S & T Income Tax Aid Specialists Pty Ltd trading as Alpha Tax Aid and Tax Practitioners Board (Taxation)
[2019] AATA 4099
•9 October 2019
S & T Income Tax Aid Specialists Pty Ltd trading as Alpha Tax Aid and Tax Practitioners Board (Taxation) [2019] AATA 4099 (9 October 2019)
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:9 October 2019
Place:Sydney
Pursuant to section 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal orders that:
1.The interim stay order dated 23 August 2019 is discharged on 14 October 2019.
2.Subject to the following orders, the effect and operation of the respondent’s decision dated 11 July 2019 is stayed until the decision of the Tribunal on the application for review comes into operation or until further order of the Tribunal.
3.The stay referred to in order 2 shall not take effect unless and until the applicant has sent a letter, approved by the respondent, to its current clients advising of the decision of the respondent to terminate the applicant’s tax agent registration and the ongoing appeal.
4.All tax agent services carried out by the applicant are to be supervised by registered tax agents, Pei Fen Liu and Robert John Heinrich, who are current employees of the applicant.
5.Until further order, the applicant undertakes that it will not engage any new clients.
........................[sgd]...............................................
Senior Member A Poljak
CATCHWORDS
PRACTICE AND PROCEDURE – application to stay decision – substantive proceedings concern termination of tax agent registration – factors relevant to the granting of a stay – prospects of success – consequences if stay not granted – public interest – utility of review – stay application granted with conditions
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) s 41
Income Tax Assessment Act 1997 (Cth) Div 28
Tax Agent Services Act 2009 (Cth) ss 30-10, 30-30, 60-125
CASES
Re Scott and Australian Securities and Investment Commission (2009) 51 AAR 114
Re Su and Tax Agent’s Board (SA) (1982) 13 ATR 192
SECONDARY MATERIALS
Taxation Ruling (TR 97/12) – Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear, Australian Taxation Office, 2011
Explanatory Paper TPB(EP) 01/2010, Tax Practitioners Board, 2010
REASONS FOR DECISION
Senior Member A Poljak
9 October 2019
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. Mr McGuid has been a tax agent in Australia for over 40 years, operating through the applicant for most of that time. The applicant currently has around 600 clients.
The Australian Taxation Office (“ATO”) conducted an audit of eight of the applicant’s clients in respect of the income year ended 30 June 2016. All eight clients had work-related expenses denied. 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 of its clients 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”).
Pending the hearing of the substantive proceedings, the applicant has applied for a stay of the decision under review pursuant to section 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”). The Board opposes the stay application.
An interim stay has been in place since 23 August 2019. For the reasons set out below the stay application is granted with conditions.
Relevant Legislative Provisions
Section 41(2) of the AAT Act provides:
The Tribunal may, on request being made by a party to a proceeding before the Tribunal (in this section referred to as the relevant proceeding), if the Tribunal is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review, make such order or orders staying or otherwise affecting the operation or implementation of the decision to which the relevant proceeding relates or a part of that decision as the Tribunal considers appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.
In considering whether to grant a stay, factors which may be taken into account were discussed by Justice Downes in Re Scott and Australian Securities and Investment Commission (2009) 51 AAR 114 at [4]. Relevant factors include the prospects of success; the consequences for the applicant of the refusal of a stay; the public interest; the consequences for the respondent in carrying out its functions depending upon whether a stay is granted or not; whether the application for review would be rendered nugatory if a stay were not granted; and, any other matters that are relevant.
Consideration
Prospects of Success
The respondent contends that the merits of the applicant’s case are tenuous and relies on two specific examples relating to taxpayer 2 and taxpayer 4.
1.Taxpayer 2 was an engineer/sports coach during the 2016 income year. The applicant claimed, on his behalf, a deduction for, inter alia, work-related car expenses, laundry and dry cleaning expenses and Asics running shoes. The claimed deduction for work-related car expenses was in regard to two vehicles. At audit and based on documentation provided by the applicant, one of the vehicles was under novated lease and as such no deductions were allowable for the vehicle. An individual is not entitled to a deduction for car expenses under Division 28 of the Income Tax Assessment Act 1997 (Cth) for a car provided by your employer under a novated lease as part of your salary package. In regards to the Asics running shoes, the applicant indicated that the shoes were used for taxpayer 2’s coaching job. However, the deduction was disallowed because the shoes were not of a protective nature and as such was considered conventional clothing. The respondent submits that these two disallowed deductions should have been abundantly clear to the applicant and that any competent tax agent should have understood that they were not sufficient to be deductible. On the available evidence there is no indication that the applicant warned taxpayer 2 of the risk that the claim may be denied.
