House of Representatives

Explanatory Memorandum

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

Chapter 6 - Regulation impact statement

Background

6.1 Tax agents are currently regulated under Part VIIA of the Income Tax Assessment Act 1936 and Part 9 of the Income Tax Regulations 1936. Part VIIA, which imposes a mandatory registration system for entities providing tax agent services for a fee, was inserted in 1943 and remains largely unchanged. It replaced various items of state legislation as the passage of the uniform income tax legislation necessitated uniform treatment of tax agents.

6.2 When Part VIIA was introduced, regulation of tax agents was considered necessary for reasons of both consumer protection and administrative control. Registration of tax agents was considered to be in the best interests of both the taxpayer (who would benefit with an assurance that their agent is reputable and competent) and the taxation department (which would be able to deal effectively with unscrupulous persons who may exploit taxpayers and expose them to penalties). ^[2]

6.3 Since Part VIIA was introduced, the movement to a self assessment system in 1986-87 shifted the balance of risk and uncertainty towards taxpayers. Self assessment effectively moved the responsibility of interpreting and applying the law to particular circumstances from the Australian Taxation Office (ATO) to individual taxpayers.

6.4 In addition, Australia's tax environment has changed significantly in a number of other ways:

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The expansion of the tax base to include capital gains tax (CGT), fringe benefits tax (FBT), expanded superannuation regimes, and the goods and services tax (GST).

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Several waves of tax reform during the 1980s and 1990s, which resulted in the addition of new regimes (eg, consolidation), special treatment for market segments (such as special concessions for small business) and the rewriting of significant parts of the law (eg, through the Tax Law Improvement Project).

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The expansion of taxation expenditures to include numerous family assistance and industry policy measures.

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Responses to the threats of several concerted periods of tax avoidance activity.

6.5 Taken together, these developments have markedly increased the volume and complexity of the taxation laws (at least in terms of the number of interactions), leading to significant challenges for those seeking to interpret and apply them.

6.6 These changes, together with lifestyle decisions, have led to significant growth in the use of tax agents over the last 20 years. Engaging an agent relieves taxpayers of some of the anxiety and uncertainty faced under self assessment and assists them to deal with the complexity in the taxation laws. Whereas, in 1980, approximately 20 per cent of individual taxpayers sought professional assistance from tax agents to lodge their tax returns, by 1992 this figure had grown to 72 per cent. ^[3] At present there are approximately 26,000 tax agents who prepare and lodge around 74 per cent of individual tax returns and over 95 per cent of tax returns for business. ^[4]

6.7 Although the rationale for the introduction of Part VIIA in 1943 remains relevant and valid today, the changes in the regulatory environment and the growth of the taxation laws have prompted consideration of whether the existing registration system remains appropriate and adequate for the contemporary setting.

6.8 This potential need for realignment of the legislation with its setting was contemplated when, during the early 1990s, the regulatory arrangements and professional standards for tax agents were reviewed. The review was performed by a working party of accountants, legal practitioners, tax agent representatives and the ATO, and its report, Tax Services for the Public, was issued in November 1994. The report examined the need for regulation and concluded that continued government intervention is necessary and that the existing legislation should be updated and strengthened to redress the deficiencies that had become apparent over time.

6.9 Although in April 1998 the introduction of a new legislative framework for tax agent services was announced, its implementation was postponed at the behest of the tax profession to allow it to adjust to other changes to the tax environment occurring at that time.

6.10 Work on the new regulatory framework recommenced in 2002, using the findings outlined in Tax Services for the Public, and the existing legislation, as a base.

Problem specification

6.11 The need for reform is justified by deficiencies with the existing regulatory framework. These deficiencies that can be classified into three broad categories.

