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AAT decision on tax agent’s termination by TPB for failure to receive R&D advice before lodging ITRs

A recent AAT decision published in November 2022 involved the case of a tax agent and firm (the Applicants), which ran a medium sized practice with approximately 450 client groups contesting a decision by the Tax Practitioners Board (TPB) who had decided to terminate the tax agent registrations and to disqualify them from applying for tax registration for a period of two years.

The case is published in the public domain, but we have not named the firm here.

Investigations initially undertaken by the Commissioner of Taxation regarding several of the Applicants’ clients making ineligible claims for the research and development (R&D) tax incentive triggered a TPB investigation, which seemed to be aggravated by some failures in the Applicants’ management of their own tax affairs.

Key points of note include:

• In May 2022 TPB made Reviewable Decisions to terminate tax agent registrations;
• TPB found that the Applicants had breached s 30-10(1) of the Code of Professional Conduct (the Code), in that they failed to act honestly and with integrity, by making a false representation to TPB during TPB’s investigation that the Applicants had received and relied upon third-party advice regarding R&D tax claims prior to lodging various income tax returns (ITRs) for eight of their clients for various years of income between 30 June 2013 and 2018. TPB found that either no R&D tax advice was received, or such advice was sought post-lodgement;
• It is of note that many of the above noted R&D claims were audited and significant portions were denied, primarily based on a lack of nexus with R&D activities and the absence of contemporaneous records, with tax shortfalls of $4.9 million and penalties of approximately $2.6 million;
• TPB found that the Applicants had breached s 30-10(7) of the Code, in that they failed to ensure that a tax agent service that they provided, or that was provided on their behalf, was provided competently. That is, the Applicants had lodged ITRs for the Relevant Clients in circumstances where the Applicants did not have R&D tax expertise, did not receive specialist R&D advice, nor did not receive any other R&D advice from other registered tax agents supporting the claims made prior to lodgement of the ITRs. According to TPB, this failure was especially serious where the Applicants likely knew, or ought to have known, by virtue of the relationships referred to immediately above, the Relevant Clients were not entitled to the R&D claims;
• The Applicants argued (and the AAT conceded) that there may have been a misunderstanding, as R&D schedules were not received prior to the lodgement of the ITRs, but were received prior to the amended ITRs;
• TPB also pointed to the fact that the Applicants had indirect economic interests in some of the Relevant Clients by virtue of directorships and or shareholdings in entities that were shareholders of the Relevant Clients;
• The Commissioner was also concerned about the Applicants’ non-compliance with its personal tax obligations.

The AAT ultimately concluded that:

• The Reviewable Decisions be stayed, with conditions that the Applicants do not take on any new clients, and inform all existing clients, existing employees and new employees of the administrative actions taken by the Applicants and the AAT proceedings.
• The stay will lapse if the Applicants fail to comply with any of these conditions.
• The confidentiality orders are refused.

Swanson Reed is not suggesting that tax agent firms who fail to ensure their clients engage specialist R&D advisors immediately run the risk of termination by TPB. However, this case is a reminder that R&D schedules should be collated with care, and where the general tax agent does not have expertise in R&D tax specific issues, specialist advice may be required, particularly for large or complex claims.

Please get in touch with our office if you would like to speak to someone about a potential  R&D claim, or check out our website for more information.