Robert Richards CPA looks at an intricate time-sensitive case involving a resources giant, and has a clear warning for accountants not to step into the legal realm.
Time out for Tax Office
The income tax law is full of instances where a taxpayer has to do something on or before some specified date.
Most obvious is the case where a taxpayer wants to make an objection against an Australian Taxation Office assessment, or lodge an appeal against a decision disallowing such an objection.
But apart from this, the tax law contains many other provisions when a taxpayer has to elect to do one thing or another, or to make a claim for some concession before some specified date.
An example of this is the loss transfer provisions.
Originally these provisions were contained within section 80G of the Income Tax Assessment Act 1936. That section was subsequently replaced by Division 170 of the Income Tax Assessment Act 1997.
With the introduction of consolidation, Division 170 was itself replaced (companies that form part of a consolidated group are automatically allowed to offset losses incurred by one of them against income derived by others in that group).
However, in all instances the law required or requires elections to be effectively made before the losses can be transferred. So far as section 80G and Division 170 were concerned, losses could only be transferred from one company to another if made by written agreement completed before the day of lodgement of the tax return of the company claiming the advantage of the transfer or within such further time as the Tax Office allowed.
So far as consolidations are concerned there are no loss transfer provisions as such. However, losses cannot be effectively transferred between companies unless those companies have agreed to consolidate. Companies agree to consolidate by lodging a notice of consolidation with the Tax Office on any day within the period beginning, or on the date specified in the choice, and ending on the day of lodgement of the first consolidated tax return or within such further time as allowed by the Tax Office.
One would think that provided a taxpayer had some justifiable excuse for delay, the Tax Office should grant them an extension of time as a matter of course. As Justice Hill said in Brown v F C of T (Full Court, 6 May 1999) in respect of the ability of the Tax Office to extend the time in which a taxpayer was able to lodge a notice of objection, the provision allowing the extension was 'an ameliorating provision designed to avoid injustice'.
However, the recent case of BHP Billiton Direct Reduced Iron Pty Ltd v Duffus, deputy commissioner of taxation (Federal Court, 2 October 2007) is an example of an unsuccessful attempt by the Tax Office to deny a taxpayer an extension of time in which to elect to recoup losses not so as to 'avoid injustice' but rather to penalise a taxpayer.
That case involved an attempt by a company in the BHP Billiton Limited group to transfer $89,848,367 of losses pursuant to the former Division 170 to another company within that group. The losses were incurred in 1999.
The two companies were 'out of time' when they elected to transfer these losses from one company to the other (lodging a notice in 2005).
The Tax Office refused to allow the taxpayers to make an 'out of time' election. This caused the taxpayers to seek an application for review of the Tax Offices decision from the Federal Court. As Justice French (who decided the case) said: 'The principal grounds upon which review was sought were that [the Tax Office] exercised [its] discretion for refusing extension of time for the improper purpose of penalising [one of the companies] for tax avoidance conduct in respect of which a penalty had already been imposed.'
The history of this matter is quite complex. In essence, the reason why there was such a significant length of time between the incurring of the losses and the attempt to transfer them was because the companies had for some time been in dispute with the Tax Office. Until resolved this would not have allowed the companies to determine whether or not losses should be transferred.
On the one hand, the company, which had incurred those losses, had been denied a deduction for expenditure made in respect of claimed research and development expenditure claims. However, those deductions were after substantial Tax Office review allowed. This caused that company to incur tax losses (which could be transferred).
On the other hand, the company, which sought to take advantage of those losses, had its income increased by a successful application by the Tax Office of Part IVA of the Income Tax Assessment Act 1936. The Tax Office reversed a claim made by that company for a write-off of a bad debt that it had incurred by reason of it making a loan to a BHP Billiton Ltd subsidiary.
It was not until those disputes had been resolved that it was practical to determine whether there was an $89,848,367 loss that could be transferred.
Justice French granted the application sought by the companies. He said this was because:
'Having regard to the history of the matter ... and the reasons for the decision to refuse the extension of time sought, it is my opinion that the decision makers discretion has miscarried. It has miscarried in part because the narrow focus of [its] reasons for refusing to extend time to allow [the companies] to enter into a transfer agreement has led [it] to overlook matters directly relevant to the exercise of discretion, including the legislative purpose of the loss-transfer provision, the absence of any adverse impact of the proposed extension of the administration of the Act and the repeatedly stated intention of the group to seek to transfer the losses in question on crystallisation of the relevant companys tax position. In addition, the discretion has miscarried because the decision maker took the view that the alleged culpable conduct on the part of [one of the companies] attracted a heavy weighting said to reflect the need to penalise to a greater extent the taxpayers involvement in serious non-compliance activities'.
Accordingly, Justice French ordered that the decision be quashed and that the matter be remitted to the Tax Office for reconsideration in accordance of the law.
