Income Tax Regulations (Amendment)

Income Tax Regulations (Amendment) 1997 No. 416

EXPLANATORY STATEMENT

STATUTORY RULES 1997 No. 416

Issued by authority of the Assistant Treasurer

Income Tax Assessment Act 1936

Income Tax Regulations (Amendment)

Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that the GovernorGeneral may make regulations prescribing matters required to give effect to the Act.

The purpose of this regulation is to increase the registration fees charged to a tax agent or a nominee of a tax agent. A nominee is a nominated partner or employee of a partnership or a nominated employee of a company where the partnership or company is the registered tax agent.

The registration of tax agents and nominees is administered by the Tax Agents' Boards. To be registered, a person must satisfy certain registration requirements and pay a registration fee. Registrations remain in force for a 3 year period. At the end of the period a tax agent or nominee is required to apply for re-registration and pay a re-registration fee.

The fees payable by a tax agent or a nominee are found in Divisions 3 and 4, Part VIIA of the Act. These fees were last increased by amendments made in Taxation Laws Amendment Act (No. 2) 1988. Specifically, subsection 251J(2) provides for a fee of 580 for a person applying for original registration as a tax agent and subsection 251JB(2) provides for a re-registration fee of $40. Under subsection 251KB(2), a person registering as a nominee of a tax agent must pay a fee of $80 for original registration or $5 for re-registration. These provisions also allow for higher fees to be prescribed by regulation.

Since 1988, there have been significant increases' in the operating costs of the Tax Agents' Boards. The new fees are set at a level which more closely reflects the cost incurred in operating the Tax Agent Boards. This is consistent with a user pays system and the intention of the 1988 amendments which provided for-the setting of higher fees by prescribing regulations to achieve cost recovery.

This amendment to the Income Tax Regulations prescribes higher registration fees. It is the first increase since 1988 and is set at a level to recover the operating costs of the Tax Agents' Boards.

Details of the regulations are as follows.

Regulation 1: Provides for the regulation to commence on 1 January 1998.

Regulation 2:       Provides that the Income Tax Regulations are amended as set out in these regulations.

Regulation 3: Inserts regulation 158A which increases the fees as follows:

The regulations commence on the 1 January 1998.

Tax agent registration fees

Regulation Impact Statement

1.       Policy objective

To recover the costs of operating the Tax Agents' Boards in accordance with the registration fee provisions in Part VIIA of the Income Tax Assessment Act 1936.

The Income Tax Assessment Act 1936 was amended by Taxation Laws Amendment Act (No. 2) 1988 to introduce a new flat fee structure for registration of tax agents or their nominees. The registration fees were set at a level to recover the costs of operating the Tax Agents' Boards. The 1988 amendments also authorised regulations to be made for the purpose of prescribing higher registration fees. Parliament considered that having a regulation power would enable registration fees to be subject to regular review.

2.       Implementation option

The implementation of the Government's policy objective involves amending the Income Tax Regulations to set registration fees at a level that will provide for full cost recovery.

The only option that will achieve this objective is to prescribe a flat fee increase. No other type of fee structure is possible without first amending the Income Tax Assessment Act 1936.

The proposed fees will be payable in respect of all applications for registrations or reregistrations made after 1 January 1998. There are no transitional arrangements.

Tax agents will be advised of the fee increase by letter from the Tax Agent's Boards. In accordance with the Income Tax Assessment Act 1936, the fee must accompany the application for registration or re-registration that is lodged with the Tax Agents' Board.

3.       Assessment of impacts (costs and benefits)

Impact groups

A tax agent or a nominee of a tax agent must apply to the Tax Agents' Boards before they can derive income from the preparation, or assisting in the preparation, of income tax and fringe benefits tax returns. A nominee is a nominated partner or employee of a partnership or a nominated employee of a company where the partnership or company is to be the registered tax agent. A person's registration is valid for a 3 year period.

The groups impacted by the higher registration fees are as follows:

*       tax agents - it is estimated that there will be approximately 24,000 renewals and 2000 new registrations over the next 3 year registration cycle;

*       nominees of tax agents - it is estimated that there will be approximately 10,000 renewals and 1000 new registrations over the next 3 year registration cycle;

*       the Commonwealth Government - who will no longer have to subsidise the costs of operating the Boards;

*        clients of tax agents - who may have increased registration costs passed on to them;

*       the ATO who will no longer have to budget for the shortfall in operating costs of the Tax Agents' Boards; and

*       the Tax Agents' Boards who, in conjunction with the ATO, will have to advise tax agents of the higher fees.