2.Taxpayer 4 was a solicitor during the 2016 income year. The applicant claimed, on her behalf, a deduction of $1,115 for suits. The respondent submits that the claim was contrary to the Commissioner’s view and the Taxation Ruling (TR 97/12) about the deductibility of conventional clothing and that any competent tax agent should have understood that ‘suits for court’ are not sufficient to be deductible. The respondent further submits that 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’.
While it may be superficially attractive to accept that the applicant should have known not to claim work-related expense deductions for conventional clothing and for a vehicle provided by an employer under a novated lease, there are many factors surrounding these claims which remain unknown. Such as, for example, the instructions and evidence that were provided to the applicant from the taxpayers in support of their work-related expense deductions claimed and the advice provided by the applicant. It is true that the applicant and Mr McGuid has steadfast refused to accept that the claims made in regards to all eight taxpayers should be disallowed. This is concerning, particularly in regards to the clear examples provided by the respondent in relation to taxpayer 2 and taxpayer 4. In saying that, the merits of each claim are still to be properly tested having regard to the evidence in its entirety. It is also important to note that the question in the substantive proceedings is not solely whether the work-related deductions claimed were permissible but whether the applicant failed to comply with subsection 30-10(7) of the Code of Conduct which provides:
“You must ensure that a tax agent service you provide, or that is provided on your behalf, is provided competently”
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.
On 22 August 2019, Mr McGuid wrote to each of the 8 clients referred to in the Board’s decision to seek their permission to disclose information relating to their affairs in relation to the substantive proceedings and the stay application proceedings. At the date of these proceedings, only taxpayer 1 and taxpayer 7 had consented to their information being disclosed. The applicant anticipates that consent may be obtained from the other taxpayers prior to the hearing of the substantive matter enabling the applicant to put on evidence specific to each client’s dealings with the applicant and Mr McGuid. This may shed some light on how the applicant conducted its affairs in relation to the preparation and filing of the relevant ITRs.
While it is neither necessary nor appropriate for me to determine the substantive matter on an interlocutory application, I must be satisfied that the applicant has some prospects of success. This can be a difficult task given that all of the evidence intended to be relied upon at hearing of the substantive matter may not be before me. As is the case here. Given that further evidence is expected to be obtained and filed in support of the applicant’s case, it cannot be said at this stage that the applicant’s case is without merit.
Consequences if a Stay is Not Granted
The applicant contends that unless the stay is granted it will suffer extreme hardship occasioned by the loss of the ability to earn an income; the loss of the applicant’s business; and the administrative burden occasioned by the sudden termination of the registration. Further, the applicant contends that third parties will suffer personal hardship including the applicant’s employees, who will lose their jobs; the applicant’s current clients who will have to engage alternative tax agent services; and the research company K. I. Marine Research Pty Ltd (“KIMR”), which will no longer be able to derive funding from the applicant to sustain the continuation of its research activities.
Mr McGuid advises in his affidavit sworn 12 September 2019, that should the applicant be required to terminate the employment of its employees, it will have a liability of between approximately $100,000 and $150,000 comprising, for example, long service leave, accrued annual leave and payment in lieu of notice. This is as a result of the employees having continuous service for 2 to 10 years and with one employee having 20 years of continuous service.
A number of employees of the applicant have provided affidavits in these proceedings outlining the impact of losing their employment with the applicant. The evidence contained in the affidavits was unchallenged. In summary they say as follows:
1.Thi Kim Hue Dong, employed by the applicant in the position of bookkeeper, states that if she lost her job it would be very difficult for her to find another job given her age and lack of experience. This would place her in financial difficulty, as she supports her 25 year old son who is financially dependent on her, has no savings, and has fortnightly mortgage repayments to meet.
2.Vahideh Shokri Kordahmad, employed by the applicant in the position of tax accountant, states that he financially supports his elderly mother who resides in Tehran, Iran and that if he lost his job he would not be able to send her any money and would not be able to afford his living expenses. He states that he has strong anxiety and depression and that if he lost his job his condition would worsen and he would not be able to work for a while as a result.
3.Yong Fang Yuan is employed by the applicant in the position of office cleaner. She states that if she loses her job with the applicant it would be hard for her to get another cleaning job straight away. She says she has unsuccessfully tried to get more cleaning jobs in the past. She also states that she is over 60 years of age, her husband does not work, and she has monthly mortgage repayments to meet.
