Reasonable care is an important element of the Code of Professional Conduct (Code) in the Tax Agent Services Act 2009 (TASA).
Under the Code, you are required to take reasonable care:
in ascertaining a client’s state of affairs that is relevant to a statement you make or a thing you do on behalf of a client (Code item 9)
in ensuring taxation laws are applied correctly to the circumstances in relation to which you provide advice to a client (Code item 10).
There is no set formula for determining what it means to take reasonable care in any given situation. Determining what reasonable care is will involve you exercising your professional judgement, taking into account relevant factors including:
the terms of engagement between you and your client
the complexity of the transaction
your client’s circumstances, including their level of sophistication (such as their level of tax knowledge in the subject area)
the nature and scope of services being provided, including the nature of any pre-existing relationship between you and your client.
The terms of the engagement with a client may arise in a variety of ways, including a letter of engagement, an email or via telephone. It is prudent to have a written agreement (such as a letter of engagement) between you and your client that sets out the terms and conditions of the arrangement.
Ascertain a client's state of affairs
You must take reasonable care in ascertaining your client’s state of affairs to the extent that it is relevant to:
a 'statement' you make, or
a ‘thing’ you do for your client.
a ‘statement’ could be a statement you make to the Commissioner of Taxation or to your client when providing taxation advice
a ‘thing’ you do could include providing taxation advice to your client, or preparing and lodging returns, statements, objections or appeals on behalf of your client.
The Code does not require you to ‘audit’, examine or review books and records or other source documents to independently verify the accuracy of information supplied by your clients. However, you should not simply accept what your client provides or tells you at face value.
When an existing client provides information that seems credible (and is consistent with the client’s previous statements) and you have no basis to doubt the information supplied, you may use your professional judgment in accepting the information without further checking.
However, if the information provided does not seem credible, or appears to be inconsistent with the client’s previous claims or statements, further enquiries would be required having regard to the terms of the engagement with your client.
If your client’s circumstances have changed, you should consider asking additional questions to ascertain their state of affairs relevant to the tax agent, BAS or tax (financial) advice services being provided.
Even if the agreed scope of services excludes the examination of information provided by the client, you should make further enquiries or decline to act for them if you know (or reasonably ought to have identified) that the information supplied does not seem credible.
If the service you are providing requires you to rely on the information or advice of another expert, further enquiries are not required unless you identify (or reasonably ought to have identified) that the information was incorrect or incomplete.
Comparison with the Corporations Act for tax agents with a tax (financial) advice services condition
Below are some obligations under the Corporations Act 2001 that are comparable to those under Code item 9, requiring the person providing the advice to:
make reasonable enquiries to obtain complete and accurate information relating to client’s relevant circumstances
warn the client, where the client’s information is incomplete or inaccurate, that the advice provided may be incomplete or inaccurate, and to consider if the advice is appropriate before acting on it
decline to provide advice if they do not have the expertise required to provide advice on the matter.
For further information refer to TPB(I) 17/2013 Code of Professional Conduct – Reasonable care to ascertain a client’s state of affairs.
We have provided some examples below to illustrate the general application of Code item 9.
Failing to examine the nexus between client’s employment and expense being incurred
A client who works as a sales representative at a pharmacy went to her tax agent and asked if she could claim her nursing degree course fees as a self-education expense. The client advised that she spent over $1,000 in course fees but did not keep written documentation for this expense. The tax agent incorrectly advised the client that she could claim the self-education expense as a work-related expense (WRE) and included it as a deduction in the client’s income tax return.
The tax agent failed to take reasonable care to examine the nexus between the client’s employment and expense being incurred and also failed to advise the client she needed written evidence to substantiate the expense.
Failing to make sufficient enquiries about a WRE claim
A client went to his tax agent for assistance on his income tax return and advised that because of COVID-19 he had to work from home, so he purchased a new keyboard for $800. The client provided the tax agent with a receipt from an electronic store for $800, however the receipt did not include a description of what was purchased. The tax agent did not make additional enquiries of the client in relation to the purchase and made the claim on behalf of the client.
Upon review by the ATO, it was established that the receipt was for a gaming console purchased by the client, instead of a keyboard, and therefore was not a WRE.
The tax agent failed to take reasonable care to ensure that the claim being made by the client was correct.
Making additional enquiries
A tax agent was completing an income tax return for a client who operated a coffee shop. The tax agent noticed that the client was seeking to claim the purchase of several board games as a business expense. While the client had receipts to substantiate the claims, the tax agent was concerned that given the client runs a coffee shop, they may be trying to inappropriately claim the board games purchased for personal use.