Inconsistency in the regulation of agents

6.12 The existing framework is narrowly centred around a registration system for tax agents with a focus on services related to income tax only. Although this approach was appropriate at the time of its inception, the tax base has expanded significantly over recent decades, with an associated increase in the volume and the complexity of the taxation laws. Indeed, the introduction and pervasiveness of new taxes such as the GST, FBT and CGT, without corresponding adjustments to the scope of the regulatory framework, has resulted in the regulation no longer reflecting the reality of the commercial environment. There is now a strong argument for broad, transparent and systemic regulation of the provision of tax agent services, which would reflect the broader scope of services being provided given the expansion of the tax base.

6.13 This narrow focus of the existing regulatory framework prevents certain competent providers of Business Activity Statement (BAS) services and specialised tax agent services from providing tax agent services, creating inconsistencies in the framework's coverage:

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Currently, only a small set of entities is permitted to provide BAS services for a fee, limited to registered tax agents (who are qualified to prepare income tax returns and transact business on behalf of taxpayers in income tax matters), and individuals such as those who are members of a recognised professional association (which are largely the accounting professional associations) or who work under the direction of a registered tax agent (a requirement which is rarely enforced due to uncertainty as to the meaning of the phrase 'under the direction'). This limitation does not necessarily reflect the qualification/skills required to provide BAS services competently.

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In addition, entities which specialise in services related to a particular area of the taxation laws (other than income tax) or a particular type of service such as advice rather than return preparation are unable to register without demonstrating a range of experience that extends beyond their specialisation to cover a variety of services across the income tax laws. This impacts on both the specialist agent, who encounters high barriers to entry and who cannot truly specialise, and also consumers, by, in turn, restricting competition.

6.14 Even within the existing regulatory framework there are inconsistencies. Registration and regulation, although under Commonwealth legislation, are administered on a state basis by the six Tax Agents' Boards (state Boards), which has led to inefficiencies with duplication of services and administrative functions. It has also allowed inconsistencies in interpretation and application of the law to develop, which in turn has consequences for the consistent regulation of tax agents across the states and results in discrepant standards of services provided to taxpayers.

6.15 Although many tax agents are currently subject to codes of ethical and professional conduct by virtue of their memberships of professional associations, such market initiative does not apply consistently across all of the industry, as not all agents are members of such organisations.

Inadequacy of consumer protection

6.16 For consumers, the narrow focus of the existing regulatory framework has two consequences:

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The first relates to quality of service provision. The different degrees of regulation under the current law for the provision of different types of tax agent services results in services of varying standards. For example, throughout consultation on these reform proposals, participants have communicated that the limited regulation of the provision of BAS services under the current law has allowed for a low standard of service provision, with tax agents frequently being required to re-perform work completed by bookkeepers to ensure its accuracy. The need for re-performance could cause inflation of costs to consumers and a decline in confidence in the industry.

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The second consequence relates to market competition which is affected by the presence of the inappropriate barriers to entry described above. The entry barrier for providers of BAS services, for example, is not aligned with the skills and knowledge required to provide BAS services. This misalignment allows certain unqualified people to provide BAS services while preventing other qualified people from providing BAS services. This disrupts the efficient operation of a competitive market which benefits consumers. Further, the fact that the requirement that an individual be working under the direction of a registered tax agent is rarely enforced (due to uncertainty as to its meaning) also creates incentive and opportunity for illegal operators in the market and exposes clients to risk.

6.17 The consumer protection deficiencies of the existing legislation are also evident in the lack of clarity for agents in terms of what is required and the lack of flexibility for the state Boards in terms of the imposition of sanctions, as outlined below.

6.18 The current law does not contain clear and uniform standards required of agents providing tax agent services. Instead, it only lists certain serious misdemeanours which may or will result in the termination or suspension of registration. This has the following consequences for consumers:

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the quality of tax agent service provision can vary significantly and largely depends on an individual's own professional ethics (or membership of a professional association which imposes certain standards on its members); and

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there is not a standard against which consumers can evaluate the competence and ethical standards of tax agents and there is no requirement for public dissemination of information about tax agents. As such, there are information asymmetries between tax agents and their clients which expose consumers to a risk of adverse selection.

