the public interest to ensure that a tax agent who has breached the Code of Conduct by failing to comply with taxation laws in his personal affairs be stopped from practicing as a tax agent. This is because if the tax agent were left to practice, there is a risk that he or she may cause others to breach taxation laws.
The public is entitled to rely on a registered tax agent to prepare their income tax returns competently and should be protected from such known issues of over-claimed work-related expenses and associated penalties.
I acknowledge that Mr McGuid has implemented new measures in relation to the way deductions are claimed. He has provided a booklet setting out a new set of procedures that are to be adopted by the applicant and incorporates each of the principles and requirements set out in the relevant taxation rulings and practice statements. However, I am very concerned that should the applicant’s registration be reinstated, there is a real risk of future non-compliance. This is because the applicant and Mr McGuid lack contrition, fail to appreciate the significance of the applicant’s non-compliance or fail to demonstrate true insight regard the applicant’s conduct. In correspondence with the ATO and most recently in correspondence with the Board, Mr McGuid remained steadfast in his position that the claimed deductions for each taxpayer should “not have been reduced” or “never have been disallowed”. Even at hearing, Mr McGuid was often defensive and surprised when challenged about some of the deductions he claimed on behalf of the eight subject taxpayers. His concessions were often made reluctantly and after being taken to the relevant taxation rulings and/or practice statements.
Further, the requisite relationship of mutual trust between the applicant and the ATO has been severely undermined by the applicant’s pattern of irrational, unreasonable, abusive and hectoring correspondence with those with whom the applicant disagreed, including the offices of the ATO and the Board with whom the applicant, through Mr McGuid, corresponded. Mr McGuid sent several letters to the ATO which were unprofessional and irrational. One such letter is dated 2 March 2018. Mr McGuid said:
Regarding our latest round of audit, (so far it has been a blasted 15-20 years of nightmare) as if the ATO have nothing to do but kill, kill, kill, however we always welcome you, and assist you as much and as fast as we could.
Every year, to assist you, we send letters to our clients and “beg” them to follow the rules and the ATO several requests, but principally the substantiation, the log book, and work related expenses, and advise them, watch out the ATO because basically they have no pity, no prisoner…we encourage clients to pay the ATO debt at our cost, please, please, please then you come and you blast the hell out of our clients as to encourage them to seek new frontier called hide and seek, catch me if you can, and I hate you.
I am very disappointed at your unfair, unreasonable, savage, cruel and negative attitude…
We lost our confidence to deal and trust ATO. You are nice, but golly no common sense nor logic.”
I understand that this decision with have a significant impact of Mr McGuid and the applicant and will likely inhibit or prevent Mr McGuid’s capacity to earn a living in his personal capacity as a tax agent. However, as I have outlined in this decision, the evidence shows that Mr McGuid has repeatedly failed to provide tax agent services competently. Regarding the eight subject taxpayers considered in this decision, the impact has been significant. On balance, I find that the protection of the public from potential harm outweighs any impact on the applicant and Mr McGuid.
DECISION
In all the circumstances, I am not satisfied that the applicant’s registration as a tax agent should be reinstated as it would pose an unacceptable risk to the Australian community.
The stay of the decision under review, granted on 9 October 2019, is discharged on the date of this decision
The decision under review is affirmed.
149. I certify that the preceding 148 (one hundred and forty-eight) paragraphs are a true copy of the reasons for the decision herein of Senior Member A Poljak.
.............SGD..................
Associate
Dated: 5 February 2021
Date(s) of hearing: 6 November 2019; 18 November 2019; 20 November 2019; 2 December 2019
Counsel for the Applicant: Ms Shelia Kaur Bains
Solicitors for the Applicant: Cleary Hoare Solicitors Counsel for the Respondent: Mr Luke Livingston Solicitors for the Respondent: Self-Represented
Key Legal Topics
Areas of Law
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Tax Law
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Administrative Law
Legal Concepts
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Judicial Review
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Standing
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Procedural Fairness
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Remedies
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Statutory Construction
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