House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 4 - Transition of the state Tax Agents' Boards to the Tax Practitioners Board

Outline of chapter

4.1 Part 4 of Schedule 2 to this Bill provides for the transitional arrangements regarding the references to, and things done by, or in relation to, a Tax Agents' Board (state Board) under Part VIIA of the Income Tax Assessment Act 1936 (ITAA 1936) (current law). Part 4 of Schedule 2 to the Bill also provides for the transitional arrangements to facilitate the continuation of inquiries by the state Boards.

4.2 Part 5 of Schedule 2 to the Bill provides for the transitional arrangements regarding the review of decisions of the state Boards and transitional decisions of the Tax Practitioners Board (Board) by the Administrative Appeal Tribunal (AAT).

4.3 Part 6 of Schedule 2 to the Bill provides for the transitional arrangements that relate to legal proceedings.

4.4 Part 7 of Schedule 2 to the Bill provides for the reporting and disclosure obligations and the transfer of custody of records from the state Boards to the Board.

4.5 Part 8 of Schedule 2 to the Bill provides for the making of transitional regulations by the Governor-General to carry out or give effect to matters of a transitional nature.

Context of amendments

4.6 Currently there are six state-based Boards that register tax agents and administer the current law relating to the registration and regulation of registered tax agents.

4.7 The Tax Agent Services Act 2009 (TAS Act) introduces a new regulatory regime and establishes a national Tax Practitioners Board (Board) to replace the state Boards. The Board has the general administration of the TAS Act, a function which is currently performed (in respect of Part VIIA of the ITAA 1936) by the Commissioner of Taxation (Commissioner).

4.8 This Bill provides for the transition of functions of the state Boards under the current law to the national Board under the TAS Act.

Summary of new law

4.9 The Board takes the place of the current state Boards. This means that:

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things done by the state Boards will become things done by the Board;

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references to a state Board in an instrument will be taken to be a reference to the Board;

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inquiries underway by a state Board will be considered by the Board, and evidence, information or documents required to be given to a state Board will be required to be given to the Board;

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the Board will step into the shoes of the state Boards in any pending legal proceedings; and

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records in the custody of the state Boards will be transferred into the custody of the Board.

4.10 Despite the repeal of the current law, a right to review a decision by a state Board under the current law will remain available after commencement. In addition, a right to review of a decision will be available where a decision that would otherwise have been made by a state Board is made after commencement by the Board under the Bill.

4.11 Regulations may be made prescribing certain matters related to Schedule 2 to the Bill and matters of a transitional nature relating to the amendments or repeals made by Schedule 1 to the Bill.

Detailed explanation of new law

References to and things done by or in relation to a Tax Agents' Board

Things done by or in relation to a Tax Agents' Board

4.12 If a thing was done by, or in relation to, a state Board under the current law, then after commencement, for the purposes of the operation of any law, the thing is taken to have been done by, or in relation to, the Board. A thing done includes the making of an instrument. [ Schedule 2, subitems 15(1) and ( 3 )]

4.13 Among other things, this provision allows the Board to step into the shoes of a state Board for the purpose of appealing an adverse decision made against a state Board.

Example 4.1

Before commencement, ZYX Tax Services Ltd, a registered tax agent, seeks review by the AAT of a decision of a state Board to cancel its registration. The AAT decides to set aside the state Board's decision to cancel ZYX Tax Services Ltd's registration and substitutes a decision that ZYX Tax Services Ltd's registration not be cancelled.

The TAS Act commences shortly thereafter. Following commencement, the Board decides to appeal the decision of the AAT to the Federal Court of Australia. The Board is able to appeal to the Federal Court because the Board is able to step into the shoes of the state Boards and, had the current law not been repealed upon commencement, the state Board would have been able to lodge such an appeal.

