House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 1 - New legislative regime for the provision of tax agent services

Outline of chapter

1.1 This chapter outlines the background to the new legislative regime for the provision of tax agent services and the key elements of the regime.

1.2 Division 1 of Part 1 of this Bill provides for the short title and commencement of the Bill, the Bill's application to external territories and the general administration of the Bill.

1.3 Division 2 of Part 1 of this Bill provides for the object of the Bill and general guide to each Part of the Bill.

1.4 Division 3 of Part 1 and Division 80 of Part 8 of this Bill provide for the explanation of the use of defined terms and the rules for interpreting the Bill.

1.5 Section 70-55 of this Bill provides for the regulation-making power under the Bill.

Background to and key elements of the new legislative regime

Background

1.6 The current regime for regulating tax agents appears in Part VIIA of the Income Tax Assessment Act 1936 (ITAA 1936) and was originally introduced in 1943. Since then the tax environment has changed and a much larger proportion of taxpayers use tax agents to lodge their returns and help them comply with their tax obligations. In recent years, approximately 74 per cent of individuals and over 95 per cent of businesses used a tax agent to prepare and lodge their tax returns. ^[1]

1.7 The current regime includes:

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a registration process for tax agents and their nominees (but not Business Activity Statement (BAS) agents);

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provisions which provide that only tax agents are entitled to supply certain tax agent services for a fee;

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separate state Tax Agents' Boards (state Boards) responsible for registration of tax agents; and

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administrative penalties for taxpayers for making a false or misleading statement resulting in a shortfall amount, or for late lodgment, irrespective of whether they engaged a tax agent to prepare and/or lodge the document.

1.8 Broadly, the new legislative regime to govern the provision of tax agent services is intended to ensure that tax agent services and BAS services provided to the public are of an appropriate ethical and professional standard. The regime does so by:

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requiring providers of tax agent services and BAS services to be registered and to comply with a code of professional conduct; and

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establishing an independent national board to register tax agents and BAS agents, and to monitor and enforce compliance with those standards.

1.9 Although the new legislative regime was initially announced to commence on 1 July 1999, its introduction was delayed at the request of the tax profession, to allow practitioners to focus on preparing for the reforms introduced with A New Tax System from 1 July 2000. The Treasury has progressed the proposals to create the new legislative regime since mid-2002.

1.10 Confidential consultation on a detailed discussion paper occurred in 2005 and confidential consultation on draft legislation took place with professional bodies representing tax agents and bookkeepers during 2006.

1.11 Draft legislation and explanatory materials were exposed for public comment for three months during mid-2007 and for four weeks in mid-2008.

1.12 The 2006-07 Budget contained additional funding to the Australian Taxation Office of $57.5 million over four years for the implementation of the new legislative regime.

Key elements of the new legislative regime

1.13 The key elements of the new legislative regime are set out under the following subheadings.

The establishment of a national Tax Practitioners Board

1.14 The Tax Practitioners Board (Board) has responsibility for registering tax agents and BAS agents, ensuring that agents maintain appropriate skills and knowledge, investigating complaints against agents and ensuring that unregistered entities do not hold themselves out to be agents.

A wider scope of application

1.15 Under the new arrangements, BAS agents will be governed in the same way as tax agents, but will only be able to provide a limited range of services relating to the taxation laws relevant to a BAS provision in the law.

Registration requirements

1.16 Meeting the fit and proper person test, as well as minimum educational qualifications and relevant experience requirements, will be required in order to obtain registration to provide tax agent services for a fee or other reward. The minimum educational qualifications and relevant experience requirements are set at a less demanding level for registration as a BAS agent than for registration as a tax agent, in recognition of the narrower scope of services provided by BAS agents.

1.17 To allow for the registration of 'specialist' tax agents and BAS agents, the Board may impose conditions on registration. Conditions limit the scope of the services that an agent may provide to a single area of the taxation laws or a single type of tax agent service. These limitations correspond to the prescribed qualifications and relevant experience of an individual agent or, in the case of an agent that is a partnership or company, to correspond to the prescribed qualifications and relevant experience of the individuals who work for the agent.

1.18 While registration is restricted to individuals, partnerships and companies, there is flexibility for a registered entity to conduct its business through a trust structure. The registered entity needs to be a trustee of the trust and must ensure that the work produced by the trust on behalf of the trustee is of a competent standard.

The introduction of a Code of Professional Conduct

1.19 A Code of Professional Conduct (Code) governs the ethical and professional standards of tax agents and BAS agents. The Code is set out as a statement of principles and the Board may issue binding written guidelines for the interpretation and application of the Code.

1.20 A formal legislated code has been a key aspect of the new legislative regime since it was first recommended in 1994 by the Report of the National Review of Standards for the Tax Profession, Tax Services for the Public. This report recommended that any such code should be made binding through legislation to enable the Board to impose sanctions for breaches and thereby to enforce compliance with the code.