6.19 The administrative sanctions available to the state Boards to discipline tax agents are inflexible and too limited, leading, at times, to counterproductive outcomes: the state Boards can only take an 'all or nothing' approach to regulation for misconduct. Because the sanctions available to the state Boards are limited to suspension or termination of registration, unless the misconduct is sufficiently serious to warrant the taking away of a person's livelihood, the state Boards are reluctant to impose a sanction. The ATO has advised that, in 2007-08, of 660 complaints that have been finalised, only 25 resulted in the imposition of a sanction.

Threat to the integrity of the tax system

6.20 Increasing complexity in the taxation laws has corresponded with an increasing proportion of the taxpaying public engaging the services of tax specialists to assist them to comply. With a regulatory framework that is inflexible and too narrow, the risk of incompetent work being performed is high. This could lead to a lower level of compliance, thereby subjecting taxpayers to additional risk and impacting on revenue collection.

6.21 In addition, uncertainty in the current law, inflexibility in its administration and excess demand created by inappropriate entry barriers have allowed illegal operators in the market which undermines the integrity of the tax system. For example, anecdotally, some BAS services are currently being provided unlawfully by unregulated entities.

Summary of distribution of benefits and costs under the current framework

6.22 These examples demonstrate that the deficiencies in the current regulatory framework impact negatively on taxpayers, agents and the tax system as a whole. In particular:

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in terms of the industry, tax professionals specialising in aspects of the taxation laws other than income tax are affected most acutely, as they are unable to register without demonstrating a range of experience beyond their specialisation, and therefore are not accommodated as specialist agents in their own right; and

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in terms of consumers, key costs are the uncertainty faced around the quality of services received and concern about exposure to risk.

6.23 Accepting that the current framework is outdated, generally positive feedback throughout extensive consultation over many years on the reform proposals suggests that the benefits to any party of the existing situation, in the contemporary environment, are few. Indeed the only party which may benefit from the existing situation is those misbehaving tax agents or unregistered service providers who are currently operating within the industry without being subject to sanction or clear, unambiguous regulation.

Objectives of government action

6.24 Broadly, the objective of government action is to redress the deficiencies identified above.

6.25 Specifically, the policy objectives of the new legislative framework for tax agents and BAS agents are:

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for tax agents and BAS agents - to improve consistency in registration and to regulate the provision of tax agent services in an appropriate, but flexible, way;

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for taxpayers - to enhance the protection of consumers of tax agent services, thereby reducing the level of uncertainty for taxpayers and the risks associated with the self assessment system; and

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for the system - to strengthen the integrity of the tax system and the tax industry.

6.26 The objectives outlined above are broadly stated in the Assistant Treasurer and Minister for Competition Policy and Consumer Affair's Media Release No. 039 of 29 May 2008.

Options that may achieve objectives

6.27 To address the deficiencies and achieve the objectives, the only viable option is continued explicit government intervention with a focus on a more robust regulatory framework. This is consistent with the recommendation in Tax Services for the Public, which concluded that the public interest is best served by a mandatory registration system for all those in the business of providing tax agent services, supplemented with appropriately enforceable standards of conduct.

6.28 The key elements of such an option would be:

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a national Tax Practitioners Board (Board) to replace the existing state-based Boards to, among other things, make consistent the registration process and standardise the way in which tax agents are regulated across the country;

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registration and regulation of both entities providing tax agent services (as tax agents) and entities providing BAS services (as BAS agents);

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a legislated and enforceable Code of Professional Conduct (Code), based largely on the codes of the professional associations, to make explicit the standards expected of tax agents and BAS agents and to clearly define their roles and responsibilities;

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a wider and more flexible range of administrative sanctions which may be imposed by the Board;

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civil penalties and injunctions to replace criminal penalties for certain misconduct by agents and unregistered entities; and

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'safe harbours' which provide that, in certain circumstances, taxpayers who engage a tax agent or a BAS agent are not liable to administrative penalties that would otherwise ordinarily apply for making a false or misleading statement resulting in a tax shortfall amount, or for lodging a document late.