4.14 Despite this general rule, the Minister (being a Treasury portfolio Minister) may, by writing, determine that a particular thing done by, or in relation to, a state Board is not to be taken to have been done by or in relation to the Board. That is, the Minister may determine that the general rule does not apply in relation to a specified thing done by a state Board. This provides flexibility for the Minister to ensure that the appropriate outcome is achieved in all circumstances. [ Schedule 2, subitem 15(2 )]

4.15 The Bill specifies that a determination by the Minister is not a legislative instrument, because it is not an instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . This provision is included in the Bill merely to assist readers. [ Schedule 2, subitem 15(4 )]

References in instruments to a Tax Agents' Board

4.16 If an instrument contains a reference to a state Board and the instrument is in force immediately before commencement, then after commencement the instrument has effect as if the reference to the state Board were instead a reference to the Board. [ Schedule 2, subitem 16(1 )]

4.17 Similar to above, the Minister may, by writing, determine that this general rule does not apply in relation to a specified reference to a state Board. To assist readers, the Bill specifies that any such determination is not a legislative instrument, because it is not an instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . [ Schedule 2, subitems 16(2) and ( 3 )]

Continuation of inquiries by a Tax Agents' Board where a 'show cause notice' has been issued

4.18 If a state Board had given an entity a 'show cause notice' before commencement, then the Board must make a decision within 60 days after commencement as to whether or not to investigate the entity. [ Schedule 2, paragraph 17(1)(a )]

4.19 A show cause notice means a written notice to an entity that:

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sets out the grounds on which the state Board is giving the notice;

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In setting out the grounds on which the notice is given, the notice may include, for example, a reference to the legislative provisions relevant to the grounds.

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invites the entity to respond in writing to the state Board addressing the grounds on which the notice has been given; and

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states the period within which the entity must give the written response to the state Board.

[ Schedule 2, subitem 17(5 )]

4.20 If the Board decides to commence an investigation under the TAS Act, then it must:

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notify the entity in accordance with section 60-95 of the TAS Act. This section provides that the notice must be in writing and must be given within two weeks after the decision to investigate is made;

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carry out its investigation in accordance with the process required or allowed by Subdivision 60-E of the TAS Act as if the Board were investigating conduct that may breach that Act. Subdivision 60-E provides for such things as the collection of evidence by the Board, the period during which a decision must be made following an investigation and the notification requirements; and

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take whatever action in relation to the entity as is allowed by the current law (despite its repeal by Schedule 1 to this Bill) and as the Board considers appropriate.

[ Schedule 2, paragraph 17(1)(b )]

4.21 Although the Board must carry out its investigations in such circumstances in accordance with the process required or allowed by Subdivision 60-E of the TAS Act, where a formal show cause notice has been issued it is appropriate for the Board to be bound to apply sanctions under the current law. Accordingly, following an investigation, the Board may, in accordance with the current law, either suspend or terminate the entity's registration or decide to take no further action.

4.22 If the Board decides, after carrying out an investigation as mentioned in paragraph 4.20, to suspend an entity (under the current law), then the entity is taken not to be a registered tax agent within the meaning of the TAS Act while it is suspended, except for the purposes of the following Parts in that Bill:

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Part 2 (Registration);

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Part 3 (The Code of Professional Conduct (Code)); and

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Part 4 (Termination of registration).

[ Schedule 2, subitem 17(3 )]

4.23 This ensures that an entity whose registration is suspended may nevertheless apply for renewal of registration during the period of suspension, that the entity is bound by the Code and the obligation to notify the Board of a change in circumstances and that the grounds for termination of registration continue to apply. This is consistent with the treatment of entities whose registration is suspended under section 30-25 of the TAS Act.

4.24 If the Board decides not to commence an investigation, it must notify the entity in writing that no further action will be taken in relation to the show cause notice. This notification in writing must be made within 30 days of the Board's decision. [ Schedule 2, paragraph 17(1)(c )]

4.25 If the Board fails to make a decision within 60 days after commencement, then the Board is taken to have decided not to investigate the entity. [ Schedule 2, subitem 17(2 )]

4.26 The 60-day timeframe will ensure that investigations/complaints that have already progressed to the 'show-cause notice' phase are progressed without delay to provide certainty to the entity subject to the investigation.

4.27 Complaints or inquiries that may be on foot under the current law upon commencement may relate to the following provisions:

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section 251BC or 251KC, which relates to whether or not a person is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters;

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section 251JA or 251JC, which relates to the requirements for registration and re-registration, respectively; or

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section 251K or 251KE, which relates to the reasons for which a state Board may cancel or suspend an entity's registration.

4.28 If a state Board required a person to provide evidence, information or any document and it was not provided to the state Board before the commencement time, then the evidence, information or document must be provided to the Board. [ Schedule 2, subitem 17(4 )]

Pre-commencement conduct not subject to a 'show cause' notice

4.29 Not all conduct that is undertaken pre-commencement that may warrant investigation or ultimately some form of sanction will be subject to a formal show cause notice by a state Board.