A range of sanctions for breaches of the Code of Professional Conduct

1.21 Under the new arrangements, if a tax agent or BAS agent has breached the Code, the Board has a range of options. The Board may caution the agent, require the agent to complete a course of training, subject the agent to practising restrictions, require the agent to practise under supervision, or suspend or terminate the agent's registration. (Currently, the state Boards are only able to suspend or terminate registration.)

1.22 The Board may also apply to the Federal Court of Australia (Federal Court) for an order to pay a pecuniary penalty for certain serious misconduct, or seek an injunction to prevent an entity from engaging in, or compel an entity to undertake, certain conduct.

1.23 Such a wide range of sanctions allows the Board to tailor its response according to the severity of the misconduct.

Safe harbour from penalties

1.24 A taxpayer who uses a tax agent or BAS agent will benefit from a safe harbour from certain administrative penalties in certain circumstances. Penalties will no longer apply:

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where a false or misleading statement is made carelessly, provided the taxpayer has taken reasonable care to comply with their tax obligations by giving their tax agent or BAS agent the information necessary to make the statement; and

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where a document (such as a return, notice or statement) is not lodged on time in the approved form due to the tax agent's or BAS agent's carelessness, provided the taxpayer gave the agent the necessary information, in sufficient time, to lodge the document on time and in the approved form.

Detailed explanation of new law

Commencement of the Bill

1.25 Certain provisions in the Bill commence on the day on which the Bill receives Royal Assent, while others commence on a single day to be fixed by Proclamation. [Section 1-5]

1.26 The Proclamation date must be on or after the day on which the Tax Agent Services (Transitional Provisions and Consequential Amendments) Bill receives Royal Assent, but no later than nine months after that Bill receives Royal Assent. Otherwise, if no Proclamation is made, these provisions of the Bill commence on the first day after the end of that nine-month period. (If the provisions commence in this way, the relevant Treasury Portfolio Minister must make an announcement, by notice in the Commonwealth of Australia Gazette, of the day on which the provisions commenced.) [Section 1-5]

1.27 Broadly, the Board will need to be established as early as possible on or after Royal Assent and before the regulatory arrangements commence, to enable it to prepare for its role of registering tax agents and BAS agents and regulating compliance with the legislation. (This is detailed further in paragraphs 5.26 and 5.27 in Chapter 5 of this explanatory memorandum.) In order for the Board to be established from Royal Assent, certain other provisions in the Bill need to commence at the same time, such as the introduction to the Bill and the Dictionary and interpretation provisions.

1.28 The following provisions in the Bill commence on the day on which the Bill receives Royal Assent:

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Part 1, which provides the introduction to the Bill including the commencement provisions, application provisions and the general administration of the Bill, the object clause and explanation of the use of defined terms;

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sections 60-1 to 60-90, which provide for the establishment, functions and powers of the Board, the appointment of Board members, Board procedures and committees;

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sections 70-25 to 70-45, which are miscellaneous provisions relating to the Board, in particular immunity from legal action and delegation by the Board, and miscellaneous provisions relating to the protection of information obtained under the Bill (ie, the secrecy and disclosure provisions); and

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Part 8, which provides for the rules for interpreting the Bill and the Dictionary applicable to the Bill.

[Subsection 1-5(1), items 1, 3, 5 and 7 in the table]

1.29 The following provisions in the Bill commence on a single day to be fixed by Proclamation:

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Part 2, which provides for the eligibility and process for registration under the Bill;

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Part 3, which provides for the Code and the administrative sanctions applicable for failure to comply with the Code;

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Part 4, which provides for the grounds and process for terminating registration;

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Part 5, which provides for the civil penalties applicable for certain conduct;

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sections 60-95 to 70-20 and sections 70-50 to 70-55, which are:

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the provisions relating to investigations conducted by the Board;

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the provisions relating to the public reporting obligations of the Board; and

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miscellaneous provisions relating to applications by the Board to the Federal Court for injunctions, applications to the Administrative Appeals Tribunal for review of certain Board decisions, trustees and partnerships, legal professional privilege and the making of regulations by the Governor-General.

[Subsection 1-5(1), items 2, 4 and 6 in the table]

Application of the Bill

1.30 The Bill extends to every external Territory. [Section 1-10]

General administration

1.31 The Board has the 'general administration' of the Bill. As such, the Board has the power to do all things necessary in connection with the administration of the legislative regime to fulfil the purpose of the provisions in the Bill. [Section 1-15]

1.32 The Tax Agent Services (Transitional Provisions and Consequential Amendments) Bill will amend subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to include the Tax Agent Services Bill and regulations to be made under that Bill within the definition of 'taxation law'.

1.33 While the Bill will form part of the taxation laws, the Board (and not the Commissioner of Taxation) has the general administration of the Bill.

Object of and general guide to the Bill

Object of the Bill

1.34 The object of the Bill is to ensure that tax agent services are provided to the public in accordance with appropriate standards of professional and ethical conduct. This is achieved by (among other things):

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establishing the national Board to register tax agents and BAS agents;

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introducing the Code for tax agents and BAS agents; and

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providing for sanctions to discipline tax agents and BAS agents.

