House of Representatives

Explanatory Memorandum

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

Chapter 3 - The Code of Professional Conduct

Outline of chapter

3.1 Part 3 of this Bill provides that tax agents and Business Activity Statement (BAS) agents are required to comply with a legislated Code of Professional Conduct (Code) and that failure to comply with the Code may attract administrative sanctions imposed by the Tax Practitioners Board (Board).

3.2 Subdivision 70-B of Part 7 of the Bill provides for decisions of the Board to impose administrative sanctions to be reviewable by the Administrative Appeals Tribunal (AAT).

Context of amendments

Operation of current provisions

Code of Professional Conduct

3.3 The current law does not have a comprehensive code to govern the conduct of tax agents and BAS agents. Section 251K of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a tax agent's or a nominee's registration may be cancelled or suspended for certain specified conduct, for example, the intentional preparation of a false return.

3.4 Currently, some - but not all - tax agents have to comply with a code of conduct through their membership of a professional association. Each association has a separate code and not all tax agents are members of a professional association. Consequently, tax agents who do adhere to a code currently adhere to slightly different professional and ethical standards.

Administrative sanctions

3.5 The only administrative sanctions that are currently available to the state Tax Agents' Boards (state Boards) are suspension or cancellation of registration. This can leave the state Boards without an effective response to conduct that is not desirable, but does not warrant depriving a person of their livelihood.

3.6 Subsection 251K(1) of the ITAA 1936 provides that the state Boards must suspend or cancel the registration of a tax agent or nominee if they have been convicted of a specified offence.

3.7 Subsection 251K(2) of the ITAA 1936 provides that the state Boards may suspend or cancel the registration of a tax agent or nominee if the state Board is satisfied that:

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any return prepared by the tax agent is false in any material particular;

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the tax agent has neglected the business of a principal;

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the tax agent has been guilty of misconduct; or

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the tax agent or the nominee of a tax agent is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers.

3.8 A state Board must cancel the registration of a tax agent under subsections 251K(3C) and (4) if:

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for individuals:

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the tax agent has become an undischarged bankrupt and/or permanently ceases to carry on a business as a tax agent;

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for partnerships:

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there is no partner registered as a nominee of the partnership, any partner becomes an undischarged bankrupt, or the partnership permanently ceases to carry on a business as a tax agent; and

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for companies:

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there is no employee registered as a nominee of the company, the company goes into liquidation, or the company permanently ceases to carry on a business as a tax agent.

Negligence

3.9 Section 251M of the ITAA 1936 currently provides that a tax agent is liable to pay a fine, penalty or interest charge that a taxpayer has incurred due to the negligence of the tax agent. The amount that is recoverable from the tax agent does not take into account any contributory negligence of the taxpayer.

Rationale for major changes

Code of Professional Conduct

3.10 A new legislated code sets out the conduct expected of tax agents and BAS agents, thereby giving taxpayers greater confidence that they are dealing with agents who have, and maintain, appropriate ethical and professional standards.

Administrative sanctions

3.11 The Bill provides the Board access to a graduated range of administrative sanctions for breaches of the Code, so that the Board is able to respond to breaches appropriately.

Negligence

3.12 The Bill removes the special statutory cause of action allowing taxpayers to recover a penalty, fine or interest charge incurred due to the negligence of their tax agent. This provision of the current law does not allow contributory negligence of the taxpayer to be taken into account. It is also out of step with state laws that cap liability for negligence at common law. Although these issues could have been addressed by amending the provision, this would add significant complexity. Moreover, the new regime addresses the concerns that gave rise to the old provision in a more direct way.

3.13 First, the income tax law with respect to interest charges has changed considerably since the statutory remedy was originally enacted. Now, under the Shortfall Interest Charge, interest charges for tax shortfalls are four percentage points lower than the General Interest Charge. The reduced Shortfall Interest Charge therefore does not contain a penalty element, but merely seeks to neutralise the loan benefit that taxpayers might typically receive from the temporary use of the shortfall amount. Consequently, errors of any type by tax agents will not generally have a penalty impact on taxpayers.

3.14 Secondly, under the new regime certain administrative penalties will no longer be imposed on taxpayers for the carelessness of their tax agent or BAS agent.

