A conflict of interest arises when you have a personal interest or a duty to another person which is in conflict with the duty owed to your client in your capacity as a registered tax practitioner.
The Code of Professional Conduct (Code) does not prohibit you from having conflicts of interest. However, you must have adequate arrangements in place to manage any conflicts of interest that may arise relating to the activities that you undertake as a registered tax practitioner. This is item 5 of the Code.
A conflict of interest may be an actual conflict or a potential conflict, and it can arise before you accept an engagement or at any time during the engagement. You have a duty to manage both actual and potential conflicts of interest.
How can you manage conflicts of interest
You should use your professional judgment to determine the most appropriate method to identify and manage a particular conflict. A number of mechanisms could be used, such as:
avoid – you may decide to decline to act for the client in situations where you will be unable to manage the conflicts of interest regardless of arrangements put in place
control – this involves identifying, assessing, evaluating, deciding and implementing an appropriate response to manage conflicts of interest. For example, depending on the particular circumstances, you may be able to control a conflict of interest by isolating the persons in your practice who will provide the relevant advice from those who are privy to the material information which may influence the advice
disclose – you should sufficiently disclose conflicts of interest to your clients in a manner which will enable them to make an informed decision and give them a reasonable time to assess how the conflict may affect the services being provided and about its management.
Examples involving conflicts of interest
The following examples illustrate how conflicts of interest could generally be managed in some common situations, noting that consideration will need to be given to the specific facts and circumstances.
Conflicts of interest arises by recommending software
Situation
Lance operates a small retail business and wishes to purchase a software package to assist him in managing his business affairs. Lance seeks advice from his long serving registered tax agent, Pop about a suitable software package.
Pop advises Lance to purchase ABCD Technology’s ‘evolution software package’, a cloud-based software system. Pop receives a commission from ABCD Technology for every client that Pop refers to purchase one of ABCD Technology’s software packages.
Conflict of interest
Pop has a financial incentive in referring Lance to purchase one of ABCD Technology’s software packages as opposed to another entity’s software package and, therefore, has a conflict of interest in the circumstances.
Managing the conflict of interest
Pop appropriately discloses his conflict to Lance by advising him that he will receive a commission if he purchases ABCD Technology’s evolution software package.
In this case, Pop has satisfied his obligations under Code Item 5 by disclosing his conflict of interest to Lance when referring him to ABCD Technology.
Marital break-up creates a conflict of interest
Situation
Terrence and Sandra have recently divorced. They have used the same registered tax agent, Craig, for the past seven years. In preparing their respective income tax returns for the current financial year, it becomes apparent to Craig that the claiming of a rebate or offset by Terrence would prevent the claiming of the rebate or offset by Sandra.
Conflict of interest
Craig has a conflict of interest if he acts for both Terrence and Sandra because they have competing interests in relation to the claim for a rebate or offset. Additionally, a perceived conflict may arise in regard to one or both of the clients holding any belief that Craig may not be able to objectively provide appropriate and impartial services to each of the clients.
Managing the conflict of interest
Craig appropriately discloses his conflict of interest to Terrence and Sandra and receives a waiver from both parties in relation to the conflict.
In applying his professional judgment, Craig determines that the rebate or offset is more properly claimable by Terrence. However, Craig also identifies that he is in a position wherein his duty to Sandra is in conflict with his duty to Terrence.
In this case, Craig has satisfied his obligations under Code item 5 by appropriately disclosing his conflict of interest and obtaining a waiver from Terrence and Sandra prior to preparing their respective income tax returns.
Alternative scenario
If Craig were unable to obtain the relevant waiver from Terrence and Sandra, it is unlikely that he would be able to adequately manage the conflict of interest, regardless of other arrangements that could be put in place, and should consider declining to act for one or both of Terrence and Sandra.
Personal gain from a referral creates a conflict of interest
Situation
Anthony is a long time client of Lucia’s, a registered BAS agent. Anthony asks Lucia to assist him to identify an appropriately qualified tax agent to provide advice in relation to his self managed superannuation fund. Lucia is aware of a number of suitable registered tax agents but refers Anthony to XYZ Accounting Pty Ltd because she receives a fee for the referral from this firm.
Conflict of interest
Lucia has a financial incentive in referring Anthony to XYZ Accounting Pty Ltd as opposed to another registered tax agent and, therefore, has a conflict of interest in the circumstances.
Managing the conflict of interest
Lucia appropriately discloses her conflict to Anthony by advising him that she will receive a commission if he engages the services of XYZ Accounting Pty Ltd.
In this case, Lucia has satisfied her obligations under Code item 5 by disclosing her conflict of interest to Anthony when referring him to XYZ Accounting Pty Ltd.
Potential conflict of interest arises from a personal interest
Scenario
Christina is a registered tax agent with a tax (financial) services condition, and has a number of clients, one of which is Cold Cream, a large ice-cream retailing franchise. Christina has an ownership interest in Cold Cream. Christina is approached by Ice Cold, a rival ice-cream retailing franchise, to provide tax (financial) advice services.
