The Tax Practitioners Board (TPB) has updated its Information Sheet: Reasonable care to ascertain a client’s state of affairs, information sheet, to include Examples 9 & 10 about the Black Economy.
See below for details.
The TPB issued an ‘information sheet’: TPB(I) 17/2013, in 2013, to flesh out Tax Agents’ legal obligations, under ‘Code of Conduct, item 9 requirement, in s30-10(9) of the Tax Agent Services Act 2009 (TASA) to:
take reasonable care in ascertaining a client ‘ s state of affairs, to the extent that ascertaining the state of those affairs is relevant to a statement you are making or a thing you are doing on behalf of the client.
Back in November 2019, the TPB upgraded the ‘Info Sheet’, to include examples 9 & 10 – both of which relate to the ‘black economy’.
Before turning to them, I would like to quote the the following guidance on the subject matter of this Item 9 requirement.
What is ‘reasonable care’ in ascertaining a client’s state of affairs [it falls well short of an audit…]?
- The obligation to take reasonable care does not mean that the care taken needs to be perfect or to the highest level of care possible. It is sufficient that the registered agent acts in a way that is consistent with how a reasonable person, possessing the required knowledge, skill and experience of a registered agent, objectively determined, would act in providing tax agent services or BAS services.
- Where a statement provided by a client seems credible (and for existing clients is consistent with previous statements) and the registered agent has no basis on which to doubt the information supplied, the registered agent may discharge their responsibility by accepting the statement provided by the client without further checking.
- In this case, the registered agent is not just accepting what the client tells them or gives them at face value. Rather, the registered agent is exercising their professional judgment based on the information previously provided by the client and the nature of the client themselves, and making a decision that further checking is not required in the particular circumstances.
- On the other hand, if the information supplied by a client does not seem credible (in accordance with how a competent and reasonable person, possessing the knowledge, skills, qualifications and experience of a registered agent, objectively determined, would perceive the information) or appears to be inconsistent with a previous pattern of claim or statement, further enquiries would be required, having regard to the terms of the engagement with the client.
- In such situations, taking reasonable care will mean that a registered agent will need to ask questions of their clients or examine the client’s records, or both, based on a reasonable registered agent’s professional knowledge, skills and experience in seeking information.
- Also, if the client’s circumstances have changed, the registered agent would need to consider what additional questions would need to be asked of the client to ascertain the client’s state of affairs relevant to the tax agent services or BAS services being provided.
- Some other circumstances in which there may be a need to make further enquiries of the client include:
- new or substantial changes in the law
- nature and circumstances of the client, including whether a new or inexperienced client
- unusual transactions in the context of the regular business of the client.
- Therefore, Code item 9 does not require registered agents to ‘audit’, examine or review books and records or other source documents to independently verify the accuracy of information supplied by their clients. However, there may be circumstances (see paragraphs 13 to 16 above) where a registered agent may not automatically discharge their responsibility in particular cases by simply accepting what they have been told by their clients.
The TPB indicates that it thinks key elements of the reasonable care’ obligations, in relation to ‘black economy’ risk are:
- Being aware of the types of industries likely to involve cash.
- Having an awareness of turnover to expense ratios, and the availability of ATO benchmarks, for various industries.
- Taxpayers with poor record keeping.
- Tax agents being prepared to dig into the information at taxpayer might present and wait for further information promised, to be delivered.
- The agent, themselves, having good systems (eg. checklists) and record keeping (eg. of conversations and documents requested and provided).
The two new examples are these.
Example 9 – ‘Black economy’ – where Agent DOES discharge his/her ‘reasonable care’ duties
Terms of engagement
Victor engages Sam, a registered tax agent, to prepare and lodge his income tax returns for the past 3 income tax years.
Brief description of scenario
Victor is a bricklayer who has been busy and hasn’t had the time to lodge his income tax returns for the past 3 years. During their initial discussion, Victor tells Sam that he is married with 3 children and a wife who has no income.
Victor provides Sam with invoices, bank statements and receipts for the past 3 years to assist with preparation of his income tax return. Sam notes that Victor has a poor record keeping system and the income reported appears low when compared to the expenses.
Reasonable care steps
Sam explains to Victor that all income must be declared and asks if he has any cash sales that did not have invoices or were not deposited into his bank account. Sam also advises that Victor is required to lodge his income tax returns by the due date.
Victor admits that the majority of his income is from cash payments and as the income hasn’t been deposited into his bank account he doesn’t need to declare the income. Sam explains to Victor that this is not correct and he could be subject to interest and penalties if he does not declare all of his income.
Sam lodges Victor’s three income tax returns and includes the cash payments he has received. Sam also provides advice on record keeping requirements.
As Victor’s turnover is over $75,000, Sam advises him that he will also need to register for GST and commences lodging Business Activity Statements.
Sam has satisfied his obligations under Code Item 9 as by asking for additional information and including the cash payments he has taken reasonable care to ascertain the state of Victor’s affairs.
Example 10 – ‘Black economy’ – alternate scenarios where Agent DOES and DOES NOT discharge his/her ‘reasonable care’ duties
Terms of engagement
Mitch engages Tia, a registered tax agent, to prepare and lodge his income tax return for his tiling business.
Brief description of scenario
Tia has been operating her tax agent business for the last 5 years. She has been building up her client base within her community and has new clients coming to her based on referrals. Mitch is a new client that has asked Tia to prepare his income tax return for the year. Mitch is a sole trader who is under the GST registration threshold and has no employees.
Positive scenario – ‘reasonable care’ steps adopted
Mitch provides some information that indicates his turnover for the year was $35,000 and his expenses were $25,000. Mitch has been running his tiling business for 4 years now and says he is kept pretty busy throughout the year.
After consulting the ATO Small Business Benchmarks Tia notices that Mitch’s turnover of $35,000 appears to be low and that Mitch’s business expenses as a proportion of his turnover are high for the industry that he works in.
Tia explains to Mitch that the ATO Small Business Benchmarks show ranges of business expenses to business turnover that can be used to compare his business to similar businesses in the tiling services industry. Should Tia lodge the income tax return as instructed it is more likely that he would come to the attention of the ATO who will seek additional information to substantiate his income and expenses.
Tia requested information on how Mitch records cash sales. Mitch admitted he needs to improve his record keeping, sometimes he keeps notes of what he was paid that he makes after a job, but there have been times where he has been so tired after he finishes a job that he might have forgotten. Mitch also advises that he just uses his personal bank account to deposit the cash and pay expenses. Tia advised that it is important for Mitch to keep better records going forward. Tia also advises Mitch that he should consider getting a business bank account that is separate from his personal account.
Tia works with Mitch to estimate his cash income for the year. After reviewing his bank account records, Mitch also revised the business expenses – removing personal expenses included in error.
Negative Scenario – Failure to take reasonable care
Tia asks clients to provide source records when completing their lodgment requirements but keeps no written notes of conversations, working papers or records of what was provided and has no checklist to refer to. Due to the practice getting busier, Tia admits to not asking further questions in relation to the clients’ income and expenses and doesn’t wait for documents that were not provided but accepts a verbal account.
While knowing the business expenses and income reported fall outside of the Small Business Benchmarks, Tia’s workload and desire to keep new clients leads to her not asking Mitch about his cash income, expenses or record keeping. Tia lodges Mitch’s income tax return as instructed.
Tia has failed to carry out her obligations under Code Item 9 by failing to make additional enquiries in relation to Mitch’s comparatively high business expenses and low turnover