6.29 Building on and strengthening the existing law will create fewer additional compliance and administrative costs than instituting an entirely new regulatory framework.

6.30 Other options were explored in Tax Services for the Public and during the development of the proposals:

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To deregulate the industry and rely on self-regulation or quasi-regulation would be ineffective at achieving the policy objectives. This approach would arguably decrease standards and quality of service in a complex area of the law, reducing the accuracy of taxpayers' tax returns, creating uncertainty for consumers, and exposing them to risks of penalties. As such taxpayers may obtain no benefit from engaging a 'professional'.

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The option of strengthened co-regulation was canvassed early in the legislative design phase. Two elements of this option were considered:

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allowing the professional associations to certify the academic qualifications and relevant work experience requirements for registration, as well as possibly the determination of agents' fitness and propriety; and

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sharing information about agents' conduct with the professional associations, thereby allowing the professional associations to sanction their members in accordance with their own rules.

This option was later abandoned at the recommendation of the professional associations, which expressed concern about both elements. Their concern with the former related to their inability to gather the necessary information and to recover the resources expended. Their concern with the latter was the potential exposure to civil liability for imposing sanctions either prior to the Board's decision or that differ from the Board's conclusion.

6.31 These options are not considered further in this regulation impact statement.

6.32 The option of strengthened explicit government regulation is considered against the backdrop of retaining the current system of tax agent registration (ie, maintaining the status quo). Retaining the existing regulatory framework would clearly not achieve the objectives identified above. It would commit agents and the state Boards into the current regime without flexibility to deal with the contemporary environment and issues. Additionally it would be inconsistent with the expectations of the profession, which has invested significant resources in the development of the measure.

Impact analysis

Impact group identification

6.33 The measure will impact on all taxpayer groups (including individuals and businesses which do or do not use the services of tax agents), tax agents, bookkeepers and other intermediaries, professional and para-professional associations, the state Boards, and the ATO. Many tax agents and bookkeepers operate as small businesses.

6.34 There are currently approximately 26,000 registered tax agents who will be directly impacted by these proposals ^[5] . In addition, the ATO has advised that there are a further 11,000 nominees (of partnership and company registered tax agents) who will be affected. In terms of other intermediaries, there are over 120,000 people working in the bookkeeping industry, 10 to 15 per cent (12,000 to 18,000) of whom are in business lodging BASs for clients for a fee ^[6] .

Impact of reforms

Analysis of benefits

Taxpayers / consumers

6.35 The key benefits to consumers, including small business consumers, are likely to be:

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greater protection and certainty that a tax agent or BAS agent has demonstrated and maintains a certain degree of competence (in terms of qualifications and experience and continuing professional education) and is bound to act in accordance with the statutory Code;

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increased competition with respect to the tax agent services industry as a whole, as there will be a significant increase in the number of registered entities which can provide different types of tax agent services:

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in terms of BAS agents, although imposing barriers to entry could decrease competition, the proposed very low level of entry requirement and long transitional period are expected to allow a majority (if not all) of the individuals currently providing BAS services to be registered and will therefore not inhibit the promotion of competition within this segment of the industry; and

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a 'safe harbour' (or exemption) from certain administrative penalties in certain circumstances where they engage an agent - refer to paragraphs 6.52 and 6.53.

Tax agents, BAS agents and other intermediaries

6.36 Agents, including small business agents, will benefit from the new framework in the following ways:

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improvement to the clarity of regulation and requirements, through well balanced law, coupled with flexibility for the Board which will be supplemented by detailed explanatory material and guidelines to be issued as legislative instruments by the Board;

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recognition of the important role that providers of BAS services play in the tax system;

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improvement to the reputation of the profession, which could enable agents to attract more business;

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The measure will 'raise the bar' for tax agents, and intends to raise the bar for BAS agents gradually through the proposed transitional period which will allow them time to obtain the necessary training.

