Small firms warned over financial advice

Businesses could be forced to seek legal advice on complicated tax affairs after a tribunal found that a property developer who relied on his accountant’s advice had not exercised reasonable care.

Melbourne stockbroker and property developer Richard Sinclair was hit with a $24,750 fine after relying on his accountant’s advice as proof he had taken “reasonable care” in preparing his tax return.

Sinclair’s accountant had advised him that a mortgage interest prepayment of $99,000 – which he agreed to pay when he purchased a mortgaged investment property – was tax-deductible.

The ATO disagreed, finding the money was not spent in generating his assessable income, and its decision was affirmed by the Administrative Appeals Tribunal. Sinclair was hit with a 25% penalty on the $99,000 tax shortfall, totaling $24,750.

Under tax law, a 25% penalty is imposed on taxpayers when a shortfall results from their failure “to take reasonable care to comply with a taxation law”.

The personal attributes of the taxpayer are taken into account in assessing what is objectively reasonable. In Sinclair’s case, the fact that he is mature-aged and works as a stockbroker is significant.

The tribunal found a penalty was properly imposed because “a reasonable person with Mr Sinclair’s attributes would have sought legal advice before he lodged his taxation return”.

According to AAT deputy president Stephanie Forgie, Sinclair’s accountant “could not give legal advice regarding the taxable implications of the arrangements” because he was not a lawyer.

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, says the AAT decision could hit any taxpayer who seeks advice from their accountant rather than a tax lawyer.

“To draw a line between whether you’re an accountant or a lawyer is completely inappropriate and flies against policy and a long-standing principle of tax advice being provided by both,” he says.

The Institute will lobby the ATO and the government in the next few weeks to seek assurance that they do not need to support the AAT’s decision.

According to tax expert Paul Clements, start-ups and small businesses should continue to rely on the advice of tax agents as they are licensed to provide tax advice.

“In saying that, they should also be discerning. If the advice doesn’t feel robust or they’re concerned, they should seek a second opinion. If the issue is complex, legal advice should be warranted,” he says.

An ATO spokesperson says having tax advice is only one of the factors it takes into consideration when determining penalties and should not be regarded as a “get-out-of-jail-free card”.

“From our point of view, we tend to take into consideration all things – circumstances, compliance history, things like that,” he says.