4.Vilena Assadoulaeva is employed by the applicant in the permanent part-time position of ELS tax preparer. She states in her affidavit that her father is currently suffering from stage one throat cancer and is very ill. She says her current role gives her flexibility so that she can manage caring for her father when needed and can take him to medical appointments. She is also a single mother of a 22 year old daughter who is financially dependent on her. She states that if she loses her current job with the applicant she believes it would be very difficult for her to find another job that is permanent part-time but also allows for the flexibility she currently needs to care for her father. She states that if she is not able to find another job she would not be able to meet her weekly rental expenses nor will she be able to continue financially supporting her daughter.
5.Cecilia Mohamed is employed by the applicant in the position of administrative assistant. She states that if she loses her job with the applicant it would be hard for her to find another job straightaway given that she is close to 60 years of age. She says that she has previously been to Centrelink looking for work and found the entire process very difficult and quite depressing. She states that her husband does not have an income and receives a fortnightly pension from Centrelink which pays for their rent. Her income is used for utilities and outgoings. They have no savings and live from pay period to pay period.
In addition to the consequences faced by the applicant’s employees, the current clients of the applicant would no doubt be faced with the inconvenience of seeking a new taxation agent should the stay application be refused.
The applicant also contends that the company KIMR would be adversely affected if a stay were not granted. On 5 July 2002, Mr McGuid set up the company KIMR. He is the sole director and secretary. The company is engaged in extensive research and development activities concerning the southern rock lobster. In or around 2003, KIMR launched a project seeking to create reproducible processes for the growth of the southern rock lobster from eggs, through the larval stage to juveniles, and as mature adults producing eggs in a controlled hatchery environment for commercial purposes. In an affidavit sworn 22 August 2019, Mr McGuid advises that he has invested a significant amount of capital and time into the project and that the project requires a long-term approach to be taken as the southern rock lobster has a 12 year life cycle. In his affidavit sworn 12 September 2019, Mr McGuid advises that as at 30 June 2019, KIMR had a current liability to the applicant in the amount of $1,780,332.07; and a current liability to Mr McGuid in the amount of $1,253,070.13. He states that he funded his loan to KIMR by drawing down on his personal overdraft and from his personal credit card. He advises that he needs to continue to earn an income in order to pay down those overdrafts.
In his affidavit sworn 22 August 2019, Mr McGuid states that should a stay not be granted, the hatchery would likely be closed permanently because KIMR is not yet deriving income. He states that a proportion of the net profit derived by the applicant is invested into KIMR and is used to pay the wages of the staff members who work at the hatchery. Mr McGuid also advises that there are approximately 600,000 southern rock lobsters which are maintained at the hatchery. These lobsters would likely die within 48 to 72 hours if abandoned.
The potential consequences to the applicant and third parties as detailed above weighs heavily in the favour of the granting of a stay.
The respondent does not contend that it would suffer any adverse consequences if a stay is granted.
Public Interest
The respondent submits that the protection of the public interest in this case strongly favours the refusal of a stay and holds the greatest weight in comparison to other relevant factors such as the consequences of a stay being refused and the applicant’s prospects of success in the substantive proceedings.
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.
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.”
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. Following the audit of eight of the applicant’s clients, all eight had work-related expense deduction claims denied. Most significantly, the ATO imposed penalties on six of the audited clients personally. Given that this is the time of year that the applicant would likely be filing ITRs on behalf of the majority of its clients, there is a risk that more clients may be exposed to similar issues with over-claimed work related expenses and may face personal penalties as a result. This is perpetuated by the fact that the applicant and Mr McGuid still maintain that the work-related deductions claimed, being the subject of the substantive proceedings, ought to have been allowed.
The respondent relies on a one page report titled 2016 Work-Related Expenses - how your practice compares (“assessment report”) prepared by the ATO. The ATO assessed the applicant’s risk as high in respect of work-related expenses claimed in the 2016 income year and gave the applicant a risk score of 10. The ATO also assessed that the applicant’s deduction claims for work-related expenses were higher than peer groups across all labels. I give this evidence very limited weight as there is limited evidence about how the risk assessment was actually determined and what variables were used to make such comparisons with other peer groups. The author of the document was unavailable for cross examination and as such the applicant was unable to challenge the findings made in the assessment report.
The public interest weighs against the granting of a stay order.