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removal of inefficient barriers to entry with regard to the relevant employment requirement in the existing law, which currently precludes specialists from registering as tax agents. Registration of specialists could expand the tax agent industry to meet the existing excess demand for tax agent services; and

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a broader range of more constructive and educative administrative sanctions which may be applied in cases of breach, rather than only the final sanctions of suspension and cancellation of registration.

Professional associations

6.37 The measure proposes to allow the Board to recognise associations which meet certain prescribed criteria (relating to membership numbers, professional, ethical and educational standards and governance and management procedures) as recognised BAS agent associations. This provides such associations with the opportunity to market themselves with a view to increasing their membership numbers. Importantly, it also provides an incentive to offer a variety of services to members that may benefit BAS agent members.

6.38 There is expected to be little impact on recognised professional associations (tax and accounting professional associations), which will continue to be able to be recognised under the new regulatory framework.

State Tax Agents' Boards

6.39 The state-based Boards will be replaced by a national Tax Practitioners Board.

6.40 The establishment of a nationally administered framework will improve the Board's economies of scale and enhance consistency in the Board's decision making processes and outcomes. The gains in terms of efficiency and the associated administrative cost savings are expected to be significant. Currently, the six state Boards are resourced individually (but each to the same level, regardless of relative workloads) by the ATO through its annual appropriation. They have their own rules and procedures and make decisions independently of each other. The national Board will be better able to allocate its operational budget in accordance with its priorities and create a nationally consistent regulatory framework. It will have the opportunity to centralise many of its functions and to implement process and technological improvements, such as electronic record-keeping and an interface with agents, as well as an electronic case management system to manage complaints handling and the Board's proactive integrity work.

Tax system

6.41 The measure is designed to contribute to greater institutional certainty. This is expected to have a positive economic impact as administrative and transaction costs within the tax system will reduce with the anticipated reduction in inefficiencies (eg, either elevation of tax agent performance standards or underperforming agents exiting the industry).

Analysis of costs

Compliance costs

6.42 The ATO has estimated that the potential transitional compliance cost impact of the measure (with a medium level of confidence) will be:

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a small cost for tax agents and BAS agents with the appropriate qualifications:

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The requirements for registration as a tax agent will remain largely the same as under the existing law. On transition, registration under the current law will be taken as registration under the new law.

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Although the measure represents a strengthening of the existing framework, there are likely to be some transitional compliance costs associated with learning about the changes. This could be partially offset by increased certainty about tax agents' rights and responsibilities.

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The ATO has advised that approximately 50 per cent of the bookkeepers who are currently in business lodging BASs for clients for a fee are expected to already hold the required Certificate IV Financial Services qualification in either bookkeeping or accounting.

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New entrants seeking registration as BAS agents will need to pay a registration application fee, proposed to be $100 or $50 (depending on whether or not the agent is carrying on a business), and will also need to obtain professional indemnity insurance.

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a potentially large cost for those bookkeepers who are currently in business lodging BASs for clients for a fee (and who are expected to seek registration as BAS agents) but do not currently meet the minimum standard of qualification. The cost of obtaining the necessary qualification will crystallise after two years and may be spread over as many as five years for many bookkeepers, given the proposed transitional arrangements. As many bookkeepers operate as small businesses, these costs do reflect (at least in part) a cost of the measure to small business:

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The transitional compliance cost for bookkeepers without the necessary qualifications is estimated to be up to $15,000 each ($110 million for a population of approximately 7,500), however 78 per cent of this cost estimate reflects the estimated opportunity cost of gaining the required qualification.

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Many education providers grant credit (in some cases up to 100 per cent) for relevant prior study and/or work experience. It is anticipated that a large number of bookkeepers will be eligible for such credit, and this will significantly reduce the initial compliance costs. For example, if 50 per cent of the course is granted in recognition of relevant work experience, implementation costs are expected to be $8,700 per bookkeeper ($65 million for a population of 7,500).

