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Reasonable care to ascertain a client’s state of affairs - exposure draft TPB(I) D15/2012

Exposure draft
TPB Information Sheet TPB(I) D15/2012

Code of Professional Conduct – reasonable care to ascertain a client’s state of affairs

This draft information sheet is also available as a PDF, download

(PDF, 327KB).

The Tax Practitioners Board (Board) has released this draft Information sheet as an Exposure draft and invites comments and submissions in relation to the information contained in it within 60 days. The closing date for submissions is 13 November 2012. The Board will then consider any submissions before settling its position, undertaking any further consultation required and finalising the Information sheet.

Written submissions should be made by the closing date to the Secretary of the Board via email at tpbsubmissions [at] tpb.gov.au or by mail to:

Tax Practitioners Board
PO Box 9825
PENRITH  NSW  2740

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 Board’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 Board’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 14 September 2012 and is based on the TASA as at 10 September 2012.

Introduction

  1. This Information Sheet (TPB(I)) has been prepared by the Tax Practitioners Board (Board) to assist registered tax agents and BAS agents (registered agents) to understand their obligations under the Code of Professional Conduct (Code) in relation to taking 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 the agent is making or a thing the agent is doing on behalf of the client (Code Item 9).

  2. In this TPB(I), you will find the following information:

    • background on Code Item 9 and reasonable care;
    • consequences for failing to comply with Code Item 9; and
    • practical examples involving Code Item 9.

What is Code Item 9?

  1. All registered tax agents and BAS agents are required to comply with the Code, which is contained in section 30-10 of the Tax Agent Services Act 2009 (TASA).

  2. Under Code Item 9, registered agents must 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.

  3. The Board has released an explanatory paper on the application of the Code that details the Board’s view on Code Item 9[1].

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

  1. Taking reasonable care will in most cases mean that a registered agent will need to ask questions of their clients or examine the client’s records, or both, based on a reasonable agent’s professional knowledge, skills and experience in seeking information.

  2. The obligation to take reasonable care will not mean that the care taken needs to be perfect or the highest level of care possible. It is sufficient that the agent acts in a way that is consistent with how a reasonable person, possessing the required knowledge, skill and experience of a registered tax agent, objectively determined would act in providing tax agent services or BAS services.

  3. Where a statement provided by a client seems plausible and is consistent with previous statements and the agent has no basis on which to doubt the client’s reliability or the veracity of the information supplied, the registered agent may discharge their responsibility by accepting the statement provided by the client without further checking.

  4. In this case, the agent is not just accepting the client or what the client tells them or gives them at face value, the agent is making a professional judgement call, based on the information previously provided by the client and the nature of the client themselves, that further checking in a particular scenario would not be required. If the client’s circumstances changed, the agent 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 agent services being provided.

  5. If the information supplied by a client seems implausible, would be implausible to a reasonable agent in the same circumstances or appears to be inconsistent with a previous pattern of claim or statement, further enquiries would be required.

  6. In addition, elements to be evaluated to determine if there is a need to investigate further or 'spot check', even if there is no clear reason to doubt the veracity of the information, may include:

    • whether the law is new;
    • whether the client is inexperienced or new to business;
    • whether the transactions are unusual or novel to the regular business;
    • the potential consequences (for example, the size of potential shortfall).
  7. Code Item 9 does not create a requirement that a registered agent effectively ‘audits’ their clients to avoid breaching the Code.

  8. The obligation under Code Item 9 may be influenced by the terms of an engagement or retainer letter, but cannot be supplanted by such letters. That is, whether an agent has taken reasonable care is a question of fact to be determined by the circumstances of a particular situation. Having an engagement letter will not of itself establish that reasonable care has been taken and these obligations cannot be transferred to the client[2]. Even if there is an engagement letter which seeks to determine the respective responsibilities of the agent and their client, the agent is still responsible for ensuring that they provide tax agent services in accordance with appropriate standards of professional and ethical conduct. This includes ensuring that they do not make false or misleading statements to the Commissioner and that they do not prepare such a statement that they know, or should know, is likely to be made to the Commissioner.

What does ‘reasonable care’ mean?

  1. The standard of ‘reasonable care’ generally required of a registered agent is that of a competent and reasonable person, possessing the knowledge, skills, qualifications and experience that a registered agent is expected to have.

