Taxation Ruling

IT 2055

Prescribed payments system : declaration by prescribed persons

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FOI status:

May be releasedFOI number: I 1115046

PREAMBLE

The purpose of this ruling is to clarify issues which are now being raised by a number of firms of accountants over the declaration about the accuracy of taxation returns that is required to be made by a prescribed person in an application for a deduction exemption certificate under section 221YHQ of Division 3A of the Income Tax Assessment Act 1936. The declaration in the application form is that contained in section 221YHQ which was inserted by the Income Tax Assessment Amendment Act 1983 which was introduced into the Parliament on 17 May 1983 and received Royal Assent on 14 June 1983 as Act No. 14 of 1983.

FACTS

2. Section 221YHQ sets out the conditions which are to be satisfied by a person for the issue of a deduction exemption certificate, the holder of which will be entitled to receive prescribed payments without deduction of any tax. Apart from the case of persons who are unlikely to have any tax to pay in a particular year, the issue of deduction exemption certificates is generally confined to those persons who have been in business for a significant period and are able to demonstrate that, during that time, a satisfactory taxation record has in all major respects clearly been maintained.

3. In addition to these fundamental tests, section 221YHQ requires an applicant to provide the Commissioner, but only in relation to the most recent year of income for which an income tax return has been furnished, information which, in effect, the Commissioner would gather if he himself were to conduct the kind of examination that would show whether returns had properly disclosed a person's assessable income and allowable deductions. The extent of non-reporting of income of the kinds to be subject to deduction of tax under Division 3A is such that the Commissioner could not be satisfied as to the accuracy of returns lodged which have been subject to no more than routine scrutiny in the Taxation Office. The additional information therefore required is, broadly -

(a)
where the applicant has kept full records, including a balance sheet, that are audited by a competent person - a declaration by a prescribed person as to the accuracy of the return; and
(b)
in any other case - a statement of the applicant's sources and application of funds, reconciled with the relevant return and a declaration by a prescribed person as to the accuracy of the return.

For these purposes, a 'prescribed person' is defined in paragraph 221YHQ(3)(a) as a registered tax agent or a person who, in the opinion of the Commissioner, is competent and qualified to furnish the declaration required.

RULING

4. The declaration contained in the application form for a deduction exemption certificate accords with the requirements of section 221YHQ, and could not be modified without amendment of the legislation. For that reason applications will not be accepted as valid where the prescribed person has attempted to modify, qualify or otherwise weaken the declaration by some additional statement or words either on, or attached to, the application form.

5. Requests to modify the declaration are based on the view that making it in its statutory form involves a total or absolute warranty as to the accuracy of the applicant's particular taxation return. The official view is that neither the law nor, of course, the form made available under it requires such a warranty. The form of declaration requires that in order to make it the prescribed person must satisfy himself as to the accuracy of the particular return by taking such steps as are prudent and reasonable in the circumstances. It is repeated that there is no requirement of absolute, total or irrefutable satisfaction. However, declarations qualified in the way that many declarations by tax agents in tax returns are will clearly not be acceptable.

6. In other words, the declaration required involves the exercise of the kinds of judgement on the part of the person making it that, at a practical level, are really no different from the kinds of judgements that are regularly made by taxation officers who, in the course of examining taxpayers' affairs, have to decide whether the taxpayer concerned has properly recorded his income and expenditure for tax purposes.

7. The legislation specifically requires the prescribed person to examine specified taxation and accounting records. In many cases it will not be necessary to extend the examination beyond these. For example, where a taxpayer keeps complete records which are audited and the auditor has, for purposes of the companies legislation, expressed the opinion "that the accounts ... are properly drawn up so as to give a true and fair view of the matters required ... to be dealt with in the accounts", it would ordinarily be necessary for the person making the declaration for the purposes of section 221YHQ to do no more than to satisfy himself as to the accuracy of the reconciliation of those accounts with the rules contained in the income tax law as to what is assessable income and what are allowable deductions.

8. However, in some cases, for a prescribed person to be "satisfied" as to the accuracy of the particular taxation return, it may be necessary for the person to do more, namely, to carry out or to undertake such other checks as he considers prudent or reasonable in the circumstances, e.g., examination of private bank accounts, the reporting or recording of cash transactions in businesses that are traditionally "cash" oriented, the adequacy of taxpayers' accounting systems, etc.

9. Therefore, where a prescribed person has confidence in the standard of record keeping of a client and, having examined the records specified in the legislation and carried out such other reasonable and prudent checks as he considers necessary, has no reason to doubt the accuracy of the return, it will be acceptable if, in giving the declaration, the prescribed person has satisfied himself in this sense. The judgement of the person who makes a declaration, having satisfied himself in this way, will not be called into question even though discrepancies may subsequently be discovered in the return of the taxpayer concerned.

10. It is understood that certain firms intend to incorporate in the form (by means of a rubber stamp or attachment) a statement disclaiming any responsibility or liability to third persons for civil damages arising through any person other than the Commissioner relying on the declaration. Such civil disclaimers for third persons do not affect the validity of the declaration for purposes of section 221YHQ.

COMMISSIONER OF TAXATION
16 August 1983

References

ATO references:
NO 12 L79/16 Pt 10
BO SYD AF 4173 Pt2

Date of effect:
Immediate

Subject References:
PRESCRIBED PAYMENTS SYSTEM
PRESCRIBED PERSONS DECLARATIONS

Legislative References:
221YHQ