CASE 6/2004
Members:M Sassella SM
Tribunal:
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
[2004] AATA 552
M Sassella (Senior Member)
Background
1. AX03D (``the applicant'') applied to the Tax Agents' Board of NSW (``the respondent'', ``the TAB'') for re-registration as a tax agent on 23 August 2002. He has been a tax agent for about 10 years. At a meeting on 13 March 2003 the TAB decided to refuse to re-register AX03D as a tax agent. It cited s 251JC of the Income Tax Assessment Act 1936 (``the Act'')[1]
2. The TAB had several concerns regarding AX03D. These were AX03D's alleged delays in responding to TAB correspondence, the existence of a significant tax debt owed by AX03D to the Australian Tax Office, a complaint against AX03D lodged by one of his clients and the circumstances of a person, AX03F, in preparing tax returns in the conduct of AX03D's business as a tax agent.
3. The last of these concerns may involve AX03D in a breach of s 251N(1) of the Act. Section 251N(1) provides that a registered tax agent shall not allow any person, not being his or her employee or a registered tax agent or a member of a partnership where the partnership is a registered tax agent:
- • to prepare on his or her behalf, either directly or indirectly, his or her own or any other income tax return or objection, or
- • to conduct on his or her behalf, either directly or indirectly, any business of himself or herself or any other person relating to any income tax return or income tax matter.
There is a penalty of $1,000 for breach.
4. AX03D applied to the Administrative Appeals Tribunal (``the tribunal'') on 10 April 2003 for review of the TAB's decision. On 23 May 2003, at the applicant's request, the tribunal granted a stay of the decision under review in
Re AX03D and Tax Agents Board of NSW (2003) 74 ALD 597, permitting AX03D to practise pending the outcome of this review.
Issues
5. The issue is whether AX03D is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. This requires findings in
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relation to each of the four matters raised by the TAB in [3] above.Findings on material questions of fact with reference to the evidence and other material in support of those findings
Alleged delays in responding to TAB correspondence
6. The particulars of these allegations appear in the TAB's statement of facts and contentions. The TAB sent AX03D letters on 23 September 2002 and 14 October 2002. These related to AX03D's tax debt. The first sought advice on steps AX03D had taken to clear the debt and asked for that by 7 October 2002. The second was a reminder that no response had been received to the earlier letter and giving AX03D until 29 October 2002 to respond. AX03D did not respond to the second letter.
7. AX03D's explanation for not responding to the letters had a number of facets. These were:
- • As the main cause, marital difficulties resulting from a heavy workload.
- • Ill-health had its onset during the period of non-response. AX03D was on medications in heavy doses. These in combination impeded AX03D's professional capacity. The ill-health was hypertension.
- • Introduction of the GST and PAYG withholding tax regime required AX03D to undertake a ``very big re-education campaign''. Mention was made of enormous amounts of private study, attendance at conferences, professional discussion groups and information seminars. The introduction of the personal services income from exertion legislation added to this load. In cross-examination it emerged that this work amounted to private reading, including of the twice-weekly tax service publications, and Internet research when AX03D was ill at home doing a minimal amount of work, along with attendance at a couple of sessions a month at lunch times for discussion in an accountant's office between September 2002 and March 2003. He conceded he went to no conferences. He went to one Tax Office telelink session in the relevant period. AX03D said he was working to improve his grasp of the tax changes of recent years.
- • Being overwhelmed by stress resulting from the tax debt, his tax agent registration and a complaint against him lodged with the TAB.
- • These problems lasted at least six months. Only in late 2003 did the marital relationship settle down.
8. In cross-examination AX03D added to that list. He referred to receiving correspondence, including that from the TAB, late through the mail. He thought he might not ever have received the TAB's October letter. He said also that he wanted to delay responding to the TAB regarding the tax debt until he had arrangements in place to pay the debt. He told the tribunal that when he read the TAB's letters he did not know how to respond to the questions. AX03D admitted that he left some correspondence received in that period unopened.