4.30 This would include conduct that the Australian Taxation Office (ATO) or the state Boards are unaware of at the time of commencement. It would also include investigations underway by the ATO. Under the current arrangements between the state Boards and the ATO, it is often the ATO that undertakes preliminary investigations into conduct that may ultimately warrant a sanction under the current law. This would include conduct relating to the provision of tax agent services by an unregistered entity (in which case, sanctions may be pursued by the Commissioner) or inappropriate conduct by a registered entity (in which case sanctions may be pursued by the state Boards).

4.31 If it considers it appropriate, the Board retains the ability to sanction such pre-commencement conduct under the current law. This is a result of Part 4 of Schedule 2 to the Bill (see paragraphs 4.12 to 4.15) and section 8 of the Acts Interpretation Act 1901 .

Example 4.2

On 30 August 2009, the ATO receives a complaint against Tony, a registered tax agent, about inappropriate behaviour that may be relevant to whether he is a fit and proper person. The ATO commences a preliminary investigation and notified Tony that he is under review.

On 1 January 2010 the TAS Act commences and the ATO forwards information about the complaint against Tony to the Board. After concluding its investigation, the Board determines that Tony's registration should be suspended, it can make such a decision under section 251K of the current law.

4.32 In addition to being able to apply sanctions under the current law in relation to pre-commencement conduct, the Board also has the option of imposing sanctions under the TAS Act. Notably, conduct or events that occurred prior to commencement may be directly relevant to the Board's decision to terminate a tax agent or Business Activity Statement (BAS) agent's registration under Part 4 of the TAS Act.

4.33 This may include pre-commencement conduct that goes to whether or not a registered tax agent or BAS agent is a 'fit and proper' person or some other event (such as bankruptcy or the conviction of an offence) that, under the TAS Act, can form the basis of the Board's decision to terminate registration. The requirement in the TAS Act that the Board's discretion to terminate registration where an event occurs or a tax agent or BAS agent ceases to meet the requirement to be a fit and proper person should not be taken to limit the Board's consideration to only conduct or events that occurs after commencement.

Example 4.3

On 31 December 2009, Ricardo, a registered tax agent, is declared bankrupt. On 1 January 2010, the new regulatory regime commences and Ricardo transitions into the new regime as a registered tax agent. Some weeks later the Board learns of Ricardo's bankruptcy and can terminate his registration in accordance with Part 4 of the TAS Act.

4.34 Pre-commencement conduct cannot constitute a 'breach' of the Code. This is appropriate as a registered tax agent or BAS agent should not be held to the professional standard required by the Code in relation to conduct that occurred when the Code did not exist. Of course, pre-commencement conduct when combined with conduct after commencement may establish a pattern of behaviour. This could be relevant to the Board determining an appropriate sanction for a breach of the Code.

Unregistered entities

4.35 The Commissioner is currently responsible for investigating and pursuing action against unregistered entities under the current law. While this responsibility will be transferred to the Board after commencement, the Commissioner will remain responsible for the actions of unregistered entities (such as, unregistered entities illegally providing tax agent services) that occur prior to commencement.

Legal proceedings

Continuation of pending legal proceedings

4.36 If any proceedings were pending in any court or tribunal immediately before commencement to which a state Board was a party, the Board is substituted for the state Board, after commencement, as a party to the proceedings. This ensures that, after commencement, pending proceedings may continue notwithstanding the dissolution of the state Boards. [ Schedule 2, item 19 ]

Legal proceedings by taxpayers to recover penalties or interest charges

4.37 Section 251M of the ITAA 1936 and section 120 of the Fringe Benefits Tax Assessment Act 1986 provide a taxpayer with a right to sue their registered tax agent for the amount of a penalty (including general interest charge or shortfall interest charge) where the penalty was imposed as a result of the agent's negligence.

4.38 While these provisions will be repealed by Schedule 1 to the Bill (refer to paragraph 1.10 and 1.17), the effect of these provisions will be retained in relation to penalties that have been (or will be) imposed in relation to negligence by a tax agent prior to commencement. [ Schedule 2, item 20 ]

Example 4.4

Anna engages Dan, a registered tax agent, to complete her income tax return for the 2008-09 income year. Dan submits Anna's tax return to the ATO in October 2009.