3.15 Taxpayers retain a cause of action at common law to recover damages from their tax agent or BAS agent for the negligence of their agent and a cause of action under section 52 of the Trade Practices Act 1974 to recover damages from their agent for engaging in conduct that is misleading or deceptive or is likely to mislead or deceive. Note that the primary tax cannot be recovered under a statutory negligence claim, but may be recovered under a common law negligence claim in certain situations.

Summary of new law

3.16 The ethical and professional standards required of tax agents and BAS agents in the provision of tax agent services for a fee or other reward are set out in the Code, which governs the conduct of all tax agents and BAS agents. ('Tax agent service' includes 'BAS service' - refer to paragraph 2.19 in Chapter 2 of this explanatory memorandum.)

3.17 If the Board finds that an agent has breached the Code, it may impose one or more of a range of graduated administrative sanctions. The sanctions the Board may impose include:

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cautioning the agent;

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requiring the agent to complete a course of training;

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subjecting the agent to specified restrictions when conducting their practice;

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requiring the agent to practise under supervision; and/or

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suspending or terminating the agent's registration.

Comparison of key features of new law and current law

Detailed explanation of new law

Code of Professional Conduct

Application of the Code

3.18 The Code governs the conduct of all tax agents and BAS agents. [Section 30-5]

3.19 The purpose of having a legislated code is to establish clearly the professional and ethical standards required of tax agents and BAS agents, whether or not agents are members of a professional association. The Code outlines the duties that agents owe to their clients, the Board and other agents.

3.20 The introduction of the Code, together with mechanisms for enforcing it, will ensure that tax agents and BAS agents possess appropriate skills and knowledge. The Code will not, however, place an additional burden on competent agents. Rather, it adopts existing best practices, reflecting what is required of professionals under the codes of conduct of related professions, such as the accounting and legal professions.

Principles of the Code

3.21 The Code consists of a list of core principles. A single instance of a particular conduct may amount to a contravention of more than one of these principles.

3.22 The principles are set out under five categories:

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honesty and integrity;

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independence;

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confidentiality;

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competence; and

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other responsibilities.

3.23 The Board is responsible for administering the Code, and has the power to issue guidelines (which are legislative instruments - refer to paragraph 5.35 in Chapter 5 of this explanatory memorandum) to explain how elements of the Code apply in practice. Agents may rely on the guidelines issued by the Board to apply the Code to their circumstances.

Honesty and integrity

3.24 Tax agents and BAS agents must behave honestly and with integrity. [Subsection 30-10(1)]

Example 3.1

Jack maintains a bank account in a false name and omits the interest from his income tax return. Jill, a registered tax agent, assisted Jack to set up this account. The Board may conclude that such behaviour calls into question Jill's honesty and integrity.

3.25 Tax agents and BAS agents must comply with the taxation laws in the conduct of their personal affairs. [Subsection 30-10(2)]

3.26 The definition of a 'taxation law' in section 995-1 of the Income Tax Assessment Act 1997 covers those Acts (or parts of Acts) of which the Commissioner of Taxation (Commissioner) has the general administration, and any regulations under those Acts. (Note that the definition of 'taxation law' will be amended to include the Tax Agent Services Bill 2008 and associated regulations - refer to paragraph 1.32 in Chapter 1 of this explanatory memorandum.)

3.27 An agent would ordinarily comply with the taxation laws when they take a position in interpreting the law that is reasonably arguable. This applies even if the Commissioner subsequently interprets the law differently from the position the agent has taken.

3.28 Tax agents and BAS agents must properly discharge their own personal tax obligations, including lodging their personal income tax returns and activity statements on time.

Example 3.2

Mukesh is a registered tax agent. For the past two years, Mukesh has failed to lodge his own income tax return. Each failure to lodge his tax return amounts to a breach of the Code as Mukesh has failed to comply with a taxation law in the conduct of his personal affairs.

3.29 Agents' personal affairs include affairs relating to the agent's tax agent or BAS agent practice. This would encompass, for example, the agent's duties and obligations with regard to maintaining their registration.

Example 3.3

Tyler & Associates is a partnership and a registered tax agent. If Tyler & Associates is required under the taxation laws to notify the Board of changes to the composition of the partnership within 30 days of the event, and it fails to do so, it would be in breach of the requirement to comply with the taxation laws in the conduct of its personal affairs.

