AAT a potential minefield for tax disputes

According to figures provided by the AAT, last year about 30 per cent of people who took a tax dispute to the Tribunal were represented by their accountant/tax agent.

Blurred lines and controversial decisions mean that going to the Administrative Appeals Tribunal can be a risky proposition.

At a glance

  • In 2018, about 30 per cent of people who took a tax dispute to the tribunal were represented by their accountant/tax agent.
  • The Tax Agent Services Act 2009 “safe harbour” provision affords protection from liability or penalty, but only in certain circumstances.
  • Accountants who appear at the AAT should be aware of the professional indemnity issues.

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Registered tax agents should think carefully before representing a client on a tax dispute at the Administrative Appeals Tribunal (AAT), as the AAT’s procedures and rules of evidence may be outside of their area of competence.

It is entirely legal for accountants to appear for a client at the AAT – in fact, the Tax Agent Services Act 2009 (TASA) expressly allows registered tax agents to do so – but the fact that they can does not automatically mean that they should.

According to figures provided by the AAT in its submission to the review of the Tax Practitioners Board, last year about 30 per cent of people who took a tax dispute to the tribunal were represented by their accountant/tax agent, or 198 of the 316 cases in the Taxation and Commercial Division. In the other cases, the taxpayer was represented by a lawyer.

The AAT is not a court, but an administrative body that reviews specific decisions of other government agencies, including the Australian Taxation Office (ATO). It considers whether, on the facts presented to it, the correct or preferable decision was made in respect of the applicable law, rules and government procedures. Its own decisions are judicially reviewable.

Despite the administrative status of the AAT, many issues put before it involve questions of statutory interpretation and close reading of rules. This raises a critical question for accountants: where is the line that separates appropriate tax advice to a client from unqualified legal advice?

Melbourne barrister and part-time deputy president of the AAT Frank O’Loughlin QC notes that when tax agents present cases in the AAT on behalf of their clients, they are involved in work that includes both legal and factual elements.

“Applying taxation laws to the facts of a taxpayer’s case is always legal work,” he says. “Registered tax agents are permitted to represent their clients in undertaking this work.

Different aspects of Australia’s tax system call for deployment of different types of skill and knowledge. Some aspects of the work in the AAT lend themselves to the skills of accountants, others lend themselves to the skills of lawyers. Other aspects are common to both.”

The TASA as a safe harbour

 The TASA provides a “safe harbour” for registered tax agents against the prohibition on non-legal practitioners providing legal advice. This is a provision in a law or regulation that affords protection from liability or penalty under specific situations, or if certain conditions are met. The safe harbour concept is used in several areas of law, including taxation.

A difficulty is that it applies only when an accountant is doing the ordinary “bread and butter” work of an accountant, including advising on general Commonwealth tax issues.

Chris Wallis, a barrister who has published a number of articles on the subject, believes that many accountants do not really understand the limits of the legal advice safe harbour.

He also questions a key decision known as the Felman Bubble.

The Felman Bubble concept is derived from the decision in Felman v Law Institute of Victoria [1998] 4 VR 324; (1997) 142 FLR 383, where Justice Kenny said [at pp.383-4], “… a tax agent who gives advice, as to income tax matters … does not give what is ordinarily understood as legal advice…”

“Accountants have long believed that they are entitled to give advice, including legal advice, about the operation of the tax laws more generally,” Wallis says.

“However, there is no legal basis for this belief, even if the advice is provided in relation to the preparation and lodging of a tax return.”

Wallis cautions that the Felman Bubble does not extend to work in relation to state taxes or superannuation (other than in the context of income tax).

Issues with TASA

John Morgan, a Melbourne barrister experienced in the tax field, likewise sees the weakness of the Felman decision.

“Tax agents are allowed to give ‘advice’ about taxation laws because it is a tax agent service under s90-5(1)(a)(ii) of TASA, and a federal law overrides the state and territory laws that prohibit unqualified legal practice,” he says.

Whether this protects non-lawyers from any advice they give that culminates in a tax liability has not apparently been tested.

“It may be that a court would ‘read down’ the TASA protection in cases where the public interest was not served because of the complexity of the general law,” Morgan says.

“In any event, registered agents must comply with the TASA requirements, including the Code of Professional Conduct [the code],” Morgan notes. “This includes an obligation to do this, among other things, competently. Often this will be difficult without legal training.”

