Go to top of page

Reasonable care to ascertain a client’s state of affairs exposure draft D33-2016

Exposure draft

TPB Information Sheet TPB(I) D33/2016

Code of Professional Conduct – Reasonable care to ascertain a client’s state of affairs for tax (financial) advisers 

This exposure draft is also available as a PDF – TPB(I) D33/2016 Code of Professional Conduct – Reasonable care to ascertain a client’s state of affairs for tax (financial) advisers (411 KB) 

Tax Practitioners Board exposure draft

The Tax Practitioners Board (TPB) has released this draft Information Sheet as an exposure draft and invites comments and submissions in relation to the information contained in it within 45 days. The closing date for submissions is 11 July 2016. The TPB will then consider any submissions before settling its position, undertaking any further consultation required and finalising the Information Sheet. 

Written submissions should be made via email at tpbsubmissions [at] tpb.gov.au or by mail to:

Tax Practitioners Board
GPO Box 1620
SYDNEY NSW 2001

DISCLAIMER

This document is in draft form, and when finalised, will be intended as information only. While it seeks to provide practical assistance and explanation, it does not exhaust, prescribe or limit the scope of the TPB’s powers in the Tax Agent Services Act 2009 (TASA). The principles and examples in this paper do not constitute legal advice. They are also only at a preliminary stage. The TPB’s conclusions and views may change as a result of comments received or as other circumstances change. 

Document history

This draft Information sheet was issued on 25 May 2016 and it is based on the TASA as at 8 March 2016.

Introduction

  1. This draft Information Sheet (TPB(I)) has been prepared by the Tax Practitioners Board (TPB) to assist registered tax (financial) advisers (TFAs) to understand their obligations under subsection 30-10(9) of the Tax Agent Services Act 2009 (TASA) (Code of Professional Conduct (Code) Item 9) [1] . While the focus of this draft TPB(I) is on Code item 9, it is also important to note that there are 13 other items in the Code and additional requirements in relation to being a ‘fit and proper’ person that may be relevant. [2]
  2. In this draft TPB(I), you will find information on:

what is the obligation under Code Item 9 (paragraphs 3 to 22)

consequences for failing to comply with Code Item 9 (paragraphs 23 to 27)

comparison with the Corporations Act 2001 (Cth) (Corporations Act) (paragraphs 28 to 31)

practical examples (paragraph 32)

consultation questions for stakeholder feedback (paragraph 33).

What is the obligation under Code Item 9?

  1. Code Item 9 requires registered tax (financial) advisers (and tax agents and BAS agents) to take ‘reasonable care’ in ascertaining a client’s state of affairs, to the extent that ascertaining the state of those affairs is relevant to a statement they are making or a thing they are doing on behalf of the client. However, the Code does not apply to the conduct of a tax (financial) adviser when providing financial services (as opposed to tax (financial) advice services).

What does ‘reasonable care’ mean?

  1. The duty to take reasonable care is a well-established feature of the common law in Australia. While Code Item 9 requires registered tax (financial) advisers to take ‘reasonable care’ in ascertaining a client’s state of affairs, the Code does not extend the common law duty of registered tax (financial) advisers to take reasonable care. However, it does establish an additional range of possible statutory consequences under the TASA (see paragraphs 23 to 25).
  2. There is no set formula for determining what it means to take reasonable care in any given situation. Rather, whether a registered tax (financial) adviser has taken reasonable care in a given situation will depend on an examination of all the circumstances, [3] including the nature and scope of the tax (financial) advice services being provided and the client’s level of professional knowledge and experience.
  3. The starting point for determining what reasonable care is will involve a registered tax (financial) adviser exercising their own professional judgement taking into account relevant factors, such as the client’s individual circumstances including their records and systems and the nature and complexity of the transaction.

What is ‘reasonable care in ascertaining a client’s state of affairs’?