3.30 Tax agents and BAS agents must account for money or other property they receive on trust from or on behalf of their clients. This may include money received from a client in advance for the provision of tax agent services. Where money or other property has been received and is held on trust, agents must account for it to their client and may only disburse the money or property in accordance with their client's instructions or as otherwise authorised by the operation of the law. For example, a tax agent or BAS agent may disburse money or property from the trust account if the Commissioner issues a notice under section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) requiring the agent to pay to the Commonwealth the money held in their client's trust account to satisfy a tax related liability of the client. [Subsection 30-10(3)]

3.31 To comply with this requirement, agents must establish a trust account separate from their general business operating account to receive money on trust. This is consistent with good practice as set out in the accounting professional standards of the recognised professional associations and relevant state laws such as the Legal Profession Acts and trust accounts Acts in various Australian jurisdictions. In addition, the Board may issue guidelines that provide further guidance on this requirement.

Example 3.4

Anthony, a registered tax agent, receives money on trust from his clients. To account for all the trust money he receives from clients, Anthony sets up a separate trust account with an authorised deposit-taking institution. Other than where the law requires him to do so, Anthony is only permitted to disburse the money in the trust account at his clients' instruction.

Independence

3.32 Tax agents and BAS agents must always act lawfully in the best interests of their client. [Subsection 30-10(4)]

3.33 As tax agents and BAS agents are agents of their clients, they must act in the best interests of their clients. However, tax agents and BAS agents also operate as an intermediary between taxpayers and the tax administration and therefore owe duties not only to their clients but also to the community. As such, their obligations to their clients must be subject to the law.

Example 3.5

Michael works in the hospitality industry. He engages Rahul, a registered tax agent, to prepare and lodge his income tax return. He instructs Rahul to claim a deduction for work clothing for the black trousers he is required to wear. Although Michael might believe it is in his best interest to reduce his taxable income, Rahul is aware that Michael cannot claim the cost of his work clothing as an allowable deduction because the trousers are not protective or specific to his occupation. Rahul advises Michael accordingly and must not act in accordance with Michael's instruction.

3.34 Tax agents and BAS agents must ensure that they have adequate arrangements in place to manage any conflicts of interest that may arise, wholly or partially, in relation to the provision of tax agent services. [Subsection 30-10(5)]

3.35 Tax agents and BAS agents are required to ensure that their objectivity is not impaired by an actual or potential conflict of interest. In some circumstances, regardless of the arrangements put in place, the agent will not be able to remain objective, and therefore should not perform the services for the client.

3.36 The adequacy of conflict management arrangements depends on the nature, scale and complexity of the agent's business, the nature of the service provided and the information obtained by the agent. Some effective ways of managing conflicts of interest may be through the use of ethical walls or through disclosure of a conflict of interest (and/or informed consent to it) in the form of a waiver signed by the client/s where the disclosure is specifically authorised or otherwise permitted (eg, see paragraph 3.37).

Example 3.6

James and Margie, recently divorced, have used the same registered tax agent, Sally, for the past 10 years. In preparing their returns post divorce it became apparent to Sally that the claiming of a deduction by James would have prevented the claiming of a deduction by Margie. Although Sally's professional judgment was that the deduction was more properly claimable by James, she was in a position where her duty to Margie was in conflict with her duty to James. Sally discloses the conflict and receives a waiver from both clients. She is not in breach of the Code.

Confidentiality

3.37 Tax agents and BAS agents are only permitted to disclose a client's confidential information to a third party where they receive specific authority from their client, or where there is a legal duty to disclose. [Subsection 30-10(6)]

Example 3.7

Lilly & Co. is a large accounting firm and a registered tax agent. To minimise its operating costs, Lilly & Co. enters into an agreement with a bookkeeping/data processing firm in Hong Kong, Zheng & Co., that Zheng & Co. will perform the bookkeeping and data processing work for Lilly & Co.'s clients. In order to send the clients' information to Zheng & Co. for processing, Lilly & Co. is required to disclose its arrangement with Zheng & Co. to its clients and obtain its clients' explicit permission.