[Section 2-5]

General guide to each Part of the Bill

1.35 Part 2 of the Bill provides that an entity needs to be registered to provide tax agent services for a fee or to engage in other conduct connected with providing tax agent services. It sets out the requirements for registration. [Subsection 2-10(1) and section 20-1]

1.36 Part 3 of the Bill sets out the Code with which entities registered under the Bill must comply. [Subsection 2-10(2) and section 30-1]

1.37 Part 4 of the Bill sets out the circumstances in which an entity's registration can be terminated. [Subsection 2-10(3) and section 40-1]

1.38 Part 5 of the Bill provides for civil penalties aimed at ensuring compliance with the Bill. [Subsection 2-10(4) and section 50-1]

1.39 Part 6 of the Bill establishes the Board and sets out the Board's functions and powers. The Board may investigate breaches of the Bill and has certain reporting obligations. [Subsection 2-10(5) and section 60-1]

1.40 Part 7 of the Bill contains miscellaneous provisions, mainly administrative and machinery provisions relating to the operation of the Bill. [Subsection 2-10(6) and section 70-1]

1.41 Part 8 of the Bill contains the Dictionary, which lists most of the terms that are defined in the Bill and sets out the meaning of some important concepts and provides rules on how to interpret the Bill. [Subsection 2-10(7)]

Interpretation of the Bill

Explanation of the use of defined terms in the Bill

1.42 Many terms used in the Bill are defined in the Dictionary to the ITAA 1997, starting at section 995-1 in that Act. Therefore expressions in the Bill have the same meaning in the Bill as in the ITAA 1997 (other than the expression 'this Act'). Some terms used in the Bill are only defined in the Bill. [Subsections 3-5(1) and 90-1(2)]

1.43 Most terms that are defined in either the ITAA 1997 or in the Bill are identified by an asterisk at the start of the term, for example, 'BAS service'. [Subsection 3-5(2)]

1.44 In the following circumstances, a defined term is not identified by an asterisk:

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Once a defined term has been identified by an asterisk, later occurrences of the term in the same subsection are not usually asterisked [subsection 3-10(1)] .

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Defined terms are not asterisked in the Guides, headings or notes in the Bill [subsection 3-10(2)] .

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If a term used in the ITAA 1997 is used in the Bill and the term is not identified with an asterisk in the ITAA 1997, then the term is also not identified with an asterisk in the Bill. Refer to subsection 2-15(3) of the ITAA 1997 for expressions in that Act that are not identified with an asterisk [subsection 3-10(4)] .

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Throughout the Bill, the term 'Board' is not identified with an asterisk because of the frequency with which the term appears in the Bill [subsection 3-10(3)] .

Rules for interpreting the Bill

1.45 The following form part of the Bill:

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the headings to the Parts, Divisions and Subdivisions of the Bill;

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the Guides;

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the headings to the sections and subsections of the Bill; and

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the notes and examples that follow the provisions of the Bill.

[Subsection 80-1(1)]

1.46 Asterisks are used to identify defined terms. These asterisks form part of the Bill. However if a term is not identified by an asterisk, that fact should be disregarded in deciding whether or not to apply a definition or another interpretation provision to that term. [Subsection 80-1(2)]

1.47 As mentioned above, Guides form part of the Bill. A Guide consists of sections under a heading indicating that what follows is a Guide to a particular Division, Subdivision, etc. [Subsections 80-5(1) and 90-1(1)]

1.48 Although forming part of the Bill, Guides are kept separate from the operative provisions in the Bill, and are usually presented in a box as the first provision in each Division. In interpreting an operative provision, a Guide may only be considered:

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in determining the purpose or object underlying the provision;

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to confirm that the provision's meaning is the ordinary meaning conveyed by its text taking into account its context in the Bill and the purpose or object underlying the provision;

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in determining the provision's meaning if the provision is ambiguous or obscure; or

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in determining the provision's meaning if the ordinary meaning conveyed by its text, taking into account its context in the Bill and the purpose or object underlying the provision, leads to a result that is manifestly absurd or is unreasonable.

[Subsection 80-5(2)]

Regulations

1.49 The Governor-General may make regulations prescribing matters that are required or permitted by the Bill or matters that are necessary or convenient to be prescribed for the purpose of carrying out or giving effect to the Bill. The regulations prescribed under this general regulation-making power are the proposed Tax Agent Services Regulations. [Subsection 70-55(1)]

1.50 The regulations are proposed to address matters such as:

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the details of the educational qualifications and relevant experience requirements for registration of an individual;

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the fees for application for registration; and

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the appointment and duties of the secretary to the Board.

1.51 Regulations may be made in relation to transitional matters relating to the enactment of the Bill and the repeal of Part VIIA of the ITAA 1936. [Subsection 70-55(2)]

1.52 It is appropriate for these matters to be dealt with by regulations rather than in the Bill itself because they are matters of technical or procedural detail which support the provisions in the Bill and do not themselves impose obligations on entities or impact significantly on individuals' rights and liberties.