6.43 Ongoing compliance costs are estimated to be:

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nil/minimal for tax agents; and

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small, at $1 million per annum, for BAS agents (approximately $67 each per annum):

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The registration application fee will be payable at most once every three years. Other expected costs are those associated with continuing education.

6.44 With regard to the introduction of a legislated Code, the impact will be minimal on many currently registered tax agents and individuals providing BAS services, who are subject to codes of conduct by virtue of their membership of professional associations. The impact will be greater on BAS agents entering the industry, who are not members of an association and have not previously been subject to a code of conduct. The proposed Code will not, however, be onerous and will reflect a minimum standard of professional and ethical behaviour of agents.

6.45 The introduction of the 'safe harbour' provisions may impose some costs on agents in terms of record-keeping.

Administrative costs

6.46 Additional funding for the implementation of the measure of $57.5 million over four years was allocated and announced in the 2006-07 Budget. This includes funding to cover:

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the development of information technology systems:

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this represents costs associated with changes to the Tax Agent Portal, the development of registration, accounting and correspondence systems and the development of a new Board website; and

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community education programs about the changes in the law and penalty provisions.

6.47 The ATO has advised that the ongoing administrative cost is estimated to be at least $14 million per year. This represents a net change of approximately $4 million from the 2007-08 financial year (however the administrative cost of approximately $10 million for the 2007-08 financial year includes not only the cost of administering the current framework, but also the cost of preparing for the new framework). The current spending on the state Boards is conservative given that the ATO has been in a 'holding pattern' over past years in anticipation of the new framework becoming effective (ie, the existing state Boards are not currently sufficiently resourced to perform all of their functions effectively). In addition, the proposed expanded role and functions of the proposed Board will require an increase in its budget.

6.48 Additionally, costs related to the administration of the proposed 'safe harbour' provisions are estimated at $9.089 million over four years.

6.49 The administrative costs are associated with:

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the regulatory role of the national Board including the registration of BAS agents and activity around enforcing compliance with the Code:

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Additional administrative resources will be made available to assist the Board. The ATO has estimated that secretariat staffing of approximately 100 to 110 full-time equivalent positions will need to be made available during the first two years, estimated to settle at approximately 90 full-time equivalent positions in future years. By contrast, currently approximately 70 full-time equivalent positions are dedicated to Board assistance.

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the administration of safe harbours for taxpayers in certain circumstances when they engage an agent:

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This cost is associated with designing and building administrative systems and debt collection and lodgment management.

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The timing of the application of the safe harbours (either prior to or following the imposition of a penalty) will provide flexibility to ensure that they are able to be administered in the most efficient way with minimal impact on the ATO's existing lodgment program.

Revenue costs

6.50 As the new arrangements do not introduce or remove taxes, the measure will not have a significant impact upon government revenue.

6.51 It is expected that the impact of replacing criminal penalties with civil penalties will result in a small gain to revenue. This gain is not expected to exceed $1 million over four years.

6.52 There is expected to be a cost to revenue associated with the introduction of 'safe harbour' provisions which exempt taxpayers from administrative penalties in certain circumstances.

6.53 The safe harbour from tax shortfall penalty will apply if taxpayers demonstrate that they took reasonable care by engaging a registered agent and providing them with all necessary tax information, but the agent carelessly made a false or misleading statement that resulted in a shortfall amount. The cost of this safe harbour is unquantifiable (meaning that there will be a cost, but that it cannot be measured reliably) due to a lack of data on the percentage of penalties raised due to careless tax agent errors, where the taxpayer has provided them with the correct information.

6.54 The safe harbour from administrative penalty for failing to lodge a document on time and in the approved form is proposed to apply if taxpayers establish that they engaged a registered agent, gave their agent all relevant information to enable the lodging of a document on time in the approved form and the agent carelessly failed to do so. The cost of this safe harbour is unquantifiable due to a lack of data on the percentage of penalties raised due to tax agent carelessness, as well as the unknown impact of the exemption on the behaviour of taxpayers and their agents.

