Tax Tip 250: Claiming Expenses you are not Entitled to Claim – a recent case

Discussion in 'Accounting & Tax' started by Terry_w, 23rd Oct, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    18th Jun, 2015
    Australia wide

    A fair few taxpayers claim expenses which they know, or ought to have known, they cannot claim. Often, they will try to blame the tax agent for this – they prepare the return and ‘I only sign it, I don’t know what I can and cannot claim’.

    Sometimes the tax agent is to blame, but this does not shift the responsibility away from the taxpayer. They taxpayer will be fined, if caught, and the amount of the fine will depend on the severity of the offence.

    A recent AAT case, Watts and FCT [2017] AATA 2030 illustrates this. The taxpayer claimed expenses which were not incurred at all, she also claimed expenses that she was not entitled claim. It also seems some expenses where denied because no evidence was presented as to what they related to – and this included property related expenses such as landlord insurance and body corporate fees. This doesn’t necessarily mean they were not incurred, but just that the taxpayer didn’t provide evidence that they were incurred.

    The penalties imposed on the taxpayer were 50% of the tax short fall amount.

    Interestingly the taxpayer’s tax agent has the same surname as them. One of the investment properties owned by the taxpayer was also insured in the name of the tax agent.

    The AAT had this to say about the tax agent:

    “I must also add that it was evident to me that Mr Gambhir Watts, who represented the Applicant at the hearing and identified himself as the Applicant’s taxation agent, was largely responsible for submitting deductions which were clearly not permissible under the law. Having stated during the hearing that he has been a tax agent for more than 15 years, I find Mr Watts’ conduct in claiming deductions which he either knew or ought to have known were impermissible both reckless and inexcusable.”

    Watts and FCT [2017] AATA 2030
    Watts and Commissioner of Taxation (Taxation) [2017] AATA 2030 (31 October 2017)

    Since I wrote the above draft it appears that the tax agent, now former, Mr Watts has had a run in with the Tax Practitioners Board (TPB)

    The TPB terminated the tax agent registration of both Taxation Guru Pty Ltd and Gambhir Watts on 19 September 2019. You can read about this in a recent Administrative Appeals case where a stay of deregistration was requested and refused.

    Taxation Guru Pty Ltd and Gambhir Watts and Tax Practitioners Board [2019] AATA 3249 Taxation Guru Pty Ltd and Gambhir Watts and Tax Practitioners Board [2019] AATA 3249 (4 September 2019)
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    18th Jun, 2015
    A few walk not wanted us to be diligent. Or accurate or even honest sometimes. We always recommend second opinions to support our advice or encourage a private binding ruling. But we wont prepare and lodge something we consider may be incorrect. A client cannot instruct us to lodge something we know to be potentially incorrect and tell us that they take the risk. We can be found liable for reckless conduct.

    I have encountered two recent issues. ATO have approached as as a former tax adviser seeking information under s264 notice concerning advice we have given. As a tax adviser we have no duty of confidentiality that can be used to limit a s264 notice unlike some legal advice. I say some since some tax advice may be not subject to legal professional privilege.

    I suspect (since privacy laws prevent us being told what the issue is) it relates to actions for recklessness or even evasion as in both cases the client had not wish to act on our advice but wished to act contrary. In each case we had given clear advice that the client refused to accept for a large value high risk claim. I can only guess they then lodged and got audited. As part of the audit the ATO may have wished to determine how penalties should be applied. The ATO likely see that a tax agent was engaged and ceased and another was used and put 2 and 2 together and went fishing.
    MRO likes this.