When we began this series on the tax angle to the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission), we were concerned that Justice Hayne would chastise us for taking the final report out of context. Yet, we are not alone. It was pleasing to read how QANTAS is determined to learn from the lessons from Commission. Like QANTAS, this part of our series is about “trust” – the trust of clients in their (tax) advisers. Substituting “tax advisers” for “financial advisers”, “mortgage brokers” and “intermediaries” in the Commission’s final report immediately shows the potential breadth of application of the principles in that report to tax advisers.
Key takeaways and action items
- Tax advisers should heed the reminder of minimum community expectations (not to mention their professional standards obligations) for professionals: “the conduct has … fallen short of the kind of behaviour the community not only expects … but is also entitled to”.
- Tax advisers should likewise heed the warning that, as long as they stand to benefit financially from clients acting on the advice that is given, their interests conflict with those of the client.
- Tax advisers should, as they are bound to do under professional standards and the law, be aware of and avoid conflicts of interest with their clients. Clients should also be aware of the potential for conflicts and be prepared to call these out to help eliminate them.
A profession
As professionals, tax advisers are bound to a code of ethics or conduct, some enshrined in the law (for example, Subdivision 30-A of the Tax Agents Services Act 2009 (Cth) (TASA)),
others in a body of standards enforced by the relevant professional bodies (for example, Australian Professional and Ethical Standards Board (APES) 110 – Code of Ethics for Accounting Professionals (APES 110)) and yet others in a combination of statutory and common law in conjunction with rules enforced by the courts and professional bodies (for example, the acts, regulations, rules and case law governing solicitors’ conduct, for example. In New South Wales, the applicable rules can be found here). Common to all professionals is the expectation by the community of minimum conduct, often enshrined in the relevant codes and laws.
Remuneration [1]
As clients restricted their external tax adviser spending during the global financial crisis, tax advisers responded with reduced scope and “innovative” fee arrangements. In several areas (particularly around research and development (R&D) and certain indirect tax offerings), those fee arrangements were a contingent fee where the tax advisers are remunerated on the tax outcomes achieved (success fees), benefiting both clients and tax advisers alike.
The Commission’s warnings on conflicted remuneration should be heeded by tax advisers. The tension highlighted by the Commission is the sacrifice of client service and standards of service for sales and revenue. And despite their appearance, success fees can create a misalignment between adviser and client, as evidenced in the Commission’s findings. One major tax adviser has recently received high profile coverage.
The Commission made similar observations about the impact of individual adviser remuneration. Before the introduction of the tax promoter rules, it was not uncommon for employees to be incentivised through bonuses to identify or adapt ideas for use at multiple clients. These have largely died off over the years despite high profile tax schemes such as those disclosed in the Paradise Papers. However, the variable remuneration of employees remains, and the more “sales” that an employee tax practitioner can demonstrate, the more compelling his or her case is for a bonus. The key message of the Commission is that the way in which those sales occur, having regard to compliance with the law and professional and community standards, is also important.
The Commission’s message on managing the conflict between the duty to the client and self-interest is clear: it cannot be done. “[E]xperience shows that conflicts between duty and interest can seldom be managed; self-interest will almost always trump duty.” In that light, the Commission recommended changes to the law.
As professionals, a change of law is not required – tax advisers are already under an obligation to put the interests of clients above their own self-interest. Section 210 of APES 110 sets out an accountant’s obligations in relation to conflicts of interest between adviser and client. Tax agents, in particular, are required to act in the best interests of their client under section 30-10 of the TASA. Rule 12.1 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 prohibits solicitors acting for a client where there is a conflict between the duty to serve the best interests of the client and the interests of the solicitor or an associate.
So if the law and professional rules are clear, the real question becomes whether tax advisers are complying with those obligations. As the Commission’s findings demonstrate, eternal vigilance and supervision are required, particularly if the professions wish to avoid the same level of ire levelled at financial institutions by the public.
Disclosure
The Commission made much of the power imbalance between financial institutions and their intermediaries on the one hand and consumers on the other.
Mismatch in expectations
A stark example of this can be found amongst our experiences with R&D disputes. Smaller taxpayers, often starting out in a business venture, found themselves applying for R&D concessions. Engaging professional tax advisers, they made claims and, under self-assessment, received tax refunds. However, on audits, they found themselves having to pay back hundreds of thousands of dollars, the difference between the continued survival of the business and bankruptcy.
A common element in all of these cases is the insufficiency of documentary proof supporting the claim. The common expectation of taxpayers in these cases was that they had sought the advice and assistance of tax advisers to make the claims; they assumed that the claims were supported by the necessary evidence.
However, engagement terms always disclaimed proof – the client was responsible for ensuring there was sufficient proof of the amount being claimed whereas the client assumed that the tax adviser had checked for proof in coming up with the amount claimed.
Responsibilities of tax agents
Clients could rightly argue that tax advisers in such situations were selling what the tax advisers could not deliver.
However, the tax law clearly makes taxpayers responsible for their own tax affairs. Tax agents are not responsible for a client’s tax affairs, notwithstanding they may have been instrumental in the preparation of the client’s tax returns. Although a claim of negligence or breach of contract could be commenced, a well-crafted engagement letter would mean these are not successful. Even if successful, professional standards schemes and engagement letters ensure there is a cap on liability.
The “all care, no responsibility” aspect to the relationship between tax advisers and clients creates further tensions on the duty to avoid conflicts. If tax advisers are not responsible (or have limits on their responsibility) for the tax impact on clients, there is arguably a further misalignment of interests.
Vertical integration
The Commission’s final report notes:
It is well known that the larger professional services firms have actively expanded the extent of their vertical integration. There is merit in observing the impact the self-interest created by such vertical integration and its dominance over the client’s interests has had on the banks. “[B]ecause the motivation for the [vertical] integration is, ordinarily, a self-interested one, the congruence of the [vertical integration] with the duty to act in the interests of the [client] must be closely examined.”
Eternal vigilance
Ultimately, though, the most effective vigilance and supervision will come from clients. A client’s awareness of the potential for the tax adviser to suffer from self-interest, for that self-interest to conflict with what is in the best interests of the client, and the willingness to call out such conflicts and require measures to not just manage such conflict but eliminate it are important tools.
This vigilance, supervision and recognition of the potential for conflict should be integral parts of taxpayers’ tax governance policies, which we will look at in Part Four of our series.
[1] In the interests of full and frank disclosure, the authors of this paper have worked in tax advisory firms that charged fees on a contingency basis, including fees directly related to the success of tax-related matters. Authors who were partners of those firms indirectly benefited from those arrangements. Some of the authors also worked in such firms when bonuses were awarded for the “sale” of tax-related ideas to clients, and received such bonuses. Gilbert + Tobin charges fees on a contingency basis for transactional work, but does not charge contingent fees based on the success of matters involving the ATO or other tax authorities (such as objections and disputes).
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