Terry Baucher explains the importance of having your money and tax affairs handled by a professional with the right credentials

By Terry Baucher*

“There’s no art to find the mind’s construction in the face. He was a gentleman on whom I built an absolute trust.”

Investors in Ross Asset Management are probably ruefully recalling King Duncan’s epitaph for the executed Thane of Cawdor after the Serious Fraud Office laid charges against David Ross last week. 

He is alleged to have run a Ponzi scheme which overstated investment positions by more than $380 million.

So far, the liquidators for Ross Asset Management have only found $11 million of the $450 million of assets that was supposedly under management. 

The collapse has affected at least 1,200 Ross Asset Management client accounts.

These investors almost certainly have over-declared income on the basis that the investments they thought they had made appear to have never existed.

Can these investors get back any income tax they may have overpaid?

This should be possible as the Commissioner of Inland Revenue has the discretion to amend any assessment “in order to ensure its correctness”. The collapse of Ross Asset Management would be an obvious example where the Commissioner can make the necessary amendments.  

However, in order to make the relevant application, an investor must supply details of what the correct position should have been. This is going to take some time whilst the liquidators complete their work. 

In the meantime the Inland Revenue’s position is that Ross Asset Management investors should file any outstanding tax returns to avoid potential late filing penalties. They can separately file any Ross Asset Management related disclosure needed at a later date once they have determined their true position. 

The Ross Asset Management debacle highlights how much trust drives much of what we do in life and business, and the risks when that trust is betrayed.

These risks are obviously very pronounced in the financial services sector because of the sums involved.

The risks also exist amongst accountants and tax agents who either have access to client funds, or are promoting tax planning opportunities which are too good to be true.

It’s surprisingly simple to become a tax agent: anyone can apply to become a tax agent if they are responsible for preparing the income tax returns of 10 or more taxpayers and they are either in public practice, or in the business of preparing income tax returns. At present no formal qualifications or membership of a professional body is required. 

This means that some potentially “interesting” characters can apply to be tax agents. One such person is Carl Petterson, a prisoner at Christchurch Men’s Prison, who applied to be a tax agent after helping other inmates with their tax returns. 

It didn’t end well for Mr Petterson, particularly after gang members in prison put him under pressure to reveal his secrets and enable them to make false claims. It’s not the sort of client pressure I would like to experience.

Unsurprisingly, Petterson was caught making fraudulent tax refund claims totalling $50,000, and received an additional one year jail term.

Petterson’s offending was relatively unsophisticated and easily detected. At the other end of the spectrum, two Wellington chartered accountants David Rowley and Barrie Skinner were found guilty of tax evasion in August 2012. They were jailed for eight years and eight and half years respectively, the longest sentences yet given for tax evasion. 

Rowley and Skinner prepared and filed fraudulent income tax and GST returns on behalf of their clients. These returns included claims for invoices from Rowley and Skinner for services supposedly provided.   

In fact these services were never supplied and instead Rowley and Skinner would split the resulting refund with their clients. Over a five year period the pair claimed fictitious expenses totalling more than $9 million, pocketing almost $2.3 million in the process. 

As for Rowley and Skinner’s clients, they would have been expected to pay the tax defrauded, together with use of money interest (at rates of up 14.24%), and late payment penalties.

They may even be charged shortfall penalties of up to 150% of the tax evaded.

Like the fantastic returns boasted by Bernie Madoff, Rowley and Skinner’s clients have found out the hard way that the tax savings they were promised were too good to be true. 

Despite their frauds, Petterson, Rowley and Skinner are the exceptions which prove the rule that the huge majority of the approximately 5,300 tax agents handling the affairs of almost 2.4 million taxpayers are responsible and hardworking professionals. 

There are plenty of reasons why someone would engage a tax agent: quite apart from the tax agent taking over handling the Inland Revenue (correspondence typically gets sent to the tax agent rather than the taxpayer), the due dates for filing income tax returns and payment of terminal tax are extended. 

For a taxpayer with a 31st March year end that means the due date for filing a return is extended from 7th July to the following 31st March. 

Furthermore the terminal tax date is extended by two months to the following 7th April. In addition there’s the hopefully significant benefit of gaining access to the tax agent’s expertise. But as the case of Rowley and Skinner demonstrates this can be a two edged sword.

So the lesson is, as always, to be very careful who you trust with your money and your tax affairs.

Tax agents who are members of an Inland Revenue Approved Advisors Group such as the New Zealand Institute of Chartered Accountants, CPA Australia and the Accountants and Tax Agents Institute of New Zealand are most likely to have the procedures and skills to manage your affairs honestly and efficiently.

In the same way as you might choose a financial planner, you should check out the client testimonials, be clear about what type of services you are after and don’t get too swayed by the promise of fabulous returns. 

Good luck!
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*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »