Chapter 18

Staying on the Right Side of the Law

In This Chapter

Registering as a BAS Agent — what’s involved and why it’s such a big deal

Being honest as a mirror, straight as an arrow

Ensuring that any information you submit is up to scratch

Putting systems in place to look after yourself, and your clients too

Do you work in Australia? If you have your own bookkeeping business, or you’re thinking about starting your own bookkeeping business, you must first ensure you have all the necessary qualifications, experience, registrations and insurance in place. (In contrast, the Kiwis are all very casual, and no specific government licences or registrations are required in order to practice as a bookkeeper.)

Only bookkeepers who register with the Tax Practitioners Board (TPB) — and have the experience and qualifications to do so — are able to provide ‘BAS services’ for their clients. The definition of BAS services is very broad, and includes relatively mundane activities, such as selecting default tax codes for accounts, as well as more complex tasks, such as generating employee payment summaries.

In this chapter, I provide a rundown of the legal framework for bookkeepers. Although my focus is primarily on the Australian legal framework, bookkeepers working in New Zealand may also find some parts of this chapter to be of interest. I touch on issues that all contract bookkeepers need to consider, such as codes of conduct, professional indemnity insurance and client confidentiality.

Becoming a BAS Agent

So, do you need to worry about this whole BAS Agent hullabaloo, or not? First things first: You don’t have to read any of this if you’re doing bookkeeping in New Zealand (although I’ve heard a few rumours that changes may be afoot in New Zealand as well). On the other hand, if you’re in Australia and you plan to work as a contract bookkeeper (as opposed to working as a bookkeeper on an employee basis), you almost certainly need to register as a BAS Agent. I explain the details in the following pages.

Figuring out whether you have to register

If you’re planning to work on your own as a contract bookkeeper, take a few moments to familiarise yourself with the delights of the Tax Agent Services Act. Here’s the deal:

• You have to register as a BAS Agent if clients rely on your expertise and you assist clients with BAS services. Note: A BAS service doesn’t just mean completing activity statements, but includes anything to do with GST or PAYG, including configuring tax codes in accounting software, coding tax invoices and generating employee payment summaries.
• You don’t have to register as a BAS Agent if you’re an employee receiving wages or you only do basic bookkeeping data entry based on explicit instructions provided by a client or by another registered agent. Bookkeeping activities that don’t count as BAS services include coding transactions based on specific instructions, processing payments to suppliers and bank reconciliations.
• You also don’t have to register as a BAS Agent if your work is directly supervised by another BAS or tax agent. (For more details about the nature of supervision, skip ahead to ‘Supervising others’ work’ later in this chapter.)

In my opinion, the upshot of these regulations is that if you’re serious about being a contract bookkeeper (as opposed to being an employee), you need to have BAS Agent registration.

For more details about whether you need to register, check out the BAS Agent page at the Tax Practitioners Board website (www.tpb.gov.au) or the BAS Agent page at the Institute of Certified Bookkeepers (ICB) website (www.icb.org.au).

If you’re not registered as a BAS Agent, don’t even think about providing any kind of BAS or tax advice to a client. At the time of writing, the penalty for providing BAS services without registering ranges from a not insignificant $43,000 for an individual to a whopping $212,500 for a body corporate.

Checking out what skills and qualifications you need

Sadly, registering as a BAS Agent isn’t quite as simple as signing up for karaoke night at the bar or getting a new Facebook account. Before you can register, you have to make the grade as far as the Tax Practitioners Board is concerned.

Aside from the rather pompously expressed requirement that you’re a ‘fit and proper person’ — that you haven’t been an undischarged bankrupt, served time in jail, or been convicted of fraud, tax or otherwise, within the last five years — the main hurdle is the qualification and experience requirements.

You must have a qualification equivalent to or better than Certificate IV in Accounting or Bookkeeping and successful completion of a course in basic GST and BAS principles. This GST/BAS course must be approved by the board. (Note: If you’ve only recently completed your Certificate IV qualification, an approved GST/BAS unit may well have been included as part of that course.)

In terms of experience, you must also have undertaken at least 1,400 hours of relevant experience in the preceding three years. Alternatively, you can apply to become a BAS Agent if you’re a member of a recognised BAS Agent or tax agent association and you meet the qualification requirements and you’ve undertaken at least 1,000 hours of relevant experience in the last three years.