Example 3.8

The Australian Taxation Office (ATO) is conducting an audit on Patricia's income tax return from the previous financial year, but Patricia does not have all of her receipts and payment summaries. As her registered tax agent, Edward, completed her tax return, the ATO has issued a notice under section 264 of the ITAA 1936 for Edward to provide it with all relevant information regarding Patricia's income tax return from the previous financial year. Although Edward is required to maintain the confidentiality of Patricia's information, the notice creates an overriding legal obligation. Edward must therefore provide the ATO with the information requested in the notice.

3.38 A third party is an entity other than the client to whom the information relates. Specific authority is required to disclose information relating to one entity within a service trust structure to another entity within the same structure unless the client is defined, for example in the engagement letter, as the whole structure.

Competence

3.39 Tax agents and BAS agents must ensure that a tax agent service they provide, or that is provided on their behalf, is provided competently. [Subsection 30-10(7)]

3.40 This requirement prevents tax agents and BAS agents with narrow, specialised knowledge from providing tax agent services that are outside of their area of expertise.

3.41 Tax agents and BAS agents must not provide a tax agent service or BAS service if they do not have sufficient knowledge, skill or resources to ensure that the service provided by them or on their behalf is provided competently. To ensure competent provision of services, an agent may:

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obtain expert advice and assistance;

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obtain knowledge and skill through private study and research; or

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inform the client of the likely delay and cost to acquire the requisite knowledge and skill to provide the service competently and obtain the client's voluntary consent to the tax agent or BAS agent providing the service.

Example 3.9

Matilda is a registered tax agent. The majority of the tax agent services that Matilda provides involves the preparation and lodgment of income tax returns for small businesses in the suburb in which she practises. Matilda's client, Thom, seeks tax advice on some mergers and acquisitions transactions that his company is contemplating. Provision of this advice involves areas of the taxation laws with which Matilda is not familiar. Matilda may be in breach of the Code if she provides the tax advice to Thom for a fee unless she can otherwise satisfy the Board that she is competent to give that advice.

Example 3.10

Peter is an Australian legal practitioner and obtained (unconditional) tax agent registration based on his experience of providing tax agent services (other than the preparation and lodgment of returns) as a legal practitioner. Peter breaches this requirement of the Code if he prepares and lodges returns on behalf of his clients for a fee unless he can satisfy the Board that he is competent to do so, for example, if he has undertaken private study of materials published by the ATO and available on its website and/or has completed certain courses on return preparation.

3.42 Tax agents and BAS agents are also accountable for tax agent services provided on their behalf. Entities that agents may engage to provide tax agent services on their behalf are not limited to individuals who are their employees or under their supervision and control.

3.43 To ensure that services provided on their behalf are provided competently, tax agents and BAS agents must ensure that the provider of the service has appropriate skills and experience, and that their work is adequately supervised or otherwise reviewed.

3.44 The adequacy of supervision depends on factors such as the educational qualifications and extent of experience of the provider, the actual service being provided and the structures or processes in place within an organisation to facilitate the competent provision of tax agent services.

Example 3.11

Wayne is a registered tax agent. Wayne outsources payroll-related services to Leigh who is not a registered agent. While direct supervision and control by Wayne is not possible in the circumstances, Wayne must ensure that the payroll services provided on his behalf by Leigh are provided competently by reviewing Leigh's work to ensure its accuracy.

If Leigh is a registered BAS agent whose expertise is in payroll services, then Wayne may meet this requirement of the Code without reviewing Leigh's work.

3.45 A tax agent or BAS agent must maintain up-to-date knowledge and skills relevant to the tax agent services they provide. In this regard, tax agents and BAS agents are required to maintain and improve their knowledge and skill in the areas of the taxation laws and tax administration which relate to the tax agent services they provide. Keeping up-to-date with developments in the relevant taxation laws and tax administration may require agents to undergo a certain minimum number of hours of tax related continuing professional education per year as determined by the Board. [Subsection 30-10(8)]

3.46 The Board may issue a guideline listing the training that is available in the market (including face-to-face training courses, distance learning and online courses) as being sufficient for continuing professional education purposes for this principle of the Code. For this purpose, any person or organisation can make a recommendation to the Board to have their training courses listed. The courses are not restricted only to those offered by recognised professional associations, recognised BAS agent associations, tax agents or BAS agents.