9. It was put to AX03D that he had never responded to these two letters when the adverse decision was made. AX03D disagreed, indicating that he faxed a handwritten note to the TAB just before Christmas 2002 to say that potentially successful discussions with the Commonwealth Bank had occurred. This was not referred to in AX03D's written statement prepared for the tribunal hearing. AX03D had no copy of that note with him. In re- examination AX03D identified a letter his legal representative, Mr Powrie, had sent to the TAB on his instructions on 4 December 2002 in response to TAB letters dated 23 September, 14 October and 30 October 2002 (although the letter erroneously dated these incoming letters as ``2003''). The letter actually sought further particulars rather than offering any substantial explanation.
10. AX03D conceded that he would not advise a client to deal with tax correspondence in the way he dealt with the TAB correspondence.
11. My impression witnessing AX03D giving his evidence on this matter was that it was very much the health and marital problems that were affecting him during his period of non- response. I considered that the suggestion of a great deal of self- education during the period was substantially overstated. While I would have preferred some medical evidence regarding AX03D's physical and psychological condition, it seemed to me that he had some difficulty at the time coping with the full range of administrative functions of a tax agent, especially as regards the tax debt.
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12. The respondent has cited the tribunal's decision in
Cowlishaw & Ors v Tax Agents' Board of Queensland 99 ATC 2231 as authority for the proposition that ``failure to treat the Tax Agents' Board with proper respect, [is] a serious neglect of the business of a tax agent''. This is a reasonable approach, although the decision in Cowlishaw is not informative regarding the scale of disrespect to the TAB in that case. The applicants' incompetent dealings with the Australian Tax Office ran over many years and were extreme. These dwarfed any problem they had with the TAB. AX03D's faults appear relatively mild by comparison. However, I do not see AX03D's health and relationship problems as sufficient to neutralise the disrespect shown by him to the TAB. As Mr Allatt, counsel for the TAB said, AX03D was still operating a business in the relevant period. He could have telephoned. He could have explained his personal problems to the TAB. He never did that. This is a matter I will factor into my final decision on AX03D's fitness for re- registration.
Debt owed to the Australian Tax Office
13. AX03D had paid the tax debt by the time of the tribunal hearing. This occurred as part of arrangements to obtain an annulment of his recent bankruptcy. The debt arose from cash flow problems. It accrued over three or four years. AX03D was late with his tax returns. He lodged several at once. The assessments generated a single large debt.
14. Neither party made much of the now extinguished tax debt. Mr Powrie submitted that, taken alone, the existence at one time of such a debt does not constitute misconduct in a tax agent. This would seem correct. The issue is whether a tax agent moves to extinguish the debt. AX03D did that. This is not a matter that will adversely affect AX03D in my final decision.
Complaint by client
15. A taxpayer client of AX03D, to be called Mr R, sent a letter to the TAB dated 6 May 2002 complaining about AX03D. He complained that AX03D had neglected Mr R's tax affairs to his detriment. The complaint was that in October 1999 Mr R had provided his business paperwork to AX03D to be used in preparation of his 1998-1999 business tax return. He alleged that over the course of two years AX03D failed to undertake the work. In November 2001 AX03D notified Mr R that he did not want Mr R's business. Some, but not all, of his business documents were returned. Mr R was unaware of the totality of his tax and child support debts until May 2002.
16. The Tax Office on 28 September 1999 sent to AX03D Mr R's personal tax assessments for 1995-1996 and 1997-1998. The refund cheques were posted to Mr R. However, shortly after an amended 1996-1997 assessment was sent to AX03D requiring a repayment of $9,925.15. This amended assessment was not sent to Mr R. The Tax Office began charging interest on this outstanding debt, unknown to Mr R. Successive notices quoting the quantum of debt, which continued increasing, were sent to AX03D but were not sent on to Mr R. Mr R's tax debt grew without his knowledge. He also incurred a child support debt because he did not notify the Child Support Agency that his taxable income had been reassessed and was higher than appeared on the agency's records. This led to penalties and arrears of $7,545.20.
17. AX03D attempted to settle the matter with Mr R by giving him a cheque for $1,200. Mr R saw this as insufficient. AX03D considered that this ended Mr R's complaint. The TAB has no record of any TAB officer telling AX03D that this was the case.