If you already have experience as a bookkeeper, you may be able to get some recognition for prior learning (RPL), which in turn may enable you to receive credits for some of the units that form part of the Certificate IV in Accounting or Bookkeeping.

For more of the fine print on these requirements, visit the Tax Practitioners Board website at www.tpb.gov.au.

Covering yourself with insurance

Professional indemnity insurance protects you against claims for professional negligence if you make a mistake or fail to exercise a sufficient level of skill. All BAS Agents must have this insurance.

When weighing up different policies and premiums, make sure that the policy covers all aspects of the kind of bookkeeping work that you perform. For example, find out whether the policy covers you for setting up and installing accounting software, managing payroll, generating financial reports and preparing Business Activity Statements. If you have employees or contractors working for you, make sure that the policy covers them also, and that the policy covers you for wherever you work, not just from your home office.

Lastly, don’t forget to be specific about what costs the policy covers you for. Will the insurance company pay for legal costs and defending any claim against you? Will the payout include any penalties, interest or damages claims?

You may be able to save a few dollars by subscribing to a policy organised in conjunction with a bookkeeping association. Both the Institute of Certified Bookkeepers (www.icb.org.au) and the Australian Bookkeepers Network (www.austbook.net.au) offer special deals on professional indemnity insurance.

Acting Honestly and Independently

A code of conduct is a set of expectations and responsibilities that bind any person who is a member of a particular group. If you belong to a professional accounting or bookkeeping association, you’re almost certainly bound by a particular code of conduct.

The Tax Practitioners Board oversees the code of conduct for BAS Agents that is prescribed by the Tax Agents Act. In the next few pages of this chapter I attempt to distil the essence of this code, explaining key points in as straightforward a manner as possible. However, the fine print in this code is so detailed that I can’t cover every point, and I suggest you take some time to read through the full Code of Professional Conduct yourself (go to www.tpb.gov.au and head for the Code of Conduct page).

Staying squeaky clean

The first part of the Code of Professional Conduct includes the following requirements:

• You must act honestly and with integrity. In this context, integrity means a commitment to ethical values and principles, as well as consistency in the way you conduct your business and treat your clients.
• You must comply with tax laws in regard to your own tax affairs, including any business partnerships with which you’re involved. The definition of ‘tax affairs’ includes income tax returns, Activity Statements and fringe benefits tax, and the definition of ‘complying with tax laws’ includes lodging all of your returns on time and paying your tax bills on time. Serious stuff.
• You must properly account for money held on behalf of a client. In practice, few BAS Agents or bookkeepers hold funds on behalf of clients in their own bank account. However, if you ever hold any client money in your own bank account, you must not use this money for your own benefit and you must report to the client about that money.
• You must act lawfully in the best interests of your client. You have a duty to fulfil your work with the client’s best interests in mind, using your expertise and judgement. The words ‘acting lawfully’ clarify any possible conflict between acting in a client’s best interests and following the law. For example, a client could argue that it is in their best interests to claim their kids’ school fees as a tax deduction. (After all, this deduction would lower their tax bill.) However, because you know that school fees aren’t a legitimate tax deduction, you’re obliged to allocate these transactions correctly.

Avoiding conflicts of interest

Item 5 of the TPB’s Code of Professional Conduct states that agents must have adequate arrangements in place for managing conflicts of interest.

Following are some examples of possible conflicts of interest. Have a think about each one — what do you think you’d do if you found yourself in one of these situations?

Examples of possible conflicts of interest include

• You’ve done the bookkeeping for a husband-and-wife team for many years. The couple have just had a messy divorce and both have continued with their own business interests, and both want you to continue working for them. Can you continue doing the bookkeeping for both individuals, or do you need to choose between one and the other?
• You do the bookkeeping for a local hardware store. Another hardware store that is in direct competition with your current client has just approached you to do their books too. Can you agree to do so?
• A landscape gardening company has asked you to do their books. The owner doesn’t know who you are, but you know that he is currently having a (somewhat clandestine) relationship with your sister.
• You own an investment property in the main street, but in the name of your family trust. The tenant of this property doesn’t realise that you have ownership interests in the property, and approaches you to help with their bookkeeping.
• A client has asked you for advice about what accounting software to choose. You have a preference for a specific solution, but if the client chooses to purchase this software you will receive a commission. Should you still recommend this software?

