The decision of the Administrative Appeals Tribunal (AAT) in Sinclair v FC of T [2010] AATA 902 has thrown up some uncertainty about the level of assurance that taxpayers need to obtain to avoid being subject to tax penalties.

Tax law advice

The case concerned a Melbourne stockbroker and property developer who took a deduction based on advice from his tax accountant. The Australian Taxation Office (ATO) denied Mr Sinclair's deduction and imposed a penalty equal to 25 per cent of the tax liability on the basis that Mr Sinclair had failed to take reasonable care in preparing his tax return. The AAT upheld the penalty, finding that Mr Sinclair had failed to take reasonable care because he had simply relied on the advice of his accountant. Instead, the AAT ruled, Mr Sinclair should have sought the advice of a tax lawyer.

While the decision highlights the need for taxpayers to seek expert tax law advice, it has raised a number of issues. One of these is that the AAT did not qualify its statement and gave no guidance on whether (and if so, when) the advice of a tax agent would ever be sufficient.

What is reasonable care?

Further uncertainty arises because of the subsequent decision in Shin v FC of T [2010] AATA 1012 in which the AAT held that the taxpayers, an elderly Korean couple with little business experience and who spoke little English, had exercised reasonable care in reliance on the advice of their tax accountants.

While the two decisions appear to be in conflict, they merely highlight the principle that the 'reasonable care' standard is judged by reference to what a reasonable person with all the taxpayer's circumstances (i.e. knowledge, education, experience and skill) would do. In other words, a higher standard of care is expected of taxpayers with a degree of skill and experience that should put them on notice that expert advice is needed.

It is expected that accounting bodies will lobby the ATO and government to provide clarity on the matter. In the meantime, taxpayers are advised to seek advice from a tax lawyer on any significant or complex transactions.