  2. What is ‘reasonable care’ depends upon a range of factors, including the nature and scope of the tax agent services and BAS services being provided and the client’s level of professional knowledge and experience.

  3. There is no set formula for determining what it means to take reasonable care in any given situation. The Australian Taxation Office (ATO) has stated, in the context of the administrative penalties for false or misleading statements or failing to lodge on time in the approved form, that whether a tax agent shows reasonable care in a given circumstances will depend on an examination of all the circumstances.[3] 

  4. The starting point for determining what reasonable care is will involve a registered agent exercising their own professional judgement taking into account certain factors such as the client’s circumstances including their records and systems and the nature and complexity of the transaction.

  5. The Accounting Professional and Ethical Standards Board (APESB) has stated in APES 110 Code of Ethics for Professional Accountants that ‘professional competence and due care’ is a fundamental principle that members must comply with. This principle requires a member ‘to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional services … and act diligently in accordance with applicable technical and professional standards’. This requires, among other things, the exercise of sound judgement in applying professional knowledge and skill in the performance of such a service.[4]

Consequences for failing to comply with Code Item 9

  1. If an agent does not take reasonable care in ascertaining a client’s state of affairs, the Board may find that the agent has breached the Code and may impose sanctions for that breach on the agent.

  2. If an agent breaches the Code, the Board may impose one or more of the following sanctions:

    • a written caution;
    • an order requiring the agent to do something specified in the order;
    • suspension of the agent’s registration;
    • termination of the agent’s registration.
  3. In addition, the same conduct which may amount to a failure to take reasonable care under Code Item 9 could constitute a breach of one of the civil penalty provisions in the TASA. Section 50-20 of the Act makes it a contravention to make false, misleading or reckless statements to the Commissioner. Section 50-30 of the Act creates an offence in relation to signing of declarations unless the agent takes reasonable steps to ensure the accuracy of the document.

  4. It would be a matter for the Tax Practitioner's Board to determine what action to take in particular circumstances. Such action might not be confined to disciplinary action for a breach of the Code and could extend to Federal Courts action seeking a civil penalty for a breach of these provisions. 

Safe harbour provisions

  1. Under the Taxation Administration Act 1953 (TAA), failing to take reasonable care in making a statement, which includes ascertaining the facts relevant to the statement being made, may result in a penalty to the client on whose behalf the statement is made.

  2. For statements made from 1 March 2010, safe harbour provisions apply to administrative penalties in the Taxation Administration Act 1953 (TAA) for:

    • false or misleading statements;[5]  and 
    • failure to lodge documents on time.[6] 
  3. The safe harbour provisions are administered by the Commissioner of Taxation (Commissioner), not the Tax Practitioners Board (Board).

  4. The safe harbour provisions in the TAA provide that, in general terms, where a taxpayer has engaged a registered tax agent or BAS agent, so long as the taxpayer can demonstrate that all relevant information required to enable the agent to make a statement or give a return, notice, statement or other document to the Commissioner was provided to his or her tax agent or BAS agent, the taxpayer will not be subject to an administrative penalty for:

    • making a false or misleading statement that results in a shortfall amount; or
    • failing to lodge a document on time;

        unless the shortfall amount, or failure, resulted from:

    • an intentional disregard by the registered agent of a taxation law; or
    • recklessness by the registered agent as to the operation of a taxation law.
  1. Where the ATO, or a court or tribunal, makes a decision about the application of the safe harbour provisions to the circumstances of a taxpayer, that decision may involve a finding that a tax agent or BAS agent, in making a statement or failing to give a return, notice, statement or other document to the Commissioner on behalf of the taxpayer, has failed to take reasonable care.

  2. Such a finding in relation to an agent’s conduct, while not binding on the Board, may be considered by the Board in assessing whether an agent has breached Code Item 9.

  3. Before the Board can determine if an agent has breached the Code, the Board must conduct an investigation. The Board will decide whether an investigation is required having regard to all the circumstances and will not necessarily conduct an investigation in every case. In the case of isolated mistakes, the Board might not take any specific action.