According to the Code of Professional Conduct, you have three possible courses of action when faced with a conflict of interest: You can control the conflict, avoid the conflict or disclose the conflict. (Note: Conflicts of interest can be actual conflicts or potential conflicts.)

For example, if I return to the scenario of a hardware store asking you to do their books when you already do the books for one of their competitors, you would have three courses of action:

• If you choose to control your conflict of interest, you would take on the second client, but be vigilant to behave ethically at all times. In particular, you would be super-careful never to disclose any confidential information and not to give advice to one client that could have been influenced by your knowledge of the other client.
• If you choose to avoid the conflict of interest, you would simply decline to take on the second client.
• If you choose to disclose the conflict of interest, you would tell both clients about your situation. Then each client could choose whether they wished to use your services, or not.

Can you see that there’s no simple right or wrong in many situations of a conflict of interest? Personally, I usually choose to avoid or disclose (rather than control) conflicts of interest, because I believe that these two strategies present the least likelihood of causing problems in the future. (I have enough stress in my life without voluntarily signing up for more!)

If you choose to disclose a conflict of interest, endeavour to do so at the earliest opportunity. For example, if you recommend a product to a client and you know you’ll receive commission, a good strategy is to disclose the amount of commission you receive to the client. However, you need to make this disclosure right from the start — you can’t wait until the client has already committed to purchasing this product.

Keeping stuff confidential

Item number 6 of the TPB’s Code of Professional Conduct states that ‘unless you have a legal duty to do so, you must not disclose any information relating to a client’s affairs to a third party’. This limit applies indefinitely, so that even if you worked for a client over ten years ago and their business is long since gone, you can never say anything about that client or their business to anybody else. (The only exception to this rule is if you receive a notice to provide information about this client from a court, tribunal or the Tax Practitioners Board.)

Remember that ‘not disclosing any information’ is much more complex than not blabbing at a party about how much profit a certain client is making. ‘Not disclosing any information’ means that as soon as you leave a client’s premises, it’s as if you were never there.

For example, imagine you do the books for a local builder. One day, a friend mentions that they’re thinking of hiring this builder to build an extension. You mustn’t say ‘Ah, Steve, he’s a great guy. I’ve been doing his books for years’. Respecting confidentiality means that you simply don’t make any comment about your clients to other people, or about what work you do for them.

Note: You may wonder if I’m being inconsistent here, because my books include many anecdotes about clients. However, I always either adapt the anecdotes so that my clients can’t be recognised, or I specifically ask the client for permission to refer to their story.

One more tip. If you come across a client socially, by all means nod and say ‘hello’. However, unless the client specifically initiates the topic, never ask the client how business is going, or whether a deal came through or not. Instead, keep things strictly social. (You’ll find some benefits in taking this approach. After all, what can possibly be worse than someone picking your brains for tax advice when you’ve already had two glasses of champagne?)

Lastly, remember that ‘not disclosing any information’ also covers the potential inadvertent disclosure of client information. See ‘Protecting client data’ later in this chapter for more details.

Making Sure Information Is Correct

So far in this chapter, I’ve talked about the kind of ethical behaviour the TPB’s Code of Professional Conduct expects bookkeepers to display. However, the code of conduct also covers technical matters such as ensuring any information you supply on behalf of your client is accurate, and that the services you provide are up to scratch.

I do my best to explain these concepts in plain English in this part of the chapter, but you may find it challenging to translate the theory into everyday practical actions. For a different take on the same topic, and for more detail about how to establish processes that ensure you comply with the code, head to the Resources page of the Institute of Certified Bookkeepers website (www.icb.org.au). I suggest you also subscribe to ICB’s free monthly newsletter, which not only provides updates on a whole heap of issues, but also features a monthly ‘ethical dilemma’ for members to review and debate.

Providing competent services

Item number 7 of the Code of Professional Conduct states that ‘you must ensure that a tax agent service provided on your behalf is provided competently’.