3.47 When providing tax agent services that involve a statement being made to the Commissioner or something else being done on behalf of a client, tax agents and BAS agents must take reasonable care when ascertaining the facts around their client's affairs that are relevant to the service being provided. [Subsection 30-10(9)]

3.48 This requirement applies if a tax agent or BAS agent is acting pursuant to a taxation law on behalf of their client, for example, preparing and lodging a return on behalf of a client - refer to paragraph 3.55 for the requirement to take reasonable care in applying the law in relation to the provision of advice.

3.49 Tax agents and BAS agents are only required to take reasonable care in ascertaining their clients' state of affairs insofar as the state of those affairs is relevant to the service that they have been engaged to provide. That is, the requirement is subject to the agreed scope of the engagement between the agent and their clients.

3.50 Where the agreed scope of the tax agent services excludes the examination of information provided by the client or requires the tax agent to rely on the information or advice of another expert, then further enquiries would not be required unless the agent identifies, or reasonably ought to have identified, that the information was incorrect or incomplete.

3.51 The provision focuses on the requirement for agents to take 'reasonable care'. Although tax agents and BAS agents are not responsible for the veracity of the tax information provided to them by their clients, they are required to do what is reasonable in the circumstances.

3.52 In many cases, taking reasonable care means that agents must ask their clients the appropriate questions, based on their professional knowledge and experience, in seeking the information. Where there are grounds to doubt the information provided by a client, the agent must make reasonable enquiries as to the completeness or correctness/accuracy of that information.

3.53 Where a statement provided by a client seems plausible, is consistent with previously established statements and the agent has no basis to doubt the client's reliability or the veracity of the information supplied, the agent may discharge its responsibility by accepting a statement provided by the client without further checking.

3.54 However, if a client provides information to their agent that seems to be implausible or inconsistent with a previous pattern of claim or statement, further inquiries would be required. While tax agents and BAS agents are not required to audit, examine or review books and records or other source documents to independently verify the accuracy of information supplied by their clients, agents do not discharge their responsibility in such a case by simply accepting what they have been told.

Example 3.12

Alfred & Co. is a registered tax agent and has been engaged by XYZ Media to conduct a review of its annual income tax return prepared by its in-house tax manager. In reviewing the draft return, Alfred & 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, Alfred & Co. must make further enquiries to resolve the inconsistency.

Example 3.13

Ozz & Associates, a registered tax agent, has been engaged by Abco Media to prepare its annual income tax return, based on the audited financial statements of Abco Media (Ozz & Associates is not the auditor).

Ozz & Associates determines that it can rely on the information provided by Abco Media, because it has appropriate staff involved in its financial function and Ozz & Associates has no reason to doubt the quality of the materials provided in the course of the tax return preparation engagement.

Ozz & Associates 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 3.14

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 (eg, tax invoices) or satisfying himself of the procedure and methodology Craig used to arrive at a particular determination.

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

3.55 Tax agents and BAS agents must take reasonable care to apply the taxation laws correctly to the circumstances in relation to which advice is sought. The circumstances may be the actual circumstances of their clients or the hypothetical circumstances provided by their clients. [Subsection 30-10(10)]

3.56 This provision does not require agents to determine the correct application of the law, rather it requires agents to take reasonable care to ensure the correct interpretation and application of the law.

3.57 Where an agent is uncertain about how a taxation law applies to a particular set of circumstances, it must seek clarification from relevant authorities and sources such as:

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legislation and relevant extrinsic material (eg, explanatory memoranda);

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relevant case law;

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the Commissioner's views as expressed in rulings and determinations on the topic;

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the Commissioner's instructions in documents such as income tax return form instructions, BAS instructions, fact sheets and practice statements;

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information published or provided by a recognised professional association, recognised BAS agent association or legal professional association; or

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information published by experts, other agents or specialists and other relevant commentaries.

Example 3.15

Justin is a registered tax agent. Bryn engages Justin to provide GST-related tax advice. As the majority of Justin's work involves providing income tax advice or preparing and lodging income tax returns, his experience and knowledge in the GST law is not up-to-date. Without carrying out any further research into the subject matter (eg, checking the relevant law and publications by the ATO on the subject), Justin provides the advice based on his existing knowledge of the GST law obtained through certain professional education courses he attended several years ago. As a result, Justin's advice to Bryn is incorrect. Justin is in breach of the Code for failing to take reasonable care to ensure the correct application of the taxation laws to Bryn's circumstances.

