Recently (late June 2008), one of our clients switched accounting firms. Hours before the end of the 2008 Financial Year (and the Commissioner's Div 7A amnesty) the new accountant realised that Division 7A had not been addressed in (possibly) various annual returns and sought our assistance in seeking the Commissioner's discretion.
Almost 5 months later and at considerable cost, we were informed that the Commissioner would not exercise his discretion in favour of our client. The clients who were your 'average Aussie business owners' that left their tax returns up to their professional advisers, had never heard of Division 7A. Immediately upon receipt of our advice, we were told by the clients to rectify the breach. Our clients did what was right. They did not attempt in any way to disguise the facts. But simply doing the right thing ended up, the wrong thing.
One requirement for the exercise of the Commissioner's discretion was for there to be an honest mistake or inadvertent omission by our clients. The Commissioner concluded that (and we quote):
- the Division 7A breach occurred over a period of 6 years, which indicated a total disregard for the application of Division 7A, rather than a one off isolated instance of non compliance. It is apparent that there was a systematic disregard for compliance with Division 7A;
- Not withstanding that the company financials may have confirmed the existence of such loans, there was a failure to indicate that the debit loan existed at label 8N within the company income tax return. The company income tax return instructions are clear about the requirement to complete this label.
Under the heading of Self Assessment in The Taxpayers' Charter the following warnings appear:
If you give us information and then realise it is wrong, let us know as quickly as possible....
If you come forward to tell us about a mistake which means you owe us money, we will ask you to pay the money and may also charge you interest. However, in most cases we will reduce any penalty that may apply.
To remedy the situation the client, using their new accountant, is required to amend their income tax statements to include the deemed dividends for each relevant year. If they do not, "the matter will be referred to our active compliance area."
By now the fox is well out of the woods and the hounds have picked up the scent. Where to from here?
Tax Agent Services Act 2009
Royal assent was given to the Tax Agent Services Act 2009 on 26 March 2009.
Paragraphs 6.53 and 6.54 of the Explanatory Memorandum provide for two 'safe harbours':
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.
Failing being able to access either of the safe harbours, the next course of action is a professional indemnity claim. Paragraph 2.78 of the Explanatory Memorandum stated:
Tax agents and BAS agents are professionals who hold themselves out as having a special skill on which members of the community can rely. As they are agents for the client, they can be liable for any financial loss or damage which their clients suffer through failure or mistake. The requirement to have appropriate professional indemnity insurance cover ensures that those people who are exposed to the risks of financial loss resulting from agents? conduct are adequately protected and compensated.
Chase the insurance
If all else fails, the only avenue open may be to chase the professional adviser for negligence. Please be aware that once you start down this path, you will not be dealing with the professional adviser who made the alleged mistake, but the lawyers associated with the relevant insurer. The bottom line is that there will inevitably be a substantial amount of time and money involved in accessing the appropriate insurance