"The lesson is: if you go to the AAT, be very sure about the scope of the task you are undertaking and why you are doing it." Chris Wallis

Morgan also points out that providing legal documents to a client is clearly outside what tax agents are permitted to do.

A breach of the code can lead to disciplinary action by the Tax Practitioners Board, resulting in suspension or cancellation of registration.

There is also legislation in each state and territory that prohibits an unqualified, uncertified person from engaging in legal practice, and substantial penalties are involved, with similar carve-out arrangements impacting accountants.

Also, just because a matter relates to tax does not mean that it qualifies for the carve-out: it can depend on the particular circumstances of a case.

Serving the client before the AAT

Another issue that Wallis raises is the potential for accountants to unwittingly engage in legal practice when they represent a client at the AAT.

He believes that many accountants do not understand the breadth of the issues that can arise and whether the Felman Bubble, while it applies to the representation in the hearing, can be stretched to the research and other work required to prepare for the hearing.

“An accountant before the AAT is almost always appearing to defend a client in relation to work undertaken by the accountant,” he says.

“If the accountant submits that the client had provided everything that was needed, the accountant has implicitly advised on evidence rather than tax. Similarly, if the accountant concludes that the client did not provide everything that was needed, they are advising on evidence.”

Morgan emphasises that in the objection process, there is a need to inform the client of the available options, including independent advice, representation by a lawyer and the choice between the AAT and the Federal Court of Australia.

“Strange as it sounds, there have been accountants who go to the AAT without their client’s knowledge,” Morgan says.

“Perhaps they are trying to defend a mistake they have made,” he adds. “In any case, it is hard to see that it meets the standards of the code.” 

Wallis emphasises that the protective strength of the Felman Bubble, which applies in Victoria but not necessarily in other states, is untested.

“From a tax practitioner’s point of view, a prohibition without a bright line test is a disaster waiting to happen,” he says. “The lesson is: if you go to the AAT, be very sure about the scope of the task you are undertaking and why you are doing it.”

Realistic assessment

Accountants who appear at the AAT should be aware of the professional indemnity (PI) issues, although Drew Fenton, director of Fenton Green, CPA Australia’s insurance broking partner, notes that not all PI policies provide complying cover for accountants.

“The PI policy coverage needs to provide cover for CPA bylaws as well as all usual professional activities an accountant would undertake. That would include going to the AAT for a review,” he says.

Fenton goes on to suggest that accountants representing their clients at the AAT should keep clear records relating to verbal advice and always reiterate verbal advice in writing.

“Do not stray from providing factual and verifiable accounting advice for taxation and bankruptcy,” he says. “Peripheral and personal advice should be highly avoided.”

Deliberately committing an offence invalidates the policy through a fraud and dishonesty exclusion. There is an exemption provision for innocent partners in a practice.

Fenton says taking a case to the AAT can involve significant time and effort.

“This decision really needs to be made jointly through consultation between accountant and client,” he says.

“Part of that discussion should be to identify the possible benefits, as well the chances of success. You have to be realistic in your assessment.”

CPA Australia resource: CPA Australia’s Regulatory Burden Report. Read now.

Considerations for accountants when taking a case to the AAT

Ensure that the facts of the case and the reasons for the decision being contested are understood.

Check that arguing the case does not cross the line into unqualified legal advice.

Consider whether the participation of a qualified and suitable legal specialist would be in the client’s best interests.

Consider whether you have the knowledge and competence to represent your client at the AAT, including strong knowledge of rules of evidence and the procedures of the AAT.

Ensure that good records, especially of discussions with the client, are kept.

Check that all actions align with the Code of Professional Conduct in the TASA, as well as the professional and ethical requirements for CPA Australia members.

Read next: Message for accountants: Talk to the ATO

Disclaimer: The material contained in this article is comment of a general nature only and has been produced for reference purposes only and is not intended, in part or full, to constitute legal or professional advice. To the extent permitted by the applicable laws in your jurisdiction, CPA Australia, its employees, agents and consultants exclude all liability for any loss, damage, claim, proceeding and or expense including but not limited to legal costs, indirect special or consequential loss or damage, arising from acts or omissions made in reliance of the materials. Where any law prohibits the exclusion of such liability, CPA Australia limits its liability to the resupply of the information. Before acting on the basis of any material contained in this article, we recommend that you consult your professional adviser.

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