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The breach reporting obligations will cause significant headaches for practitioners across a wide range of real-life scenarios, a tax expert warns.
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Dob-in provisions to pose major issues for common scenarios
21 May 2024
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Tax expert and education provider John Jeffreys said the significant breach obligations are badly written law that would force tax practitioners to make difficult judgements on whether a breach constitutes a significant breach or if it is of “material value”.
Jeffreys said some common situations that practitioners regularly encounter illustrate how difficult the law will be to apply.
Some of the scenarios are likely to arise where a practitioner takes on a new client, he said.
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In a recent article, Jeffreys gave an example of a tax agent, Kirk, who takes on a new client who operates a business through a company.
“The company is registered for GST. When reviewing the company’s financial statements and tax returns for a number of past years, Kirk notices that the company has a vehicle in its fixed asset register and that the vehicle has been changed over a few times in the last five years,” said Jeffreys.
After asking the owner, Hubert, about the cars and what they were used for, Hubert says he drives the car home each night, but that it is only used for work purposes. He travels to and from home to work in the vehicle each day. He has another car that he uses for private purposes.
The vehicles owned by the company are a 5-seater dual cab ute, a Mercedes and a Ford Mustang. Kirk then asks whether fringe benefits tax has ever been paid by the company and notes that he has not been provided with any fringe benefits tax returns to review.
Hubert says he didn’t think they were subject to any tax because they were used only for work purposes. He also says that his previous tax agent never spoke to him about any FBT issue.
Jeffreys said in this situation, Kirk first has an obligation to advise his new client that FBT returns need to be lodged to the extent applicable and any tax paid.
Kirk must then decide whether to report the prior accountant for a significant breach of the Code of Professional Conduct, he said.
“The issue is whether there is material loss or damage to any part or whether the breach by the prior accountants is ‘otherwise significant,” said Jeffreys.
“Looking at the facts, it is possible that the dual cab ute may not be subject to FBT. However, the provision of the Mercedes and the Mustang would have constituted a fringe benefit on each day it was made available to Hubert.
“So, assuming that both vehicles cost $100,000 and they were used for two years each, the FBT that has not been paid would be in the order of $80,000.”
Kirk will need to determine whether a loss of $80,000 is a material loss to the Commonwealth, Jeffreys said.
“Does Kirk consider whether Hubert’s company must now pay this amount to be a material loss or damage plus any interest charges? Should Kirk consider this breach to be ‘otherwise significant’ in relation to the prior tax agent?” he asked.
In this scenario, Jeffreys said that Kirk contacts the prior tax agent, by email, and asks what advice was given to Hubert and his company regarding FBT on the vehicles.
The prior tax agent gives a short reply to say that the correctness of tax information lodged with the ATO is the responsibility of the client.
Kirk also considers whether, if the ATO audits Hubert’s company, penalties will be applied, causing further expense to his new client.
“Again, it is difficult to say whether this event should be treated as a ‘significant breach’, but I think the better view is that he should treat it as being such and lodge a report with the TPB and the prior tax agent’s professional body,” said Jeffreys.
He said: “$80,000 plus possible penalties plus interest charges could add up to $200,000. Hubert is likely to consider that amount ‘significant’. If the client is likely to consider the amount ‘significant’, I think the breach should be reported.”
The non-payment of superannuation contributions, whether by mistake or by deliberate action is another common issue that most practitioners will come across sooner or later.
Determining whether this type of breach is significant will also be a perplexing issue, said Jeffreys.
In these types of situations, Jeffreys said practitioners will again be confronted with the question of whether the breach is otherwise significant.
Where the underpayment of super involves multiple individuals, practitioners may need to consider the total amount of non-paid superannuation overall rather than just the impact on each individual when determining whether the breach is significant.
While the Tax Practitioners Board has released an information sheet to try and assist practitioners in applying the new laws, Jeffreys said the exact meaning of significant breach remains unclear.
“When I have considered real life scenarios I found little assistance in the information sheet for resolving whether a significant breach report should be made. I was still left wondering what to do even after reading and re-reading the legislation many times and spending many hours analysing what the TPB says in the information sheet,” he said.
“Several times in the information sheet tax practitioners are left with the directive to use their ‘professional judgement’. This is government organisation speak for ‘we don’t know what this means, so you have to make up your own mind’.
“This leaves a most unsatisfactory situation for the tax profession.”
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