Audit, voluntary disclosure and an agent's professional obligations
Priya is the engagement partner for Wattle Downs Pty Ltd, a private company with $14 million turnover that sells outdoor furniture. The ATO has issued a notice of assessment for 2022-23 denying $2.1 million of deductions claimed for 'brand licence fees' paid to an Isle of Man entity and has imposed a 50% shortfall penalty for recklessness. The 60-day objection period expires on 12 September 2025. While preparing the objection, Priya discovers that the licence agreement was backdated and that the Isle of Man entity is owned by the managing director's brother-in-law and has no employees; she also finds the same deduction was claimed in 2021-22 and 2023-24, which have not been audited. The managing director says 'we'll fight it - the accountants signed off on the structure and we can't change the past'. Wattle Downs cannot use the tax agent safe harbour because its turnover exceeds $2 million. The ATO audit is currently limited to 2022-23 and no examination notice has issued for the other two years.
1. Analyse the penalty outcomes of contesting 2022-23 versus making a voluntary disclosure for 2021-22 and 2023-24.
Read the worked answer
Base penalties (s284-90, Schedule 1 TAA 1953): failure to take reasonable care 25%, recklessness 50%, intentional disregard 75%. The ATO has applied 50%.
Voluntary disclosure reductions (s284-225):
- disclosed before the ATO tells the taxpayer it is examining the year - base penalty reduced by 80%;
- disclosed after notification - reduced by 20%.
2022-23 (audit underway): the best available outcome is 50% × 80% = 40% of the shortfall. Note the risk: the backdated agreement and the no-employee related party may support a reclassification to intentional disregard (75%), which even with a 20% reduction gives 60% - a disclosure can worsen the outcome if the conduct is re-categorised. Contesting successfully reduces the shortfall itself, which reduces the penalty proportionately.
2021-22 and 2023-24 (no examination notified): a full, specific disclosure before notification gives 50% × 20% = 10% of the shortfall. An anonymous or partial disclosure does not qualify - it must identify the years, amounts and conduct.
Other points: GIC is not reduced by a voluntary disclosure and runs until payment. The four-year amendment period for 2021-22 may be close to expiry, and if the ATO forms the view that documents were fabricated, it can amend beyond the four years for fraud or evasion. Quantify all three years before deciding, and sequence the disclosure so the 2022-23 objection and the other-year disclosures are consistent.
2. What are Priya's obligations under the TPB Code of Professional Conduct, and what should she do?
Read the worked answer
The Code of Professional Conduct (s30-10, Tax Agent Services Act 2009) requires honesty and integrity, compliance with the law, acting lawfully in the client's best interests, and not misleading the Commissioner. Preparing or lodging an objection asserting that the arrangement was genuine and arm's length, when Priya knows the agreement was backdated and the counterparty is a related entity with no employees, would breach the Code, expose her to sanctions (caution, suspension or termination) and risk criminal liability for knowingly making a false statement.
Correct steps:
- Put the findings to the client in writing: the backdating, the related party, the absence of benchmarking, the Part IVA and transfer pricing exposure, and the penalty benefits of a voluntary disclosure.
- Obtain instructions and document them.
- If the client insists on maintaining the false position, decline to lodge the objection on that basis and consider withdrawing from the engagement. The Code's confidentiality obligation does not prevent disclosure required by law, but there is no general obligation to report the client.
- Preserve documents - never destroy or amend the backdated agreement.
- Escalate within the firm and check professional indemnity exposure, since Priya's firm previously signed off the structure.
She is not required to concede: a properly arguable position (for example, that the fees were arm's length, or that Div 815 limits the adjustment rather than denying it) can still be run. She cannot, however, make a submission she knows to be untrue.
3. Advise on the objection process, the onus, and the dispute resolution options if the objection fails.
Read the worked answer
Objection. Lodge by 12 September 2025 (s14ZU). A late objection needs an extension of time, which can be requested and is determined by the Commissioner and, on review, the tribunal. The objection must state the grounds fully, because new grounds need leave later.
Onus. The taxpayer bears the onus of proving the assessment is excessive (s14ZZK). With a backdated agreement, a related counterparty with no employees and no benchmarking evidence, the licence fee claim is unlikely to succeed on its merits. The realistic issues are quantum (a Subdivision 815-B adjustment to an arm's length amount rather than full denial) and penalty.
Options if the objection fails:
- review by the Administrative Review Tribunal, which replaced the AAT on 14 October 2024 - merits review, new evidence permitted, application within 60 days of the objection decision, filing fee and possible costs orders;
- appeal to the Federal Court on the same 60-day timeframe;
- the ATO's in-house facilitation or independent review as a lower-cost alternative before litigating;
- a complaint to the Inspector-General of Taxation about process (not the merits).
Practical sequence: quantify the shortfall, GIC and penalty across all three years, decide the voluntary disclosure position before the objection deadline, then either narrow the objection to quantum and penalty or negotiate a settlement. If fabrication is established, expect amendment beyond the four-year period and possible referral for prosecution.