18. AX03D's evidence on this matter was that Mr R was a client from 1997 to 2001. AX03D said he did not complete Mr R's 1999 tax return because he did not feel ``comfortable'' with Mr R. He said that Mr R was intent on maximising his deductions because of his child support liability. AX03D said that Mr R wanted to claim deductions said to stem from a registered business that had made no income for a number of years. AX03D said that Mr R also did not want to pay a $1,500 bill to AX03D. AX03D refrained from completing the 1999 tax return because he did not want to do Mr R's work any longer. AX03D conceded in evidence that he should have told this to Mr R. Mr R eventually took his business to another firm and AX03D says that he passed some material to that firm, but not everything.
19. AX03D said that the $1,200 he sent to Mr R was the additional interest Mr R had to pay because AX03D had not told him of his tax debt. In fact, the additional interest totalled something close to $2,600. AX03D did not see that he should pay any of the tax or child support arrears. AX03D argued that Mr R's tax
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problems emanated from Mr R's instructions to AX03D to claim deductions aggressively.20. Mr R in his complaint to the TAB listed numerous attempts to try and contact AX03D over a lengthy period. Each time AX03D was not present or failed to return calls. AX03D told Mr Allatt that he failed to see Mr R because AX03D was often out of the office (he said he was out of the office 95% of the time). His work style involved visiting clients to take instructions regarding their tax. He said also that Mr R was not easy to contact, ``being a public servant''. He said he regrets the situation that arose and that he sent the cheque to Mr R because he felt he had let Mr R down. He said he was uncertain why he failed to deal with Mr R. He cited stress and long hours of work. Approaching Mr R about the tax debt was something for the ``too hard basket''. He said he was frustrated that the problem of the amended assessment had arisen after he had warned Mr R that he was claiming too aggressively. Mr Allatt noted that this all happened between 1999 and 2002, before AX03D's health and marital problems. He queried why it was so hard to tell Mr R that he had not been able to dissuade the Tax Office from amending the assessment. AX03D said that Mr R was reasonably difficult. He had a high expectation of receiving refunds. He thought it would be difficult to explain to Mr R why he had been unsuccessful and explain what had happened.
21. AX03D admitted his dealings with Mr R ``were not very professional at all'' and he was not proud of himself.
22. AX03D's treatment of Mr R was, in my view, extremely negligent and unprofessional. AX03D himself says he greatly regrets how he handled Mr R, although he seems adamant that his $1,200 compensation offer was fair. AX03D's treatment of Mr R is a serious matter that I will address in the ultimate findings.
AX03F
23. As a part of the re-registration process AX03D submitted an application to have AX03F registered for the first time as a tax agent. The issue all along with AX03F was his status in AX03D's business. As shown in [3], a registered tax agent must not allow a person to prepare a tax return or objection unless that person is a registered tax agent, an employee or a member of a partnership that is a registered tax agent. In addition, in order that AX03F might become a registered tax agent he needed to demonstrate that he had been engaged in ``relevant employment'' under regulation 156 of the Income Tax Regulations 1936 (``the Regulations'').[2]
24. AX03F explained his employment arrangement with AX03D. AX03F knew of AX03D when he was working with another accountant who became de-registered. AX03F was impressed because AX03D had more corporate and big business accounts than AX03F was used to seeing. He saw AX03D as more professional than his previous boss. AX03F agreed to work for both AX03D and his previous ``employer'' on the basis that they paid him on a commission basis, that the ``employer'' paid no workers' compensation or superannuation for AX03F and that he received no sick leave or recreation leave. There was no PAYE tax deducted from the money his ``employers'' paid to AX03F. However, AX03F submitted no tax returns on his own behalf. AX03D examined all AX03F's work and submitted completed returns on AX03D's own laptop computer. AX03D in his evidence said that AX03F did research in relation to objections which AX03D actually lodged. AX03F received no fees from taxpayers for whom he prepared returns. They paid AX03D who remitted appropriate funds to AX03F. AX03F paid his own tax through a sole proprietor business name entity. AX03F began working with AX03D in 1998. The gist of this arrangement was that the indicia of a typical master/servant relationship were largely absent. AX03F looked to be a contractor. AX03D and AX03F disagreed with this because they considered that AX03D maintained close control over AX03F's work.