  1. The obligation to take reasonable care does not mean that the care taken needs to be perfect or to the highest level of care possible. The standard generally requires a registered tax (financial) adviser to act in a way consistent with how a competent and reasonable person, possessing the knowledge, skills, qualifications and experience of a registered tax (financial) adviser, objectively determined, would act in the circumstances. This requires, among other things, the exercise of sound judgement in applying professional knowledge and skill in the performance of such a service.
  2. Where a statement provided by a client seems credible (and for existing clients is consistent with previous statements) and the registered tax (financial) adviser has no basis on which to doubt the information supplied, the registered tax (financial) adviser may discharge their responsibility by accepting the statement provided by the client without further checking.
  3. In this case, the registered tax (financial) adviser is not just accepting what the client tells them or gives them at face value. Rather, the registered tax (financial) adviser is exercising their professional judgement based on the information previously provided by the client and the nature of the client themselves, and making a decision that further checking is not required in the particular circumstances.
  4. On the other hand, if the information supplied by a client does not seem credible (in accordance with how a competent and reasonable person, possessing the knowledge, skills, qualifications and experience of a registered tax (financial) adviser, objectively determined, would perceive the information) or appears to be inconsistent with a previous pattern of claim or statement, further enquiries would be required, having regard to the terms of the engagement with the client.
  5. In such situations, taking reasonable care will mean that a registered tax (financial) adviser will need to ask questions of their clients or examine the client’s records, or both, based on a reasonable registered tax (financial) adviser’s professional knowledge, skills and experience in seeking information. Also, if the client’s circumstances have changed, the registered tax (financial) adviser would need to consider what additional questions would need to be asked of the client to ascertain the client’s state of affairs relevant to the tax (financial) adviser services being provided.
  6. Some other circumstances in which there may be a need to make further enquiries of the client include:  
  • nature of the client, e.g. new or inexperienced
  • unusual transactions in the context of the regular business of the client
  • new or substantial changes in the law
  • where there is, or could be, a conflict between the interests of the registered tax (financial) adviser and their client.
  1. Therefore, Code Item 9 does not require registered tax (financial) advisers to ‘audit’, examine or review books and records or other source documents to independently verify the accuracy of information supplied by their clients. However, there may be circumstances (see paragraphs 10 to 12 above) where a registered tax (financial) adviser may not automatically discharge their responsibility by simply accepting what they have been told by their clients.
  2. It is also recommended that relevant advice processes are reviewed as appropriate to ensure they facilitate a thorough understanding of your client’s circumstances, including ‘fact finding’ and/or appropriate documentation (for example, in relation to agreed terms of engagement, ensuring the Statement of advice (SOA) clearly articulates the tax component of the advice process undertaken).

What does ‘… to the extent that ascertaining the state of affairs is relevant to a statement the practitioner is making or a thing the practitioner is doing on behalf of their client’ mean?

  1. The requirement to take reasonable care relates to the circumstances to which the registered tax (financial) adviser is providing a tax (financial) advice service to their client and is therefore subject to the agreed terms of the engagement with the client. [4]
  2. The terms of the engagement with the client may arise from a variety of sources, which may include a signed letter of engagement, [5] signed consent, or other communication with the client which may include, in certain circumstances:
  • a relevant Financial services guide and consent;
  • a relevant Statement of advice (incorporating an ‘authority to proceed’) signed by the client; or
  • a relevant Record of advice (incorporating an ‘authority to proceed’) signed by the client.
  1. These terms will determine the scope of the engagement between the registered tax (financial) adviser and their client and adherence to these terms will usually be the first step towards showing that reasonable care has been taken. The TPB considers that a written agreement between a registered tax (financial) adviser and their client, that sets out the terms and conditions of the arrangement between the parties and is appropriately reviewed when relevant circumstances change, is prudent.
  2. Where a registered tax (financial) adviser knows or ought reasonably to know that information provided by the client is not credible, the tax (financial) adviser should make further enquiries or consider declining to act for the client rather than continue to provide tax (financial) advice services. Further, where the agreed scope of the services excludes the examination of information provided by the client or requires the registered tax (financial) adviser to rely on the information or advice of another expert, then further enquiries would not be required to rely on the relevant information unless the registered tax (financial) adviser identifies, or reasonably ought to have identified, that the information was incorrect or incomplete. It is noted that this aligns with a relevant requirement in the Corporations Act (see paragraphs 28 to 34 in this draft information sheet).
  3. In all cases, whether or not a registered tax (financial) adviser has taken reasonable care under Code Item 9 will be a question of fact to be determined by examining all of the circumstances of a particular situation. Various factors will need to be considered, including the terms of the engagement between a registered tax (financial) adviser and their client.

