By Jack Stuk (Principal, and President of NTAA Ltd) and Eli Bursky (Lawyer)
A recent decision of the Administrative Appeals Tribunal highlights that tax agents may be severely sanctioned for private misconduct unrelated to their tax agent work.
In Kishore v Tax Practitioners Board 2017 ATC ¶10-448, the Tax Practitioners Board (the Board) terminated the registration of a tax agent who had breached a restraint of trade clause in his employment contract. The case serves as a cautionary tale to employee tax agents who may be thinking about starting their own business and a reminder to employers of the “strategic legal tools” available to stop them.
When tax agent Kamal Kishore resigned from his employer, Charltons CJC Pty Ltd (Charltons), to start his own firm he had no reason to think his tax agent registration would be adversely affected, let alone terminated. Kamal’s competence as a tax agent had never been questioned by the Board and any disagreement with his former employer was surely a matter unrelated to his professional standing as a registered tax agent.
The Board thought otherwise and terminated Kamal’s registration as a tax agent after a complaint lodged by Charltons. The Board considered Kamal had breached the Code of Professional Conduct (the Code) by not acting “honestly and with integrity” towards Charltons as his then employer when he left the firm.
Kamal applied to the AAT for review of the Board’s decision to terminate his registration. In its decision, the AAT agreed with the Board that tax agents can be sanctioned for private conduct unrelated to their work, but in this matter considered that a written caution was more appropriate than deregistration: Kishore v Tax Practitioners Board  AATA 764 (first judgment) and Kishore v Tax Practitioners Board 2017 ATC ¶10-448 (second judgment).
Authority to sanction tax agents for private conduct
There are two possible sources of authority to sanction tax agents for private conduct.
The first is s30-15 of the Tax Agents Services Act 2009 (the Act), which provides that the Board may sanction a tax agent if it is satisfied that the agent has failed to comply with the Code. The sanctions range from a written caution to suspension or termination of the tax agent’s registration.
The Code, which is in s30-10 of the Act, imposes a series of obligations that generally relate to a tax agent’s professional conduct, such as the obligation to avoid conflicts of interest, to be competent and to maintain professional indemnity insurance. However, the Code also imposes an obligation to “act honestly and with integrity”, which the Board relied upon to terminate Kamal’s registration.
The second source of authority is s40-5 of the Act, which allows the Board to terminate a tax agent’s registration if:
- one of the events in s20-45 occurs, which are the following: the agent is convicted of a serious tax offence or an offence involving fraud or dishonesty, the agent is penalised for promoting a tax exploitation scheme or for implementing a scheme that has been promoted based on conformity with a product ruling in a way that is materially different from the ruling, the agent becomes an undischarged bankrupt or is sentenced to a term of imprisonment, or
- the agent ceases to meet the requirements for registration as a tax agent, which is relevantly the requirement to be a “fit and proper person”. In determining whether the agent is such a person, the Board must have regard to the criteria in s20-15, which are essentially whether any of the above s20-45 events have occurred in the past five years.
After Kamal resigned from Charltons, the firm applied to the Supreme Court of New South Wales to restrain Kamal (and his two colleagues) from breaching their contractual and fiduciary obligations and to seek damages arising from the breaches.
Justice Pembroke not only decided that Kamal and his co-defendants had breached their contractual and fiduciary obligations — which they themselves admitted — but also made a series of damning findings about their conduct.
The AAT listed at  of the first judgment the following specific findings made by Pembroke J:
“(a) Mr Kishore had breached his contract of employment by failing to comply with a valid restraint of trade clause and failing to abide by a contractual duty of fidelity;
(b) Mr Kishore had breached his fiduciary obligation of loyalty to his employer;
(c) Mr Kishore’s conduct (and that of his co-defendants) was ‘characterised by dishonesty, misrepresentation and intrigue’;
(d) Mr Kishore and his co-defendants were ‘engaged in a strategy of deception’ with respect to the establishment of a new business, which ‘effectively diverted from Charltons the business opportunity’ of various clients;
(e) ‘The admissions made and the evidence tendered, also satisfy me generally that after termination, Fitzgerald and Kishore assisted each other, and after 13 July 2012 — assisted Intuitive [the new firm], to solicit and entice away from Charltons a significant number of existing clients of the firm’;
(f) Mr Kishore’s conduct (along with that of his co-defendants) caused substantial loss to Charltons.”