25. AX03F arranged to obtain advice from a large Canberra law firm as regards the correct characterisation of the relationship between AX03D and AX03F. The advice was that they were in a partnership. AX03F preferred to describe it as a hybrid relationship unknown to law. Mr Allatt suggested to AX03F that he could not be AX03D's partner because AX03F did not see the firm's books to examine profit and loss. AX03F was asked at the hearing whether he had ever seen himself as a partner and he was extremely reluctant, or unable, to answer the question. AX03F agreed that he never thought he carried the risk of any commercial loss AX03D's business might
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sustain. However, after he saw the legal advice AX03F thought he might be a partner.26. AX03D also gave evidence regarding the relationship with AX03F. The additional information from that evidence was that he took AX03F on initially part-time. AX03F did a range of tax work competently - individual returns, partnership returns, complex individual returns, company returns, company accounts, negative gearing and about 10 objections. AX03D trained AX03F in audit work. AX03D said he regarded the relationship as a partnership on the basis of the legal advice. He no longer so regarded it at the hearing.
27. AX03D summarised the financial arrangements he had with AX03F, as in [24] above. He agreed with Mr Allatt that these amounted to an apparent contractor's engagement. He agreed he was aware of that at the time. AX03D agreed with Mr Allatt that AX03F was not an employee or a partner. He signed correspondence to the TAB describing the relationship as a partnership, as suggested by the legal advice. He said he knew this to be incorrect as AX03F had no equity in AX03D's business. AX03D said he was unaware of s 251N of the Act and that it is an offence to permit a contractor to prepare a tax return or objection. AX03D said that he thought the legal advisors had a point in the reasoning that led them to describe the relationship as a partnership. He said he did not have the energy to argue about the letter the law firm had drafted and so he signed it. He would not repeat that error. He would discuss it with the lawyers. AX03F is now an employee and all the usual master/servant indicia are in place. This arrangement began in January 2003.
28. In final submissions Mr Powrie pressed the following in relation to AX03F's status:
- • He has relevant experience to equip him to be a tax agent. He has relevant qualifications.
- • The purpose of s 251N of the Act is to ensure that taxpayer clients receive an appropriate quality of service. AX03D's control of AX03F's work ensured this.
- • There was effectively a master/servant relationship between AX03D and AX03F given the control arrangements.
- • The High Court in
Stevens v Brodribb Sawmilling Company Pty Ltd (1986) Aust Torts Reports ¶80-000; (1986) 160 CLR 16 identified the difficulties in defining these relationships. Deane J at Torts page 67,460; CLR page 49 noted that in the Victorian Supreme Court four judges had divided equally on whether a worker was an employee or a contractor. Deane J said that the distinction between employee and independent contractor had become increasingly amorphous as the single test of the presence or absence of control had been submerged in a ``circumfluence of competing criteria and indicia''. He regarded the control test as fairly definitive in the context of vicarious liability. Here, of course, we are not concerned with vicarious liability.
29. I find that from 1998 to early in 2003 AX03F was an independent contractor in relation to AX03D. This is for several reasons:
- • The indicia of a master/servant relationship are largely absent. Despite the Brodribb remarks, I doubt that a control test simpliciter can now resolve this issue very often. In any case Brodribb is distinguishable as it relates to vicarious liability.
- • As regards AX03D's control, this seemed to me to enter at the end of the process. AX03D appeared on the evidence to set AX03F free to do the spade work and produce drafts of returns and objections which AX03D gave a look over before submitting.
- • The arrangement seemed to me to be one whereby AX03D contracted AX03F to do the drafting of the tax documents and present them to him. This was the ``deliverable'' in AX03F's independent contract.
AX03D as a fit and proper person to be a tax agent
30. Mr Powrie submitted that the test of whether AX03D is a fit and proper person is to be administered as at the present, not as at the time when he was experiencing personal problems and professional difficulties. He cited
A Solicitor v Council of the Law Society of New South Wales (2004) 204 ALR 8 as authority. The full court in a joint judgment said at page 19 that the fact that the solicitor was guilty of professional misconduct in 1997 did not necessarily mean that he was unfit to practise in 2002. This seems a reasonable proposition in
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AX03D's context because any decision I make will have prospective effect. Any such decision is also highly important to AX03D as it will affect his right to work on his own account.31. Nevertheless, a number of AX03D's actions are a cause of concern. His handling of Mr R was very poor, continued for far too long and ended only two years ago, but before the onset of the health and family problems. It seems that AX03D's explanation as to why such poor customer service is unlikely to be repeated is that he now accepts much less work than he was doing in 1999.