The TAS Act commences in early 2010.

In February, shortly after commencement, Anna receives a notice from the ATO that she has understated her income earned in 2008-09 and thus her tax payable has increased. Anna had provided all relevant information to Dan and his negligence, before commencement of the TAS Act, caused her to have a tax shortfall. This tax shortfall has also exposed her to a shortfall interest charge.

Although section 251M was repealed when the TAS Act commenced, Anna retains her right to sue for and recover from Dan the shortfall interest charge that she has incurred as a result of Dan's negligence.

Special rule relating to the civil penalty for employing or using the services of a deregistered entity

4.39 Section 50-25 of the TAS Act provides for a civil penalty where a registered tax agent or BAS agent:

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employs or uses the services of an entity to provide tax agent services on its behalf;

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in circumstances where it knows, or ought reasonably to know, that the entity is not registered and was previously a registered agent; and

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had its registration terminated within the period of one year before the registered tax agent or BAS agent first employed/used the services of the entity.

4.40 The Bill ensures that this civil penalty will apply where a registered tax agent or BAS agent employs or uses the services of an entity (registered tax agent or nominee) whose registration was cancelled under the current law. [ Schedule 2, subitem 21(1 )]

Example 4.5

In May 2009, Toby is convicted under section 8N of the Taxation Administration Act 1953 for recklessly making a false statement to a taxation officer, and, as a result, a state Board decides to cancel Toby's tax agent registration.

The TAS Act commences in January 2010.

Alistair, a registered tax agent, knowing the circumstances of the cancellation of Toby's registration, employs Toby in February 2010 to prepare his clients' business activity statements on his behalf.

Toby is taken to have been previously a registered tax agent under the TAS Act, and the cancellation of his registration is taken to have been a termination of registration under Part 4 of that Bill for the purposes of the civil penalty in section 50-25. As such, Alistair may be liable for a civil penalty under section 50-25 of the TAS Act, for employing Toby to provide tax agent services on his behalf when he knew that Toby's registration was cancelled within one year before he employed Toby.

4.41 Of note, the civil penalty does not apply where a registered tax agent or BAS agent employs or uses the services of an entity whose registration under the current law was cancelled because it ceased to carry on business as a registered tax agent. This is because the cancellation of registration did not result from misconduct by the entity. [ Schedule 2, subitem 21(2 )]

Review of decisions by the Administrative Appeals Tribunal

4.42 After commencement, despite the repeal of section 251QA of the current law (which lists the decisions of the state Boards that are reviewable by the AAT) applications may still be made to the AAT under that section for review of a decision by a state Board made before commencement under a provision of the current law, if, upon commencement, the period for making an application for review had not lapsed. [ Schedule 2, paragraph 18(1)(a )]

4.43 The right to apply for review by the AAT allows those entities who have been affected by a decision of a state Board or the Board to question the Board's exercise of its powers before an independent administrative body. For the reviewable decisions listed in item 18 of Schedule 2 to the Bill, the Board is required by section 27A of the Administrative Appeals Tribunal Act 1975 to give a notice to the affected entity/entities stating that a decision was made and that the entity has the right to have that decision reviewed. Under section 28 of that Act, the Board is required, upon request, to provide a written statement setting out the findings on material questions of fact, referring to the evidence or other material on which those findings were based and giving the reasons for the decision. A request for the review of a Board decision must be lodged directly with the AAT, generally by the twenty-eighth day after the day on which the terms of the decision are given to the affected person.

4.44 In addition, after commencement, an aggrieved entity may also continue to apply under section 251QA for the review of a decision of the Board where the Board is specifically empowered by this Bill to make a decision under the current law. These decisions, further information for which can be found in Chapter 3, are:

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A decision by the Board to reject an application for registration or re-registration (under section 251JA or 251JC of the current law - requirements for registration).

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A decision by the Board to reject an application for registration or re-registration (under section 251KC of the current law - requirements for registration and re-registration as a nominee).

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A decision by the Board to refuse a request to allow an application for re-registration to be made at a later time (under section 251JB or 251KB of the current law - application for registration as a registered tax agent or nominee to be made at a later date).