A ‘statement’ the practitioner is making 

  1. Generally, a statement a registered tax (financial) adviser makes will be a statement (oral or written) made by a registered tax (financial) adviser to their client. For example, a registered tax (financial) adviser may make a statement to their client as to the operation of a taxation law (which could include a superannuation law) provision to the client’s particular circumstances. 

A ‘thing’ the practitioner is doing on behalf of the client 

  1. A thing a registered tax (financial) adviser does on behalf of their client is a broad encompassing term. It includes, but is not limited to, giving a taxpayer advice about a taxation law that the taxpayer can reasonably be expected to rely upon to satisfy their taxation obligations.

Relevant factors that may impact on the level of reasonable care required

  1. Some of the factors that may impact upon the steps required to take reasonable care under Code Item 9 include:
  • the terms of engagement between a registered tax (financial) adviser and their client
  • the complexity of the transaction
  • the client’s circumstances, including their level of sophistication (such as a large client with in-house tax teams and specialists) and
  • the nature of any pre-existing relationship between the registered tax (financial) adviser and their client.

Consequences for failing to comply with Code Item 9

  1. If a registered tax (financial) adviser does not take reasonable care in ascertaining a client’s state of affairs under Code Item 9, the TPB may find that the registered tax (financial) adviser has breached the Code and may impose sanctions for that breach.
  2. If a tax (financial) adviser breaches the Code, the TPB may impose one or more of the following sanctions:
  • a written caution
  • an order requiring the registered tax (financial) adviser to do something specified in the order
  • suspension of the registered tax (financial) adviser’s registration
  • termination of the registered tax (financial) adviser’s registration.
  1. In addition, the same conduct which may amount to a failure to take reasonable care under Code Item 9 could constitute a breach of another Code item.
  2. In contrast, it is noted that if an Australian financial services (AFS) licensee or an authorised representative of an AFS licensee fails to comply with the Corporations Act (including the Best interests duty), they may be liable for:  
    • a civil penalty; [6] and/or
    • an order for compensation for loss or damage suffered by the client. [7]
  3. Ultimately, determining whether a tax (financial) adviser has complied with their obligations under Code Item 9 will be a question of fact. This means that each situation will need to be considered on a
    case-by-case basis having regard to the particular facts and circumstances.

Comparison with the Corporations Act 2001 (Cth)

  1. The TPB recognises that the obligations of some Australian financial services (AFS) licensees and their representatives under the Corporations Act are similar to some obligations under the TASA. [8]
  2. While compliance with relevant Corporations Act and ASIC requirements will be a relevant factor, it is not conclusive in relation to whether obligations under Code item 9 in the TASA have been satisfied.
  3. Having regard to the principles and elements of Code item 9 in the TASA, the following sections in the Corporations Act are highlighted:
  • 912A - General obligations of AFS licensees
  • 961B - Provider must act in the best interests of the client
  • 961E - What would reasonably be regarded as in the best interests of the client?
  • 961H - Resulting advice still based on incomplete or inaccurate information.
  1. In particular, the following requirements are noted:
  • The person providing the advice must make reasonable enquiries to obtain complete and accurate information relating to the client’s relevant circumstances. [9]
  • If it is reasonably apparent that the information on which the advice is based is incomplete or inaccurate, the person providing the advice must warn the client that:
    • the advice is, or may be, based on incomplete or inaccurate information relating to the client’s relevant personal circumstances, and
    • that the client should consider the appropriateness of the advice before acting on it. [10]
  • If the person providing the advice does not have the expertise required to provide advice to on the client’s particular subject matter, they must decline to provide the advice. [11]
  • It is also noted that licensees must ensure that their representatives are adequately trained and are competent to provide financial services.