6.55 In both cases, the sensitivity analyses suggest that a small change in the assumed percentage of tax agent errors can have a large impact on the cost estimates.

Anticipated net impact

6.56 In summary, the principle costs of the measure are associated with the following elements:

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compliance costs borne by bookkeepers to obtain the educational qualifications required for registration as a BAS agent; and

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administrative costs borne by the Government to fund the national Board at a sufficient level to enable it to perform its legislated functions, including its role registering and regulating a larger number of agents.

6.57 While the benefits cannot be quantified, it is expected that the costs will be more than offset by the benefits to taxpayers, agents and the tax system as a whole outlined above, resulting in an overall net benefit of the measure. In terms of the key elements of the measure, broadly speaking:

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establishment of a national Board will benefit agents by providing nationally consistent regulation and will benefit the Board by enabling greater efficiency in the use and allocation of its resources;

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registration and regulation of tax agents and BAS agents, including the introduction of the Code, will benefit taxpayers who engage agents and the tax system as a whole by regulating the standard of services provided and improving confidence. It will also provide certainty and clarity for agents as to what is expected of them, and should therefore reduce compliance costs. BAS agents will face certain barriers to entry, but will benefit from the clarity provided by a move away from the partially regulated but unenforced arrangement in place currently;

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taxpayers will benefit from the introduction of a wider range of administrative sanctions which may be imposed by the Board through the assurance that agents will be appropriately disciplined for breaches of the Code. Agents will also benefit from the expansion of options available to the Board rather than just suspension or termination of registration. Administrative flexibility also has the benefit of allowing the Board to administer the system most efficiently;

•

replacement of criminal penalties with civil penalties and injunctions will benefit agents and the integrity of the tax system, by providing appropriate disincentives to act inappropriately; and

•

safe harbours from certain administrative penalties in certain circumstances where a taxpayer engages a tax agent will provide greater protection for taxpayers and will improve the integrity of the tax system by encouraging taxpayers to engage tax experts to assist them in their interactions with the tax system.

Consultation

6.58 The details of the new regulatory framework and the draft legislation have evolved through extensive consultation with tax agents and bookkeepers, tax, accounting and legal professional associations and bookkeeper associations, representatives of community organisations, government departments and agencies including the ATO, the state Boards and taxpayers.

6.59 The broad range of entities consulted and the extent of consultation has resulted in an appropriately balanced regulatory framework. Consultation has promoted stakeholder buy-in and ownership of the reforms, and has undoubtedly led to better, more robust, outcomes. Indeed, the key elements of the measure have received unanimous support.

6.60 Consultation spanned the period since the establishment of the working party in 1992 - refer to paragraph 6.8 - through to late 2008, and included:

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confidential consultation on the framework during the late 1990s;

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extensive confidential consultation with the tax profession in 2004 and 2005 on the proposed framework (including on a Treasury discussion paper) and in 2006 and 2007 on draft legislation prior to public release:

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Throughout these consultation processes the tax profession expressed general support for the proposed reforms and indicated its endorsement of release of an exposure draft package for public consultation. Prior to the public release, several revisions and refinements were made to draft legislation as a result of concerns raised.

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release of a first exposure draft package for public consultation for 14 weeks from 9 May 2007 to 10 August 2007, followed by numerous consultation meetings with key stakeholders:

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Treasury received 114 submissions in response to the exposure draft package, most of which expressed broad support for all of the elements of the proposed reforms. The key issues raised were a need for greater clarity in the wording of various principles of the proposed Code and a need for independence of the Board from the ATO. These concerns were raised by practitioners, the legal, tax and accounting professional associations, the ATO and the existing state Boards. Amendments made to the materials to address concerns raised included revisions to the Code and associated explanatory materials and the transfer of the exposure draft into its own, separate Bill, of which the Board - and not the Commissioner of Taxation - has the general administration. Some relatively minor technical adjustments were also made.