The tax agent contacted the client to raise her concerns and requested the client to confirm by email how the purchase is related to running a coffee shop. The client advised by email that the coffee shop runs a games night twice a week and the purchase of the board games was in fact for that purpose, and not for personal use. As such, the tax agent lodged the client’s income tax return, including the deduction for the purchased board games.
In this scenario, the tax agent took reasonable steps to ensure that the claims made in the income tax return for the client were correct.
Reasonable suspicions about claims being made
A client requested a tax agent to complete their income tax return. The client started a new job working as a delivery driver for a local business, using his personal car to make deliveries. The client was referred to a tax agent who prepared income tax returns for a number of workers at the same business. When reviewing the client’s logbook, the tax agent noticed that the figures in the client’s logbook were identical to another two clients who worked in the same business.
As it was tax time, the agent’s practice was busy so the tax agent decided to accept all the information from the client at face value, and proceeded to lodge the client’s income tax return.
In this example, the tax agent has failed to carry out their obligations under Code 9, by failing to make additional enquiries in order to be satisfied that the claims being made on behalf of the client are correct.
To have met the obligations of Code Item 9, the tax agent should have requested additional substantiating documentation and information in order to be satisfied that the claims being made were correct. Examples of additional evidence that the tax agent could request include:
delivery schedule/diary to confirm the client’s delivery jobs, including the location of deliveries
petrol and servicing receipts
odometer readings using either the logbook method or the cents per kilometre method.
The agent should have also advised the client of proper record keeping of expenses that the client wants to claim in deductions. Further information can be found on the Australian Taxation Office (ATO) website on car expenses and record keeping.
Making appropriate enquiries of a new client
A BAS agent is engaged by a new client to prepare and lodge the client’s quarterly BAS.
The new client has been referred to the BAS agent by a tax agent. When preparing the BAS, the BAS agent notices that certain transactions appear to be abnormal for the client’s industry. When questioned about the transactions, the client is vague and does not provide sufficient clarity to satisfy the BAS agent that the transactions have been appropriately recorded and relate to the client’s business.
As such, the BAS agent raises their concerns with the referring tax agent. The tax agent tells the BAS agent to include the transactions with a note for the tax agent to look at the transactions more closely at the end of the reporting period, which the BAS agent does.
In this circumstance the BAS agent has discharged their obligations by raising the concerns with the tax agent and making a note for the tax agent to review the transactions in question at the end of the reporting period. The tax agent must also ensure that they take reasonable care in ascertaining the client’s state of affairs when reviewing the transactions.
Asking questions about changes to a client’s circumstances
A tax agent was preparing an income tax return for a client who had engaged the tax agent for the previous five years. For the past three years the client had been single and had not reported having a spouse in her income tax return.
In preparing the client’s income tax return, the tax agent did not make any enquiries of the client in relation to whether any of her personal circumstances had changed, including whether or not she had a spouse.
As a result, the tax agent incorrectly reported that the client did not have a spouse in her income tax return, which affected the client’s eligibility to receive a rebate for private health insurance. In this case, the tax agent failed to take reasonable care to ascertain the client’s state of affairs relevant to the preparation of her income tax return.
Ensure taxation laws are applied correctly
You must take reasonable care to ensure you correctly interpret and apply taxation laws to your client’s circumstances when you provide advice.
If you make a mistake in correctly applying tax laws, it does not necessarily mean that you have failed to take reasonable care. However, if you made a mistake because you did not take reasonable care, it could be considered a breach of the Code.
While there is no set formula, this may include referring to legislation and other relevant materials issued by the ATO, recognised professional associations, specialists or other registered tax or legal practitioners.
For further information and practical examples, refer to TPB(I) 18/2013 Code of Professional Conduct – Reasonable care to ensure taxation laws are applied correctly
Comparison with the Corporations Act for tax agents with a tax (financial) advice services condition
There are some obligations under the Corporations Act 2001 that are comparable to those under the Code item 10. They require the person providing the advice to a retail client to:
act in the best interests of the client in relation to the advice
only provide advice if the resulting advice would be appropriate to the client.
For further information about Code item 10 and the comparative obligations, refer to TPB(I) 18/2013 Code of Professional Conduct – Reasonable care to ensure taxation laws are applied correctly.
Failure to take reasonable care
If you fail to take reasonable care in ascertaining a client’s state of affairs or applying taxation laws correctly to your client's circumstances, we may find that you have breached the Code and impose sanctions for that breach.