3.58 Where an agent, after consulting the relevant authorities and sources, is still uncertain of how to apply a taxation law, the agent may choose to seek assistance from another party, such as another agent, a legally qualified professional, a recognised professional association or recognised BAS agent association, a legal professional association, or the ATO. The agent should be satisfied that the individual or organisation from which assistance is sought has the ability and resources to provide advice on the taxation laws. If the client is to bear the associated costs, the agent should seek approval from the client before seeking such assistance.

3.59 One method of clarifying the application of a relevant law is to seek a private ruling from the ATO (see Division 359 of Schedule 1 to the TAA 1953). Private rulings can be relied upon by taxpayers to bind the Commissioner. However, there is no obligation for the taxpayer to act in accordance with the ruling. A taxpayer or agent may object under Part IVC of the TAA 1953 where he or she applies for a private ruling and the Commissioner fails to make the ruling and has not otherwise declined to make the ruling within a certain time period.

Other responsibilities

Proper administration of the taxation laws

3.60 Tax agents and BAS agents must not knowingly obstruct the proper administration of the taxation laws. [Subsection 30-10(11)]

Example 3.16

Stella is a registered tax agent. Stella becomes aware that the ATO is investigating the tax affairs of one of her clients, Georgia. To delay the investigation process, Stella removes documents relating to Georgia's tax affairs from her business premises and 'misplaces' them elsewhere. Stella is in breach of this principle of the Code.

3.61 Relying on the agent's or the client's lawful rights to withhold documents or not provide information, such as legal professional privilege or accountants' concession, is not a breach of this requirement.

Example 3.17

Elizabeth is a registered tax agent. Greg is one of Elizabeth's clients. The ATO is conducting an audit of Greg and serves a notice under section 264 of the ITAA 1936 on Elizabeth to obtain information relating to Greg's tax affairs. After consulting with Greg, Elizabeth delays compliance with the notice, however she provides the required information within the time frame specified on the notice. Elizabeth is not knowingly obstructing the proper administration of the taxation laws.

Example 3.18

Henry is a registered tax agent. Ella is one of Henry's clients. In response to a notice under section 264 of the ITAA 1936 being served on Henry to provide documents relating to Ella to the ATO, Henry, on behalf of Ella, claims accountants' concession, in good faith, over some of the documents sought. Henry is not in breach of this requirement by claiming the concession.

If, however, Henry knows that the documents sought are not within the scope of the accountants' concession, and still claims they are in an effort to delay the process, he would be in breach of this requirement.

Advising clients of their rights and obligations

3.62 Tax agents and BAS agents must advise clients of their rights and obligations under the taxation laws that are materially related to the services being provided. [Subsection 30-10(12)]

3.63 The advice may include:

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an explanation of the nature of self assessment, including the Commissioner's ability to amend an assessment within a certain time of the original assessment;

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the client's obligation to keep proper records and the consequences of not doing so;

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that the responsibility for the accuracy and completeness of the particulars and information required to comply with the taxation laws vests with the client; and

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where necessary, the rights or options available to clients including how to seek a private ruling and how to object or appeal against adverse decisions made by the Commissioner.

3.64 However, a tax agent or BAS agent is only required to advise a client of their rights and obligations that are relevant to services within the scope of engagement between the tax agent or BAS agent and the client. One way of advising clients of their relevant rights and obligations under the taxation laws is to outline them in the engagement letter between the agent and their clients.

Holding professional indemnity insurance

3.65 A tax agent or BAS agent is required to maintain appropriate professional indemnity insurance. [Subsections 20-30(3) and 30-10(13)]

3.66 Given that some agents may already maintain appropriate professional indemnity insurance, it is not mandatory for the Board to specify professional indemnity insurance for all agents. However, the Board is expected to give notice in writing requiring an agent who does not have appropriate professional indemnity insurance to maintain professional indemnity insurance as specified - refer to paragraph 2.77 in Chapter 2 of this explanatory memorandum.

Following the directions of the Board

3.67 A tax agent or BAS agent must respond to requests and directions from the Board in a timely, responsible and reasonable manner. [Subsection 30-10(14)]

3.68 A tax agent or BAS agent may have to balance their obligation to comply with requests from the Board against other professional obligations, such as common law privileges or statutory obligations. Consequently, claiming legal professional privilege or other legal rights of the client is not an unreasonable response to a direction of the Board.