Kamal’s main argument
Kamal’s primary argument before the AAT was that the Code only requires tax agents to act honestly and with integrity in the “provision of tax agent services”. As the conduct was not itself the provision of these services, it followed there could be no breach of the Code.
The AAT rejected this argument, noting the statutory guide to Div 30 of the Act states that the Code “regulates your personal and professional conduct as a registered tax agent” (emphasis added). The AAT said at  the purpose underlying the entire Code is to uphold all aspects of a person’s conduct as a registered tax agent, whether that conduct is personal conduct as a registered tax agent, or professional conduct as a registered tax agent. The AAT added at : “That the Code reaches beyond conduct undertaken in relation to the provision of tax agent services does not conflict with the object of the Act as specified in s 2-5. It is by requiring appropriate standards in all aspects of a person’s personal and professional conduct as a registered tax agent that the Code seeks to ensure that tax agent services are provided to the public ‘in accordance with appropriate standards of professional and ethical conduct’.”
Having decided that the Code may apply to private conduct, the AAT considered in its second judgment whether Kamal’s conduct breached the obligation to act honestly and with integrity. In finding that the conduct breached this obligation, of “particular concern” to the AAT was the conduct detailed at (c) and (d) of the first judgment (see above), namely that the conduct was “characterised by dishonesty, misrepresentation and intrigue” and that Kamal and his co-defendants (also former employees of Charltons) were “engaged in a strategy of deception” with respect to the establishment of their new business.
The AAT was also concerned that Kamal and his co-defendants had, in the months leading up to their departure from Charltons, “provided accounting services to persons or entities who were not existing clients of the firm; that they did not bill those persons or entities on behalf of Charltons; and that they effectively diverted from Charltons the business opportunity that those clients represented”. The AAT said at  this was “a clear case of Mr Kishore putting his own interests ahead of those of his employer, even though he was bound to do the opposite, not only by his contract of employment but also by his fiduciary obligation of loyalty”.
Despite finding that the conduct breached the Code, the AAT declined to uphold the Board’s termination of Kamal’s registration and substituted a decision that he be given a written caution. The AAT said that termination should be “reserved for the most serious cases of wrongdoing” and this case was not in that category. In arriving at this conclusion, the AAT considered a number of extenuating circumstances, including that Kamal felt aggrieved by Mr Charlton’s treatment of him in failing to honour (as far as Kamal was concerned) a promise that Kamal would be offered equity and partnership in the Charltons business, that no client of Charltons or the new firm suffered any financial loss or disadvantage and that Kamal had an otherwise unblemished professional history.
Working against Kamal were his lack of contrition and the concomitant “risk that if Mr Kishore is once again confronted with an ethical dilemma where his personal interests are in conflict with his obligations to others (as was the case in his dealings with ‘shadow clients’, where he elevated his own interests above those of Charltons) he may protect his own interests, to the possible detriment of his clients.” The AAT acknowledged this as a “possibility”, but a “slim one … considering Mr Kishore’s otherwise satisfactory professional conduct over a period of 15 years or more”.
In this case, the AAT confirmed that private conduct may demonstrate behaviour that is inconsistent with maintaining the trust of the community in the tax system and those that serve it and hence breach the Code.
A question raised by the case is where the line should be drawn between private conduct that warrants scrutiny by the Board and behaviour that should be off-limits. While this is not an easy question to answer, any conduct that a Supreme Court judge finds is “characterised by dishonesty, misrepresentation and intrigue” is likely to warrant scrutiny and serious sanctions for the errant tax agent.
Clearly, if Charltons had been successful in having Kamal’s registration terminated, Charltons would have removed a major competitive threat, while Kamal and his colleagues remained deregistered. During this period of deregistration, the new practice could not perform tax agent services, which would have undermined its functionality and assisted Charltons in retaining its existing clients and perhaps the new firm’s “shadow clients”.
Despite the AAT’s decision, in the right circumstances the Code could still be used to curtail the over-aggressive ambitions of a conniving, aggrieved and ungrateful former employee tax agent, at least for a period if the agent’s registration is suspended. While termination of registration would now seem an unlikely outcome from a complaint to the Board, much will depend upon the facts of the particular case concerned as to the likely sanction.
This article was published in CCH Tax Week (21 March 2017).