Practical examples involving Code Item 9

  1. Outlined further below are possible indicative examples for the purpose of illustrating the general application of Code Item 9. In all cases, consideration will need to be given to the specific facts and circumstances as well as to the taxation laws as applied to those facts.

Example 1 (scaled advice)

Terms of engagement

Kimberley engages Helena, a tax (financial) adviser, to provide scaled advice on the investment of specific funds and the tax implications in relation to this investment.

Scenario

Helena recommends that Kimberley pursue a mixed portfolio of particular investments and provides advice on the tax implications of these investments. However, Helena fails to ascertain relevant details of Kimberly’s current assets and liabilities which, if known, would have affected Helena’s advice on the tax implications of the recommended investments.

Reasonable care steps

Although the investments were ultimately profitable for Kimberley, Helena has failed to take reasonable care in ascertaining Kimberley’s state of affairs relevant to the tax (financial) advice services provided.

To satisfy her obligations under Code Item 9, Helena should have conducted a fact find to properly ascertain Kimberly’s state of affairs.

Example 2 (holistic advice)

Terms of engagement

Karl engages Johnny, a tax (financial) adviser, to provide advice on superannuation options associated with retirement, including relevant tax consequences.

Scenario

Johnny undertakes a fact find to identify relevant information for the purposes of his advice. Karl provides Johnny with all the relevant information as requested, except Karl omits the fact that he has been married before and has children from the previous marriage because Johnny did not specifically seek this information.

Johnny subsequently provides the requested advice; however, this advice is materially different to that which would have been provided had Johnny identified details of Karl’s previous marriage.

Reasonable care steps

Johnny has failed to take reasonable care in ascertaining Karl’s state of affairs relevant to the tax (financial) advice services provided by failing to identify details of Karl’s previous marriage. Accordingly, Johnny has breached his obligations under Code Item 9.

Consultation questions

  1. The TPB is inviting stakeholders to provide specific comment in relation to the following questions:
    • Do you agree with the general principles outlined in paragraphs 7 to 11?
    • Paragraph 12 details some circumstances where a tax (financial) adviser needs to make further enquiries of their clients:
    • Do you agree with these circumstances?
    • What other circumstances, if any, should be included in the list?  
      • Paragraph 16 outlines a number of sources where the terms of an engagement with a client can be found:
      • Do you agree with these sources?  
        • What other sources, if any, should be included in the list?
    • In relation to the Examples, do you have any comments about:
      • relevance of the scenarios?
      • what would constitute the reasonable care steps?
    • Are there any additional examples or scenarios that should be incorporated into the information product? If so, please also outline what you consider to be reasonable care steps.

[1]TPB(I) 17/2013 Code of Professional Conduct: Reasonable care to ascertain a client’s state of affairs sets out the TPB’s view on the application of Code Item 9 to tax and BAS agents. While TPB(I) 17/2013 was developed specifically for the purpose of assisting registered tax agents and BAS agents, it provides useful guidance for all registered tax practitioners.

[2]For further information, see TPB Explanatory paper TPB (EP) 02/2010 Fit and proper person.

[3]See, for example, Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard.

[4]For further information on what constitutes a tax (financial) advice service, including facts and circumstances considered in determining whether a client can reasonably be expected to rely on a service being provided, refer to TPB(I) 20/2014: What is a tax (financial) advice service?

[5]For further information on engagement letters, refer to TPB(I) 01/2011 Letters of engagement.

[6]See sections 961K and 961Q in the Corporations Act.

[7]See section 961M in the Corporations Act.

[8]Although not specifically related to taxation advice, the TPB also notes that there are Australian Securities and Investments Commission (ASIC) requirements outlined in relevant ASIC Regulatory Guides (RGs), including:

  • RG 175 Licensing: Financial product advisers - Conduct and disclosure
  • RG 244: Giving information, general advice and scaled advice.

[9]See paragraph 961B(2)(c) of the Corporations Act.

[10]See section 961H of the Corporations Act.

[11] See paragraph 961B(2)(d) of the Corporations Act.