32. AX03D's signing of letters to the TAB suggesting a characterisation of his professional relationship with AX03F that he knew to be wrong - ie AX03F could not be a partner because he had no equity in AX03D's firm - was at the very least poor form and might be far worse. His failure to deal sensibly and respond to legitimate inquiries from the TAB was also unprofessional. These are serious matters. AX03D gave me evidence regarding his health and marital problems at the time, yet he did continue his practice, albeit with help from AX03F. He must have considered himself capable of acting professionally to at least an extent.
33. A related problem is an apparent breach by AX03D of s 251N(1) of the Act in permitting AX03F to prepare tax returns when the latter was not an employee or a partner. AX03D explained that he was unaware of the import of s 251N of the Act. This is not really a defence. A tax agent should be aware of statutory requirements directly related to how they are to conduct their work. This would seem even more the case where what is involved is a statutory provision carrying a penalty for breach.
34. The A Solicitor case [30] is instructive to a point, but a central feature of that case was the court's finding that the solicitor's sexual misconduct had no relationship to his professional work. The solicitor had also served a lengthy period without a practising certificate. The court was somewhat sympathetic in that context. The problems in AX03D's case are all intrinsically related to his work as a tax agent and he has continued to practise as a tax agent.
35. Mr Powrie provided two testimonials for AX03D. One was from a chartered accountant, dated 22 April 2004. The writer has known AX03D for six or seven years. He has always found AX03D hardworking and professional. He has relied on AX03D's knowledge and experience on more than one occasion. AX03D has always been approachable and makes an effort to help and guide. He believes AX03D to be a fit and proper person to hold a tax agent's licence. He refers to AX03D as a family man who was ill late in 2002 and who is well on the way to recovery from a minor upset.
36. Another chartered accountant wrote on the same day that he has known AX03D for 23 years in a professional and social capacity. The two have worked together on a number of professional engagements. He regards AX03D as a person of the highest integrity and character and he has no hesitation in recommending him.
37. My final position on these matters is that I am less concerned about the failure to respond to TAB correspondence than about the other matters. I am also less concerned about the confusion or dissembling relating to AX03F's status within AX03D's business. It seemed to me, hearing the evidence, that AX03D was in fact unaware that AX03F was a contractor. He seemed to misunderstand what is required for a person to attract the status of an employee. He seemed to consider AX03F to be as well supervised and trained as any employee would be. He authored correspondence to the TAB that was apparently misleading at the same time as he was experiencing his personal problems. That may be a partial explanation and excuse.
38. Most important was the faulty handling of Mr R which, as I noted earlier, predated the onset of the personal problems. I was concerned by a certain reluctance on AX03D's part to admit fault and express contrition in this matter. He seemed to continue to see the offer of $1,200 compensation as adequate when it plainly was not. He also sought to try and shift some of the blame for this set of problems to Mr R. As against this I note that AX03D has incorporated AX03F into the firm as an employee and that AX03D is accepting less work. I am also conscious that AX03D has attracted relatively few customer complaints over the years and none, so far as the evidence would indicate, in recent years.
39. On balance I have concluded that AX03D should be re-registered as a tax agent. On balance I accept that AX03D experienced a temporary health and marital crisis that coincided with a heavy workload. While the
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matters of concern in this case all relate intimately to AX03D's capacity to work properly as a tax agent and remain highly relevant to any assessment of his capacity to prepare tax returns and do the other functions of a tax agent, there are explanations for the derelictions of earlier times. AX03D will have to guard against any recurrence of these problems and his unsatisfactory handling of the problems. However, the TAB has ongoing supervision of AX03D and I am certain will deal sternly with AX03D if he finds himself in difficulties again.Conclusion
40. I am satisfied on balance that AX03D is now a person of the fame, integrity and character required of one who is to be a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. I consider that AX03D should be re-registered and I remit this matter to the TAB with directions that he be re-registered for a period of three years from today's date subject to any earlier termination, cancellation or suspension that the TAB might impose on AX03D during that period.
Decision
41. The decision under review is set aside. The tribunal has decided that AX03D is a person of the fame, integrity and character required of one who is to be a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. The matter is remitted to the TAB with directions that AX03D be re- registered for a period of three years from today's date subject to any earlier termination, cancellation or suspension that the TAB might impose on AX03D during that period.
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