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A decision by the Board to suspend or cancel the registration of an entity after investigating the entity in accordance with the TAS Act.

[ Schedule 2, paragraphs 18(1)(b) to (h) ]

4.45 Section 70-10 of the TAS Act sets out the decisions of the Board that may be reviewed by the AAT.

4.46 To avoid doubt, this Bill specifies that an application may be made under section 70-10 of the TAS Act for review of any of the following decisions of the Board:

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A decision under section 20-25 of the TAS Act, as applied by Schedule 2 to this Bill, to specify a condition to which registration is subject.

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A decision under section 20-30 of the TAS Act, as applied by Schedule 2 to this Bill, to require professional indemnity insurance to be maintained.

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A decision under subsection 60-125(4) of the TAS Act, as applied by Schedule 2 to the Bill, to extend the period of time within which an investigation is to be completed.

[ Schedule 2, subitem 18(2) ]

Transitional reporting and disclosure obligations of the Tax Practitioners Board

Annual reporting requirement for the first year

4.47 Under section 60-130 of the TAS Act, the Chair of the Board will be required to prepare an annual report on the operation of the Board to be given to the Minister for presentation to the Parliament. The Bill provides for modified reporting requirements in the first year of the Board's operation.

4.48 If commencement occurs during the last three months of a financial year (normally April, May or June), then, despite section 60-130, the Chair is not required to prepare a report for that financial year. Instead, the operation of the Board during the period from commencement to the end of that financial year will be documented in the annual report for the next financial year. [ Schedule 2, item 22 ]

4.49 The preparation of an annual report is an important duty of the Board as it allows timely disclosure of information about the annual operation of the Board (and thereby enhances transparency and accountability). The modified reporting requirements provided in the Bill balance the value of timely disclosure with the competing priorities and significant workload that the Board will have during the first months following commencement.

Publication of information on the Internet

4.50 Section 60-135 of the TAS Act requires the Board to establish and maintain a register on the Internet of registered tax agents and BAS agents and entities that were previously a registered tax agent or BAS agent but whose registration was terminated (other than because they surrendered their registration or because of a reason prescribed in regulations).

4.51 The requirements of section 60-135 apply in relation to an entity if:

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the entity was a registered tax agent or registered nominee within the meaning of the current law; and

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in the period of 12 months before the commencement time, the entity's registration was cancelled under section 251K or 251KE of the current law (which outlines the reasons for cancellation or suspension of a tax agent's registration and the reasons for cancellation of registration of a nominee), other than because they permanently ceased to carry on a business as a registered tax agent (as provided in paragraphs 251K(3C)(b) and 251K(4)(c) of the current law).

[ Schedule 2, item 23 ]

4.52 Consistent with the TAS Act, this provision will facilitate compliance with the civil penalty for employing or using the services of a deregistered entity - refer to the explanatory memorandum to the Tax Agent Services Bill 2008 and to paragraphs 4.39 to 4.41.

Custody of Tax Agents' Boards' records and certain records in the custody of the Commissioner of Taxation

4.53 The records and documents that are in the custody of a state Board immediately before commencement or that relate to the activities of a state Board but are in the custody of the Commissioner before commencement must be transferred into the custody of the Board as soon as practicable after commencement. [ Schedule 2, item 24 ]

4.54 This provision allows the Board to continue investigations under the new law in relation to inquiries that have reached the 'show cause notice' stage. The transfer of records will also give the Board access to information relating to pre-commencement conduct of registered tax agents, nominees or persons exempt from registration.

Regulations

4.55 The Governor-General may make regulations prescribing matters required or permitted by Schedule 2 to the Bill to be prescribed or necessary or convenient to be prescribed for carrying out or giving effect to Schedule 2 to the Bill. For example, regulations may be made in connection with the transfer of any records or documents of a state Board to the Board to ensure that the state Boards are able to transfer information and records held by them to the Board on commencement without being subject to objection from other parties. [ Schedule 2, subitem 26(1 )]

4.56 In particular, regulations may be made prescribing matters of a transitional nature, including saving provisions and application provisions, relating to the amendments or repeals made by Schedule 1 to the Bill. [ Schedule 2, subitem 26(2 )]

4.57 The general regulation-making power described in paragraph 4.55 is not limited by the particular regulations provided for and explained in paragraph 4.56. [ Schedule 2, subitem 26(3 )]

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