Practical examples involving Code Item 9

  1. The following examples explain the application of Code Item 9.

Relying on information provided by the client

Example 1

An agent has conducted several meetings with their client where the briefing instructions in each meeting have varied over the course of those meetings in terms of the client’s circumstances and the work to be performed. Taking reasonable care in relation to this engagement may involve:

  • minuting each discussion to ensure clarity of instructions;
  • the gathering of more source data to verify the accuracy of the client’s representations;
  • reviewing all relevant contractual documentation and the client’s audit files to gain a better understanding of the disclosures in the statutory accounts; and
  • confirming with the client what work is to be done.

Example 2

Amelie & Co is a registered tax agent and has been engaged by Florist Co to conduct a review of its annual income tax return. Amelie & Co identifies an apparent inconsistency in the information contained in the return, namely that the value of the stock on hand is less than the daily stock turnover. As such, Amelie & Co must make further enquiries to resolve the inconsistency.

Not auditing client information

Example 3

Josephine is a registered tax agent, engaged by Fred to prepare his tax return. Fred has supplied Josephine with the required data to enable her to complete his return. Fred is a long-standing client with a proven record with the agent of demonstrating integrity and reliability in relation to his taxation affairs.

In these circumstances, Josephine would not need to conduct exhaustive enquiries on the data supplied but she may still be expected to, or consider it prudent to:

  • retain some working papers and/or checklists evidencing that the agent had demonstrated appropriate professional and systemic diligence in compiling the return or BAS; and
  • download a pre-filling report for the client, who is an individual, from the ATO tax agent portal to compare the information provided on that report with the instructions provided by the client.

Example 4

Penny & Co, a registered tax agent, has been engaged by Marshall’s Machinery to conduct a review of its annual income tax return, based on the audited financial statements of Marshall’s Machinery (Penny & Co is not the auditor).

Penny & Co determines that it can rely on the information provided by Marshall’s Machinery because it has appropriate staff and processes involved in its financial function and Penny & Co has no reason to doubt the quality of the materials provided in the course of the tax return preparation engagement.

Penny & Co is not required to undertake audit-like activities, such as comparing the value of trading stock on hand at the end of the year with average daily sales, in relation to the facts which underlie the financial records from which the return is prepared.

Example 5

A BAS agent engaged to prepare and lodge the BAS for their client is provided information by their client in relation to a transaction where the invoice for the supply does not quote an ABN and where the client should have withheld 46.5% of the payment but has already paid the invoice.

Before claiming any input tax credits in relation to the supply, the agent should make further enquiries concerning the nature of the transaction. Taking reasonable care in these circumstances may involve:

  • checking the Australian Business Register to determine whether the supplier is registered for GST. However, if the supplier is a large well-known supplier then it may be reasonable to assume they are registered for GST; and
  • making further enquiries in relation to the type and quality of the invoice provided.

Scoping out of Code Item 9 (engagement letters)

Example 6

Jonah, a registered tax agent, is engaged by Sophia to lodge her income tax return. Jonah and Sophia have in a place an engagement letter that sets out the terms and conditions of their engagement, in particular, that Jonah is to only complete and review the medical expenses tax offset section (based on records provided by Sophia) before lodging the income tax return.

Sophia clarifies that she has already completed the remainder of the income tax return and does not wish for Jonah to review these parts.

If Jonah were to lodge the income tax return in accordance with the terms of his engagement with Sophia, Jonah would be seeking to undertake instructions that are contrary to his obligations under the Code, including Code Item 9. This is because Jonah would be signing a declaration about the truthfulness and accuracy of the whole of the return lodged with the Commissioner by him, when he had not taken reasonable care to ascertain Sophie’s state of affairs to the extent that these state of affairs were relevant to the statement Jonah was making in the declaration to the Commissioner.

Having an engagement letter will not of itself establish that reasonable care has been taken and these obligations cannot be transferred to the client or override the operation of the law.

Relying on the work of other registered agents

Example 7

Stefan, a registered tax agent, has been engaged by Walsh Ltd to prepare its income tax return. Walsh Ltd gave Stefan all of its tax information, including its BAS and goods and services tax (GST) reconciliation accounts prepared by Craig, a BAS agent.

As Craig is a registered BAS agent, it would normally be reasonable for Stefan to accept Craig’s work at face value. However, based on previous examination of other work by Craig, Stefan has doubts as to the accuracy of Craig’s work.