I agree with the decision. I have a lack of sympathy with the Tax Office. It is all too often the case that it seeks to enforce time restrictions against taxpayers, while at the same time being incapable of complying with any time requirement imposed on it, or of administrating the tax law in a timely manner. That taxpayers suffer delays when dealing with the Tax Office more often than not is scandalous.
Furthermore, its ironic that while one of the companies allowed the Tax Office to make an adjustment to its assessable income 'out of time', the Tax Office on the other hand had no hesitation in seeking to enforce a time restriction against the same company.
Accountants warned
The various states have Acts (such as the New South Wales and Victorian Legal Profession Acts 2004) that prohibit those who are not legal practitioners from engaging in legal practice.
I have often been concerned that many accountants inadvertently (or sometimes even deliberately) contravene these Acts. As a consequence they might be subject to fines or even be guilty of contempt of court.
Examples of such possible breaches include instances where an accountant might draw up an agreement or even just prepare minutes that documents an agreement (even if only between related parties) without realising that is legal work.
I think it is quite common for accountants to prepare 'Division 7A' agreements without considering whether that too is legal work. I have even seen instances where accountants have gone so far as to prepare trust deeds and other complex agreements, believing perhaps correctly that they had a better understanding of what was required then any lawyer. But they cannot use that as a defence if prosecuted for breach of some 'legal profession type' Act.
That accountants should be concerned about such provisions is illustrated by the decision in Legal Practice Board v Computer Accounting and Tax Pty Ltd (Supreme Court of Western Australia, 13 August 2007).
There the board filed an application with the court asking that Computer Accounting and Tax be adjudged guilty of contempt in obtaining and acting on instructions to prepare a superannuation trust deed.
The board claimed that the firm had, in providing a superannuation trust deed, contravened that prohibition contained within the Western Australian Legal Practice Act, which prohibits someone from engaging in 'legal practice' unless that person is a 'certified practitioner'. That Act says (among other things) that a person is engaged in 'legal practice' if he or she 'prepares any deed, instrument, or writing relating to, or in any manner, dealing with or affecting' real or personal estate or any legal proceeding.
Legal practice
The court held that the production of the trust deed involved Computer Accounting and Tax 'directly or indirectly' performing, carrying out or engaging in work in connection with the practice of law. Even though the firm described the deed as a 'product' it was a 'complicated product'. In supplying the deed the firm was not simply performing a clerical function of completion of a commercially available document.
Tax agents
Computer Accounting and Tax seemed to have thought that it might have as a defence the fact that one of its directors was a registered tax agent. However, the court said that the registered tax agents provisions contained within the Income Tax Assessment Act 1936 do not 'authorise registered tax agents or any other person to engage in any conduct' prohibited by the Legal Practice Act.
Tax Office advice
The company argued that it should not be prosecuted for providing legal services since it relied upon representations made by the Tax Office indicating that it could provide those services. It referred to statements published by the Tax Office advising taxpayers how to establish superannuation funds.
In one statement the Tax Office said: 'The first thing you need to do is to have a trust deed prepared which evidences the existence of a trust and establishes the rules of operation for the fund. An accountant, solicitor or legal service company may prepare the deed [emphasis added]'.
In another publication, it said: 'If you are thinking about setting up a fund, it may be useful to consult a professional adviser before committing to this option. Many accountants, solicitors and superannuation specialists also have packages and kits to simplify the process.'
The court accepted that the Tax Offices statements caused the company to believe that in proving the deeds it was acting lawfully. However, that did not excuse the company. The Tax Offices advice was erroneous and could not be relied upon. I would add that here I have no sympathy for the company. Rather than relying on statements made by the Tax Office one should do ones own research.
Corporations
However, despite the fact that the court held that Computer Accounting and Tax had engaged in legal work, the court found that the company was not able to be prosecuted under the Legal Practice Act because so far as relevant that Act did not apply to corporations. It is not known whether the board will appeal that decision. However, this decision points to a loophole that I do not believe the board nor a government would tolerate.
Most accountants will not be able to rely on that loophole (presuming that any similar Act that applies in their jurisdiction would be similarly interpreted). They are not incorporated.
I know the case is causing concern to many entities that provide off-the- shelf trust deeds including superann-uation trust deeds.
But the case should also be of concern to accountants generally. They should appreciate that if they cross the border between providing accounting and providing legal services that they too might find themselves in breach of some Act (let alone what crossing that border might do to their professional negligence insurance policies).
The problem is that its a fine line. The border is obviously crossed when an accountant prepares documents (and I have already observed this is often the case as a matter of practice). I can even see an argument that the provision of tax advice, the preparation of objections, and the lodgement of appeals with either the Administrative Appeals Tribunal and (definitely) with the Federal Court is the provision of legal services. Accountants should be careful.
Robert Richards CPA is a solicitor specialising in tax.
Reference: December 2007, volume 77:11, p. 67 - 69