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public consultation on a revised exposure draft legislative package for four weeks from 29 May 2008 to 27 June 2008:

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Treasury received 45 submissions which expressed broad support for the revised package and acknowledgment of the issues addressed through the initial public consultation process. The key issues raised in submissions concerned aspects of the Code, largely resolved through minor amendments to wording and discussions with the accounting profession and professional associations, and the extent to which financial services licensees are permitted to provide tax agent services without registration as a tax agent, resolved through minor amendment of the proposed definition of 'tax agent service' to express clearly the policy intention. Some other relatively minor amendments were made to the draft legislation and explanatory materials.

6.61 Very few concerns were raised by small business throughout the consultation processes about the anticipated impacts on that segment of the community in particular. A very small number of submissions raised concern with the costs to small business BAS agents of obtaining registration. To address such concerns, a low start up requirement and long transitional period are proposed to be provided. These will enable such businesses to enter the new framework initially without being required to have the necessary educational qualifications, and to spread the associated costs of obtaining the qualifications over several years. Additionally, the registration application fee is proposed to be relatively low and a cost recovery approach has not been adopted.

Further consultation

6.62 Consultation on the complete set of transitional provisions and consequential amendments is expected to take place in late 2008 or early 2009, prior to planned introduction during the Autumn 2009 Parliamentary sitting period.

Conclusion and recommended option

6.63 The decision to strengthen the existing framework for registration of tax agents through additional explicit government regulation was made in partnership with industry and community representatives.

6.64 The details of the measure (including the introduction of the Code and the creation of a national Board) are the result of a broad consultative process undertaken over many years with the major stakeholders in the tax system. Accordingly, they represent the most efficient and transparent approach to achieve the desired policy outcomes. Further, as the proposal essentially builds on existing registration and regulatory arrangements, it will not impose a significant implementation or compliance cost on stakeholders.

6.65 This proposal is envisaged to promote greater certainty and transparency for taxpayers, clarity for agents in terms of their roles and responsibilities, and greater consistency and efficiency in the regulatory system.

Implementation and review

Implementation and enforcement

6.66 The Board will be a statutory body that falls within the Treasury portfolio. Its membership will be appointed by the relevant Treasury Portfolio Minister and will be drawn from the industry. It will operate independently, as its functions and powers will be vested in it by statute. The administrative and secretariat services will initially be provided by Australian Public Service employees (specifically, ATO officers), but this arrangement may change pending the outcome of the post-implementation review mentioned in paragraph 6.70.

6.67 Entities seeking to provide tax agent services (including BAS services) for a fee will need to apply to and register with the Board. Registration will require demonstration that they meet the prescribed qualifications and experience requirements, and the 'fit and proper person' test.

6.68 Registered agents will need to comply with the Code, which will be drafted in principles with clear guidance on what is regarded as compliant behaviour provided in the explanatory memorandum and in legislatively enforceable guidelines to be issued by the Board.

6.69 Compliance with the Code will be enforced by the Board, which will have available to it a broad range of administrative sanctions ranging from a written caution through to termination of registration. The Board will also be able to apply to the Federal Court of Australia for a civil penalty order or injunction where an agent or unregistered entity breaches a civil penalty provision.

6.70 The ATO will administer the application of the 'safe harbours' from certain administrative penalties that are available to taxpayers in certain circumstances where they have engaged a registered agent. The onus, however, will be on the taxpayer to demonstrate that the safe harbour should apply to them.

Review of regulation

6.71 The measure does not contain a statutory review requirement. However, the Government intends that the operation of the legislation will be reviewed within three years of implementation, with particular emphasis on (but not being limited to) the governance arrangements for the Board and the operation of the 'safe harbour' from penalties in certain circumstances for failing to lodge a return, notice, statement or other document in the approved form and on time.

6.72 In any case, the legislation will be reviewed under the Government's five-yearly review requirements.