Utility of the Review
The applicant contends that should a stay not be granted it would be such that even if the applicant was successful in the substantive proceedings, the applicant’s business and reputation would be irreparably damaged. Given that Mr McGuid is 80 years of age, the applicant further submits that it cannot be reasonably expected that he would be able to embark on an extensive period of re-establishing his practice should the applicant be ultimately successful in the substantive proceedings; in effect rendering the substantive proceedings futile or nugatory should a stay not be granted.
While I accept that the applicant may suffer some damage to his business and reputation, I am not convinced that this damage would be so severe as to be irreparable. The substantive proceedings have been expedited in this Tribunal to ensure that this matter is resolved as soon as practicable. This goes some way towards limiting the extent of harm caused to the applicant. Should the applicant be successful in the substantive proceedings, it can recommence the provision of tax agent services as a registered tax agent.
Proposed Conditions Should a Stay be Granted
In the interests of procedural fairness, the parties were asked to provide brief submissions on the following proposed conditions should a stay be granted:
1.The stay shall not take effect unless and until the applicant has sent a letter, approved by the respondent, to its current clients advising of the decision of the respondent to terminate the applicant’s tax agent registration and the ongoing appeal.
2.All tax agent services carried out by the applicant are to be supervised by registered tax agents, Pei Fen Liu and Robert John Heinrich, who are current employees of the applicant.
3.Until further order, the applicant undertakes that it will not engage any new clients.
The applicant consents to proposed conditions 2 and 3 should a stay be granted but opposes the imposition of proposed condition 1. In written submissions the applicant submits that the condition would cause unnecessary anxiety and distress to the applicant’s clients and may be damaging to the applicant’s business. It considers that proposed conditions 2 and 3 strike an appropriate balance between the interests of the applicant and the public interest, pending the determination of the substantive proceedings. The applicant contends that proposed condition 1 is disproportionate and unnecessary and should not be imposed because it risks exposing the applicant’s business to real and serious permanent detriment and may risk the ongoing employment of the applicant’s employees.
In a further affidavit of Mr McGuid sworn 30 September 2019, he claims that the imposition of proposed condition 1 would have a negative effect on the applicant’s ability to earn income and would have a similar effect to deregistration. He also contends that notifying his clients about the decision under review and the ongoing appeal will lead to an increase in administrative costs as a result of fielding phone calls and enquiries from clients about the situation. He says this may also lead to an increase in stress and anxiety for the applicant’s employees.
The respondent contends that should a stay be granted, the public interest strongly favours imposing the proposed conditions.
DECISION
Having carefully considered all of the relevant factors in considering whether to grant a stay, I am satisfied that in this instance it is appropriate to grant a stay with conditions.
I am satisfied that the proposed conditions detailed above provide an appropriate balance between the consequences to the applicant and third parties and the public interest. It is true that the allegations against the applicant are still yet to be tested in this Tribunal. However, given that the majority of the clients who were the subject of the audit personally received substantial financial penalties, it is appropriate that the current clients should be made aware that the competency of the taxation services provided by the applicant is under scrutiny. This enables the applicant’s current clients to make an informed decision about their taxation affairs and whether they are sufficiently safeguarded from potential errors and future penalties. This is particularly of importance during the current 2019 tax time season.
Pursuant to section 41(2) of the AAT Act, the Tribunal orders that:
1.The interim stay order dated 23 August 2019 is discharged on 14 October 2019.
2.Subject to the following orders, the effect and operation of the respondent’s decision dated 11 July 2019 is stayed until the decision of the Tribunal on the application for review comes into operation or until further order of the Tribunal.
3.The stay referred to in order 2 shall not take effect unless and until the applicant has sent a letter, approved by the respondent, to its current clients advising of the decision of the respondent to terminate the applicant’s tax agent registration and the ongoing appeal.
4.All tax agent services carried out by the applicant are to be supervised by registered tax agents, Pei Fen Liu and Robert John Heinrich, who are current employees of the applicant.
5.Until further order, the applicant undertakes that it will not engage any new clients.
I certify that the preceding 36 (thirty-six) paragraphs are a true copy of the reasons for the decision herein of Senior Member A Poljak
.....................[sgd]...................................................
Associate
Dated: 9 October 2019
Date(s) of hearing: 3 & 23 September 2019 Date final submissions received: 1 October 2019 Counsel for the Applicant: Ms S Kaur-Bains Solicitors for the Applicant: Cleary Hoare Solicitors Counsel for the Respondent: Mr L Livingston Solicitors for the Respondent: Tax Practitioners Board
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