Assessment of costs

The cost of the proposal is reflected entirely by an increase in registration fees as set out in the following table.

The estimated total number of original registrations and renewals for tax agents and nominees of tax agents is 37,000. The increased fees will result in expected revenue to the Government over the three year registration cycle of $6.2 million. Current receipts from registration fees over the three year registration cycle is $1.42 million. This is a total increase in cost to the tax agent population of $4.78 million.

While there is a wide variance in the number of client's serviced by tax agents, the average number of cIient's per agent is approximately 600. If tax agents are to seek full cost recovery of the increased registration fees from their clients, they would need to increase the fees they charge by an average of 7 cents a client per annum. There are 115 tax agents with more than 5,000 clients. The fee increase for these tax agents will be negligible. On the other hand there are about 6,000 tax agents with fewer than 50 clients. The fee increase will give rise to an additional annual cost per client of more than $1.00.

This fee structure may be seen as. inequitable for smaller tax agents, but it is consistent with the decision of the Parliament to set flat registration fees. On a proportional basis, the burden of increasing registration fees may impact more on smaller practices than larger practices, though the size of a practice does not necessarily relate to the fees generated from tax agent services.

It is expected that the higher registration fees will cause a decrease in the number of applications for re-registration, estimated to be about 1,000 over the 3 year cycle. It is highly unlikely that this will reduce competition because the agents expected not to reregister will be those with a very small client base. Furthermore, taxpayers will be able to choose from the thousands of other registered tax agents.

The proposed higher fees are consistent with the existing fee structure. They are set at an amount that will achieve full recovery of the costs to the Tax Agents' Boards of processing registrations and undertaking disciplinary measures. While the actual processing costs will vary with each application for registration or re-registration, depending on the degree of consideration that needs to be given to the particulars of the application, the fees are a general reflection of the processing costs. The registration fees also reflect the personal benefit to the tax agent or nominee from being able to derive income from the preparation of tax returns.

It costs the Boards more to process an original registration than a re-registration. This is because the Board must be satisfied that the applicant has the necessary-qualifications and relevant experience, and is a fit and proper person to be a tax agent or nominee. Reregistrations do not usually require the same level of administrative processing. The reregistration fee payable by a nominee is a lot less than the re-registration fee payable by a tax agent because it reflects the fact that, unlike a tax agent registration, the nominee cannot use the registration to practice as a tax agent in his or her own right. If a nominee leaves the practice, another person from the partnership or company must apply for an original registration and pay the higher fee.

Apart from having to pay more money, there are no compliance costs to tax agents or their nominees because their is no change in the registration process.

The ATO considers that the fee increase will not result in higher tax agents charges of a magnitude that would force taxpayers away from using tax agents. Therefore, it will not affect tax compliance or taxation revenues. There is no evidence to suggest that tax agent standards will be adversely affected by an increase in registration fees.

Assessment of benefits

There are no benefits to tax agents from the increased registration fees.

The Government will benefit by not having to subsidise the operating costs of the Tax Agents' Boards. The current operating cost of the Boards is $2.084 million per annum, whereas the total registration fee receipts average out over the three year registration cycle to be only $474,000 per annum. The current shortfall in operating costs of the Tax Agents' Boards is funded through the ATO budget.

Consultation

The Commissioner of Taxation has advised tax agents of the proposed higher fees. It has been explained that the fees, which have remained the same for almost ten years, reflect the full cost recovery intention of the Parliament when it amended the law to permit higher fees to be prescribed by regulation.

Tax agents oppose any increase in fees on the grounds that they provide a service to the community. They also maintain that their role benefits the revenue through increased tax compliance. They consider an increase in fees, at this stage, is not warranted.

4.       Conclusion

Increasing registration fees to the amounts proposed in the above table will provide for full recovery of the operating costs of the Tax Agents' Boards.

The ATO will monitor the operating costs of the Tax Agents' Boards to determine the level of tax agents registration fees. It will consult with the Tax Agents' Boards, tax agents and representatives of the tax professions to examine whether there is a more appropriate structure for registration fees in the future.