Conflict of interest
Christina has a potential conflict of interest if she provides tax (financial) advice services to Ice Cold because her ownership interest in Cold Cream could impact her ability to act in the best interests of Ice Cold.
Managing the conflict of interest
Christina appropriately identifies and discloses her potential conflict to Ice Cold by advising of her ownership interest in Cold Cream. In this case, Christina has satisfied her obligations under Code item 5 by disclosing her potential conflict of interest to Ice Cold.
Alternative scenario
Christina determines that, in the circumstances, she cannot objectively provide tax (financial) advice services to Ice Cold and therefore the conflict of interest is unmanageable and the only way to adequately manage the conflict will be to avoid it altogether. Accordingly, Christina declines to act for Ice Cold. In this case, Christina has satisfied her obligations under Code item 5 by disclosing her conflict of interest, and avoiding the conflict by declining to act for Ice Cold.
Representing two clients in a potential merger transaction creates a conflict of interest
Situation
Victor Lance Accounting, a large accounting firm and registered tax agent, is engaged by Caxton Pty Ltd and Devon Pty Ltd, two publicly listed companies, to provide confidential tax advice in relation to a potential merger transaction with one another.
Conflict of interest
Victor Lance Accounting has an actual conflict of interest if it acts for both Caxton Pty Ltd and Devon Pty Ltd because both companies are seeking confidential tax advice from the same registered tax agent.
Managing the conflict of interest
Victor Lance Accounting appropriately discloses the conflict of interest to both Caxton Pty Ltd and Devon Pty Ltd. Further, Victor Lance Accounting advises each of the companies of how it intends to control and avoid the conflict of interest. Relevant strategies include identifying and evaluating the conflict of interest, implementing and enforcing strict policies and procedures in relation to controlling the conflict, and assigning separate teams in different offices to work for the two companies. Details relevant to each of the companies will not be discussed by the relevant teams. Finally, Victor Lance Accounting obtains a waiver from each of the companies in relation to the conflict.
By taking these steps, Victor Lance Accounting has satisfied its obligations under Code item 5 to have in place adequate arrangements for the management of the conflict of interest.
Recommending audit insurance creates a conflict of interest
Situation
Luis is a registered tax agent and works for a large accounting firm. The accounting firm has a tax audit insurance policy with ABC Pty Ltd. This policy covers clients who sign up to the policy for the professional fees associated with dealing with tax audits, enquiries, investigations or reviews of tax returns lodged with the Australian Taxation Office.
Luis is approached by David, a new client of the accounting firm, regarding the lodgement of his tax return. As part of the service offered to David, Luis advises David that he should have tax audit insurance and David agrees to be added to the policy. As a result, Luis will receive a portion of the commission received by the insurance broker who sold the policy to the accounting firm for the addition of David to the policy.
Conflict of interest
Luis has a financial incentive for referring David to the tax audit insurance policy as he will receive a commission for the addition of David to the policy and will have his fees paid in the event of an audit. Therefore, Luis has a conflict of interest in the circumstances.
It also raises questions as to whether Luis has acted in the best interests of his client (a requirement under Code item 4) and whether the appropriateness of the policy to David’s circumstances was considered.
Managing the conflict of interest
Luis appropriately identifies and discloses the conflict to David by advising him that he will receive a commission if David decides to take out the tax audit insurance. As part of his duty to manage conflicts of interest, Luis also discloses to David the amount of the commission that he will receive.
In this case, Luis has satisfied his obligation under Code item 5 by disclosing his conflict of interest to David when referring him to the tax audit insurance policy.
Failure to have adequate arrangements
If you do not have adequate arrangements for managing conflicts of interest, the TPB may find that you have breached the Code and may impose sanctions for that breach.
Comparison with the Corporations Act for tax agents with a tax (financial) advice services condition
The TPB recognises that the Corporations Act 2001 (Corporations Act) requires that:
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a financial services licensee must have in place adequate arrangements for the management of conflicts of interest that may arise (either wholly or partially) in relation to activities undertaken by them or a representative in the provision of financial services
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if there are competing interests between the advice provider and the client, the provider must give priority to the client’s interests when giving advice.
However, there are some distinctions between obligations under Code item 5 and those under the Corporations Act which are summarised in the table below:
|
Code item 5 |
Corporations Act |
|---|---|
|
Requires arrangements to be in place to manage actual or potential conflicts of interest that may arise |
Narrowly focusses on how to deal with an actual conflict of interest |
|
Requires that arrangements must be in place to avoid, control and/or disclose actual or potential conflicts of interest |
Requires client’s interests to be prioritised in the event of an actual conflict |
|
Applies broadly to the personal and professional conduct in relation to the activities undertaken as a registered tax (financial) adviser |
Applies only to those providing personal advice to retail clients. |
Last modified: 24 February 2020