A recent AAT decision in JSP Partners Pty Ltd (20 February 2008) may send a shiver through principals and partners in accounting firms where they use a service entity to employ their professional staff.

JSP was a firm of chartered accountants in Victoria. The firm employed their staff through an associated service entity. Both the practice company and the service entity had common directors and those directors supervised all of the tax work undertaken. The Tax Agents Board of Victoria refused to re-register JSP and subsequently cancelled their tax agents’ registration on the basis that they did not satisfy the requirements of s 251N. The issue with the way JSP was structured was that their professional staff were employed by their service company, that was not registered as a tax agent. Irrespective of the fact that the directors of the practice company managed the staff involved in the tax work, this was deemed not to comply with the Act.

S 251N provides that:

(1) A registered tax agent or a person exempted under section 251L shall not allow any person, not being his employee, a registered tax agent or, in the case of a partnership which is registered as a tax agent, a member of that partnership:

(a) to prepare on his behalf, either directly or indirectly, his own or any other income tax return or objection; or
(b) to conduct on his behalf, either directly or indirectly, any business of himself or any other person relating to any income tax return or income tax matter.

Through the AAT, the firm requested that the Tribunal exercise its discretion to refer the question of law arising from this action to the Federal Court. The Tribunal denied the request on the basis that the 1990 case in the Tax Agents’ Board of Queensland v Seymour, decided by the Federal Court, provided authority for the decision.

This is an unfortunate result when you consider the number of firms who employ staff through service entities and the increase in outsourcing services all of which may cause a breech of s 251N and put at risk the tax agents’ registration of those firms.

We understand that at this stage the Tax Agents Boards are not specifically looking for these type of cases however, where they become aware of such a circumstance, they will act on the basis of the current interpretation of s 251N. Firms should consider their positions and whether they need to make an adjustment to current employment arrangements. This is clearly an area that needs to be addressed either in the new Tax Agents Act or where this is delayed, then by amending legislation. The current provisions are clearly out of step with commercial practice and only put properly managed practice structuring at risk.

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