3.69 Where there is no conflict of obligations, failure to follow a direction of the Board will amount to a breach of the Code and may attract an administrative sanction.

Example 3.19

Mario is a director of M & J Tax Pty Ltd, a registered tax agent. Recently, Mario was penalised for being a promoter of a tax exploitation scheme, which is an event affecting M & J Tax Pty Ltd's continued registration. The Board subsequently informed M & J Tax Pty Ltd, by notice in writing, that it was required to remove Mario from its Board of Directors within a certain period. M & J Tax Pty Ltd ignores the Board's direction and allows Mario to continue to sit on its Board of Directors. This failure to follow the Board's direction is a breach of the Code.

Administrative sanctions for failing to comply with the Code of Professional Conduct

3.70 Compliance with the Code is mandatory for all tax agents and BAS agents. If tax agents and BAS agents do not comply, they may be subject to administrative sanctions imposed by the Board.

3.71 The sanctions available to the Board allow the Board to tailor the sanction to the seriousness of the conduct that breaches the Code. The purpose of the sanctions is not primarily to punish tax agents and BAS agents, but rather to improve the performance of agents and maintain public confidence in agents' adherence to certain standards.

3.72 Where, following an investigation, the Board is satisfied there has been a breach of the Code, the Board may impose any one or more of the following sanctions [section 30-15(1)] :

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a written caution [paragraph 30-15(2)(a)] ;

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an order requiring the tax agent or BAS agent to take one or more actions including, but not limited to, the following:

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complete a course of education or training specified in the order by the Board [paragraphs 30-15(2)(b) and 30-20(1)(a)] ;

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provide services (for which the tax agent or BAS agent is registered) only under the supervision of another tax agent or BAS agent that has been specified in the order [paragraphs 30-15(2)(b) and 30-20(1)(b)] ; and/or

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provide only those services that are specified in the order [paragraphs 30-15(2)(b) and 30-20(1)(c)] ;

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suspension of registration [subsection 30-25(1) and paragraph 30-15(2)(c)] ; and/or

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termination of registration [section 30-30 and paragraph 30-15(2)(d)] - refer to paragraphs 2.95 to 2.101 in Chapter 2 of this explanatory memorandum for notice and effect of a termination.

Example 3.20

Arif is a registered BAS agent. Several complaints have recently been made to the Board regarding Arif.

As a result of investigating Arif, the Board discovers that he has made numerous errors in advising clients, largely in relation to recent developments in the taxation laws. Arif has not undertaken any continuing professional education in accordance with the guidelines issued by the Board for the last two years. The Board concludes that Arif is in breach of the Code (subsections 30-10(7) and (8)) for, in part, failing to maintain up-to-date knowledge and skills relevant to the tax agent services he provides. Since this is Arif's first breach of the Code, and to ensure that Arif is appropriately supervised until he updates his knowledge, the Board may impose sanctions such as issuing Arif with a written caution, together with orders to complete the necessary further training and to work under another agent's supervision until he completes the further training.

3.73 The graduated range of sanctions provides the Board with the capacity to tailor its response to the severity of the breach of the Code. For instance, in the case of isolated mistakes, the Board may take no specific action, or issue a written caution. For repeated mistakes the Board may issue an order specifying that the tax agent or BAS agent must undertake further education or training in the particular area. In more severe cases, where a tax agent or BAS agent has displayed a serious disregard for the Code, suspension or termination of registration may be appropriate. This is particularly so where a tax agent or BAS agent causes serious damage to their clients, or to the integrity of the tax system. Behaviour that calls into doubt the honesty, integrity or competence of a tax agent or BAS agent, or raises questions about their suitability to practise, may warrant more severe sanctions such as suspension or termination of registration.

Example 3.21

Complaints are made to the Board that Christine, a tax agent whose registration is limited to the provision of advice about the fringe benefits tax law, has been giving some of her clients advice about their broader income tax obligations over the course of several months. Christine is acting outside her expertise and would be in breach of both the conditions placed on her registration and the Code for providing a tax agent service which she is not competent to provide.