In these circumstances, it is not reasonable for Stefan to accept Craig’s work at face value. In this case, Stefan can demonstrate having taken reasonable care in various ways. These might include reviewing the original documentation (for example, tax invoices) or satisfying himself of the procedure and methodology Craig used to arrive at a particular determination.

Stefan may also decide to alert the Board to his concerns about the accuracy of Craig’s work.

Refusing client engagement

Example 8

Toni, a registered tax agent, is approached by Dylan to prepare and lodge his income tax return for the last financial year. Dylan requests Toni to prepare his return to ensure that he receives a tax refund of at least $5,000. On a quick preliminary review of Dylan’s circumstances, Toni advises Dylan that he appears to only have receipts and documentation to support an estimated tax refund of $2,000. Despite this, Dylan requests that Toni prepare his return to ensure that he receives a tax refund of at least $5,000.

If Toni decides to lodge the income tax return in accordance with Dylan’s instructions, she will breach her obligations under the Code, in particular Code Item 9, because she has not taken reasonable care to ascertain Dylan’s state of affairs in relation to the lodgement of his income tax return. In this case, it would be appropriate for Toni to refuse Dylan as a client, if Dylan were to insist on seeking a refund which cannot be supported.

Substantiation of statements made or information provided by the client

Example 9

Jenny provides Alice, her registered agent, with small business software records to prepare her income tax return. The small business software records show a low net profit for Jenny’s business.

Alice prepares the return from the small business software records. Alice does not question the small business software records or undertake any checks that the income is consistent with industry standards or Jenny’s living expenses. Alice also does not undertake any reconciliation of the small business software records against source documents or BAS returns for the period. Jenny signs a declaration that the return is correct and Alice lodges the return.

Alice has not taken reasonable care in this case as she has not undertaken any checks to satisfy herself that the records used to prepare Jenny’s return are likely to be correct and complete. Alice has also not properly advised Jenny of her obligation to provide correct and complete records to prepare the return and the possible consequences of not doing so.

Example 10

John engaged an agent to prepare his income tax return for the previous income year. In discussions prior to preparing the return, John informed the agent that his house had been sold during the year of income. The house had been John’s principal residence for the last five years but prior to this time he had let it to tenants.

The agent does not ask John whether the residence had ever been used for income producing purposes and does not include a proportion of the capital gain realised on the sale of the dwelling in John’s assessable income. By not asking for additional information about the way in which the house has been used, and whether John has chosen to continue to treat the property as his main residence, the agent has not taken reasonable care.

Materiality

Example 11

Ted and Terry Taxation Pty Ltd is engaged by Piper to advise on the taxation implications in relation to the sale of a $1 million investment property. In particular, Piper requests Ted and Terry Taxation Pty Ltd to advise her on the capital gains tax implications.

In determining the cost base of the investment property, Ted and Terry Taxation Pty Ltd need to determine, among other things, the incidental costs in acquiring the property. There are two incidental costs that Piper is unable to provide substantiating documentation for, being legal fees of $10,000 and advertising costs of $200.

For Ted and Terry Taxation Pty Ltd to comply with its obligations under the Code, it should obtain from Piper relevant documentation to support the amount for legal fees as this amount is material taking into account the circumstances and value of the transaction. On the other hand, it may be reasonable for Ted and Terry Taxation Pty Ltd to not require substantiation for the advertising costs where it is satisfied that an advertisement was placed and the relevant amount appears to be appropriate in the circumstances.

Degree of transaction complexity 

Example 12

An agent is engaged by a long-standing trusted client to provide detailed written advice on a highly complex matter concerning the operation of various taxation laws and the application of these laws to the client’s position.

In this circumstance the agent should seek confirmation of the factual instructions provided and review source documentation to ensure that there are not any material factual errors or omissions which could affect the accuracy of the advice to be provided.

[1] Refer to paragraphs 118 to 132 of TPB(EP) 01/2010 Code of Professional Conduct.

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

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

[4] APESB APES 110 Code of Ethics for Professional Accountants, sections 100.5 and 130.

[5] See subsection 284-75(1) in Schedule 1 to the TAA.

[6] See subsection 286-75(1) in Schedule 1 to the TAA.