Hotspots on the regulatory radar
The regulators are gearing up for enforcement mode as the industry enters a new financial year. But tax agents who are fully aware of their obligations can make it out safely.
It is no secret that tax agents have come under immense pressure in recent times.
Public warnings and increased scrutiny from industry regulators have led many tax agents to wonder if clients are beginning to lose trust in the profession. Just two months ago, ATO commissioner Chris Jordan unleashed a string of scathing comments that questioned whether tax agents should still be considered “guardians of the system”.
His tone comes after the ATO discovered recently that incorrect claiming on tax returns was more common in agent-prepared returns than in self-prepared returns. In response, the ATO will be increasing its focus on a number of areas of concern for the new financial year.
Meanwhile, the Tax Practitioners Board has vowed to assist the ATO in taking action against the tax agents who are caught contributing to the claims disparity as well as those who are involved in the ‘black economy’. Corporate regulator ASIC is also said to be zoning in on limited licensed accountants who are not complying with the laws.
Vicki Stylianou, executive general manager of advocacy and technical at the Institute of Public Accountants, says that pressure from the regulators on accountants is indeed growing.
“We’re seeing overall a much greater level of scrutiny, of surveillance, of monitoring. More and more obligations are being passed onto the private sector,” she says.
In the new financial year, the ATO says it will be focusing on the areas that “taxpayers are getting wrong”. One of the biggest areas of concern is over-claiming on work-related expenses – in particular for cars, home offices, and clothing and laundry.
In order to lawfully claim a work-related expense, three rules must be met: the client must have spent the money him or herself and not be reimbursed; the expense must be directly relating to earning income; and the client must have a record to prove it, the ATO says.
“If the expense was for both work and private purposes, you can only claim a deduction for the work-related portion,” an ATO spokesperson said. “The ATO wants taxpayers to claim what they are entitled to. No more, no less.”
But it seems that claims may be on the “more” side.
The ATO says it is seeing claims where there is no connection to income earned or no evidence that an expense was incurred. The Tax Office is also seeing claims for private expenses or incorrect distribution between private and work use. Substantiation exceptions are also being used as ‘standard deductions’ – regardless of whether the taxpayer has actually spent the money, the ATO says.
“We are aware that tax practitioners can face a number of pressures in correct return preparation, including time and pressure to accommodate a client’s expectations of a refund. We will continue to work with tax practitioners, professional associations and consultative bodies to address areas of concern that have been identified through our random enquiry program,” the ATO spokesperson said.
“For the small number of agents who seek to deliberately undermine or abuse the system, we have strategies in place to identify and monitor these agents. Our interventions include audits of their clients, the practice and the tax agent’s own affairs as well as referrals to the TPB. We also follow up on information provided by the community and other practitioners to protect the integrity of the profession and the tax system, and ensure a level playing field for agents doing the right thing.”
The ATO says it has already referred 20 agents to the TPB this year for questionable practices involving false work-related expenses claims. TPB chair Ian Taylor says he is expecting the number of referrals from the ATO to increase.
“Agents have an obligation under our code of professional conduct to do a number of things, one of which is to ensure that they exercise reasonable care in ascertaining a client’s state of affairs. Secondly, they need to ensure that the tax laws are applied correctly to those circumstances,” he says. “Agents need to ensure that they follow those rules. And if they did, then there would be no over-claiming of the expenses.”
Rental property claims and newcomers
Other claims that the ATO plans to watch closely are ones made on rental property and holiday homes. The Tax Office will look at rental property income that is disproportionate to expenses as well as claims on holiday homes that are not genuinely available for rent.
It will also be watching for any overstated claims interest, where a portion of a loan is private in nature.
“When reviewing claims for rental properties, the law has changed. Travel expenses related to the inspecting, maintaining or collecting rent for the residential rental property can no longer be claimed and depreciation on second-hand assets for residential properties purchased on or after 7.30pm on 12 May 2017 can no longer be claimed,” the ATO spokesperson said.
“The ATO’s ability to identify unusual claims is becoming more sophisticated due to enhancements in technology and data analytics. Our improved analytics are allowing us to identify obvious errors quicker at the time of lodgement and correct the return before any assessment issues.”
While the ATO homes in on rental property claims, the TPB will be working with new tax intermediaries to ensure the right tax is paid on property sales. From 1 July of this year, conveyancers will be required to ensure their clients pay the correct tax.
“The government in recent times is looking for ways to more efficiently ensure that the correct amount of tax is paid,” Mr Taylor says. “So, we’re involved in that process as well to ensure that the correct advice is provided and that nobody is in breach of the Tax Agents Services Act in providing services whilst unregistered.”
Agents in the 'black economy'
Another major focus area for the TPB is the government’s Black Economy Taskforce, which was established in a bid to crack down on taxpayers who intentionally misreport their tax and superannuation obligations.
One of the outcomes from the taskforce has been Minister for Revenue and Financial Services Kelly O’Dwyer introducing a bill that is aimed at banning electronic sales suppression tools, and extending the current Taxable Payments Reporting System (TPRS) to the courier and cleaning industries.
According to the ATO, sales suppression technology and software allows businesses to understate their incomes by untraceably deleting selection transactions from electronic records in POS equipment. The bill also introduces amendments to require entities that provide courier or cleaning services to report to the ATO details of transactions that involve engaging other entities to undertake those courier or cleaning services for them.
But there is another expected outcome from the Black Economy Taskforce, and that is an increased focus on registered tax practitioners, says Mr Taylor.
“There are two elements of the black economy: There are those people who just totally ignore the tax system itself, and there are those that do become part of the tax system but don’t pay the right amount,” Mr Taylor says.
“Now, the question is what involvement do agents have in that whole process. Where agents are involved, then clearly we think there should be an increased focus on agents ensuring their clients are fully compliant with the law. If they don’t, or if the client is not willing to, then the agent will need to have a very serious discussion with their clients, potentially getting to a circumstance where the agent may decline to act for that client if they know the client is not doing the right thing.
“Because they have an obligation to ensure that they act in the best interest of their clients. But that only applies where they are acting legally.”
Getting your house in order: limited licences
Beyond the tax issues, accountants with limited Australian Financial Services Licences (AFSL) are expected to be further scrutinised by the corporate regulator in relation to certain paperwork about their businesses, says Ms Stylianou.
She says ASIC is slated to go into “enforcement mode” soon on limited AFSLs that are not complying with the legislation. Turns out, some accountants are not keeping up with the relevant paperwork that is required by law as a licensee.
“Having a financial services licence is a big deal in that there is a lot of compliance that comes with it,” Ms Stylianou says. “So, some of the people who are new to being a licensee are not aware of or haven’t got around to complying with things like putting in the paperwork.”
Some of the forms required include statements that show the accountants are financially viable as well as their systems. They also have to submit forms that show they are compliant with the conditions of their licence and that they are giving the right advice to their clients.
In addition, Ms Stylianou expects ASIC to continue conducting shadow shopping on accountants, although this would mostly be for suspicious practitioners.
“We’ve been trying to prepare our members, and we’re going to be continuing to raise the awareness and help them. So there is going to be more enforcement around financial services, which we were expecting but now the time has come,” she says.
“Crunch time has come.”