The Board is satisfied that the allegations against Christine are true and decides to impose an administrative sanction. While the Board can terminate Christine's registration for failing to comply with a registration condition or the Code, given that this is the first time that Christine has been found to have breached a condition of her registration and the Code, the Board may choose to issue Christine with a written caution for failing to comply with the Code and a condition of her registration and order her to provide only those services which she is registered to provide.

Example 3.22

Rithy is a registered tax agent. It is brought to the Board's attention that for the 2007-08 financial year Rithy lodged 22 income tax returns on behalf of clients containing mistakes in relation to allowable deductions. The Board orders Rithy to undertake a course in taxation law specialising in general and specific deductions. Rithy ignores the Board's direction and fails to comply with the order by the notified date. When questioned as to the cause of his failure to comply, he responds simply that he has been too busy. Rithy fails to comply with a new order for training issued by the Board with an extended date. The Board may subsequently decide to suspend Rithy's registration for displaying a serious disregard of the Code by repeatedly failing to follow directions of the Board.

3.74 The Board may decide not to impose an administrative sanction against a tax agent or BAS agent for immaterial breaches of the Code. Some breaches of the Code may be so trivial or isolated that it would be unlikely for the Board to take any further action against the agent.

Example 3.23

Dave is a registered BAS agent. Dave has lodged his own tax returns on time for many years. Due to a sudden spike in workload, he fails to lodge his own income tax return on time (being a month late) and is referred by the ATO to the Board for appropriate action. In this case, although Dave is in breach of the Code for failure to comply with the taxation laws in the conduct of his personal affairs, the Board may choose not to impose any sanction.

Period of orders

3.75 The Board may specify the period of time in which the tax agent or BAS agent must comply with requirements in the order, or alternatively, the time period during which the agent must perform certain requirements stated in the order. [Subsection 30-20(2)]

Period of suspension of registration

3.76 Where the Board decides to suspend the registration of a tax agent or BAS agent, the Board may determine the period of suspension that applies to the agent. If the agent's registration has already been suspended, the Board can extend that suspension for a further period, which commences at the end of the original suspension period. [Subsections 30-25(1) and (3)]

3.77 Tax agents and BAS agents must not provide tax agent services while their registration is suspended. If an agent provides tax agent services in these circumstances, the Board may impose further administrative sanctions, for example, it may suspend the agent's registration for a further period or terminate registration. Alternatively (or additionally), the Board may apply to the Federal Court for a civil penalty order and/or an injunction to restrain the agent from continuing to provide tax agent services - refer to Chapter 4 of this explanatory memorandum for an explanation of civil penalty orders and injunctions. [Subsections 30-25(2) and (4)]

3.78 A tax agent or BAS agent under suspension can apply for registration if their registration is due to expire during or after the suspension period and must, where required, notify the Board of a change in circumstances. The Board can also impose further administrative sanctions, including termination for failure to comply with the registration requirements or failure to comply with the Code, during the suspension period. The agent is not, however, taken to be a tax agent or BAS agent for any other purpose during the suspension period. [Subsection 30-25(4)]

Example 3.24

Luke has had his registration suspended by the Board for engaging in conduct that breaches the Code. Luke does not inform his clients that his registration has been suspended and continues to provide tax agent services. The Board applies to the Federal Court for a civil penalty order against Luke for providing tax agent services for a fee while unregistered. At the same time, the Board also applies to the Federal Court for an injunction to restrain Luke from continuing to provide tax agent services to his clients during the period of his suspension.

Notification of the Board's decision

3.79 Where the Board sanctions a tax agent or BAS agent, the Board must notify the agent of its decision in writing. The notice must contain the reasons for the Board's decision - refer to Chapter 5 of this explanatory memorandum for notification requirements following an investigation by the Board that results in the imposition of a sanction. [Subsections 30-20(2), 30-25(1) and 40-20(1) and paragraphs 60-125(8)(c) and (d)]

3.80 A decision by the Board to impose an administrative sanction is a reviewable decision for which the tax agent or BAS agent may apply to the AAT for a review. This includes decisions to make an order and to specify a time period in an order, a decision to suspend registration, including a decision as to the length of the suspension, and termination decisions - refer to paragraph 2.67 in Chapter 2 of this explanatory memorandum for further explanation of AAT review of Board decisions. [Paragraphs 70-10(e) to (g)]