Sounds awfully woolly, don’t you think? To get your head around this part of the code, you’re probably best to read the 1,500 words or so of fine print at the TPB website (visit www.tpb.gov.au and go to the Code of Conduct page). However, just in case you don’t feel up to government-speak, I’ll try to summarise the gist of this part of the code here.

The code defines ‘competence’ as ‘a state of being capable, fitting, suitable or sufficient to provide a tax agent service’. The code notes that the definition of competence varies from bookkeeper to bookkeeper. You may have a particular expertise in the building and construction industry while another bookkeeper may have a high level of skills in payroll and employee awards.

If a client poses questions that are outside of your expertise but within the scope of your letter of engagement, part of the key to being competent is to seek expert advice and assistance. On the other hand, if a client poses questions that are outside the scope of your letter of engagement, such as seeking advice on income tax matters, you should refer your client to their tax agent. See ‘Understanding the limits of your advice’ and ‘Writing an engagement letter’, later in this chapter, for more details.

Note also that Item 8 of the Code of Professional Conduct states that you must ‘maintain knowledge and skills relevant to the BAS Agent services you provide’. Specifically, Item 8 suggests 15 structured hours per year of continuing professional education (CPE) to be an ‘indicative minimum standard’. In other words, although you’re not required to lodge proof of your ongoing professional development, the Board has an expectation that you would spend at least 15 hours a year attending courses, webinars, conferences or distance learning.

Supervising others’ work

Providing ‘competent services’ (see the preceding section for details) doesn’t just include the services that you provide, but also the services of your employees and subcontractors.

You must ensure that any employees or subcontractors have appropriate skills and experience and that you provide adequate supervision. The level of supervision depends on a range of factors, including

• The qualifications and experience of the person you’re supervising
• The nature of the work that this person is doing
• Any checklists or processes that you have in place
• The physical proximity of this person
• The frequency that you supervise this person’s work

In short, you need to be confident that the work performed by people under your supervision is ‘competent’. You need to provide a much higher degree of supervision for an employee with little experience and who works offsite with no checklists in place than you would for an experienced employee who works in the same office as yourself, and who follows a series of strict procedures.

Taking reasonable care

Item 9 of the Code of Professional Conduct states that ‘you must take reasonable care in ascertaining a client’s state of affairs’.

The essence of this part of the code is about whether or not you can rely on the information that the client gives you. This part of the code may not be that relevant if you’re the one doing all the bookkeeping, because you check everything yourself when you record transactions. However, if you only see the client once very few months and the client does the bulk of the bookkeeping themselves, you need to take ‘reasonable care’ to ascertain that the information the client provides is accurate.

‘Reasonable care’ is a tricky term to define, but depends on a range of factors including

• The scope of the services you are providing. Hopefully you’ve already defined what you’re responsible for doing in your engagement letter (if not, see the section ‘Writing an engagement letter’, later in this chapter).
• Whether this client is new or established. You need to take a higher level of care with new clients, reviewing the systems they have in place.
• The client’s level of professional knowledge and experience. For example, if a client is new to business and has little understanding of tax, you need to check their information much more closely than you would a client who has been in business for years.
• The kind of systems that the client has in the place. A client with a clutter of shoebox receipts and some dog-eared bank statements needs a more vigilant eye than a client who uses accounting software and has a superb filing system.
• The complexity of the business. If a client has a complex business such as primary production or manufacturing, you need to take more care than if a client has a simple business with few expenses.
• Any recent changes in the law. If the law has recently changed — an increase in superannuation, for example — you should double-check that the client is aware of this change.

In order to be sure that you meet the standards of reasonable care, I suggest you follow these four steps with each and every client:

1. Take care to advise a client of their obligations under the law. For example, ensure your client is aware of deadlines for lodging reports and paying employee superannuation.

2. If you’re not sure about something, ask questions. Never second-guess. If you encounter a tricky situation you haven’t met before, whether this be foreign currency gains, withholding tax or import duty, ask questions (either of your client, of their tax agent or of an independent expert) until you’re sure you’ve got the correct answers.

3. Establish the level of engagement the client requires. Part of taking reasonable care involves having a measure of what the client expects you to do. Some clients expect their bookkeeper to do only simple tasks, such as reconciling bank accounts and paying employees. Other clients may expect a much higher level of knowledge, maybe monitoring retentions, creating cashflow reports or implementing new software systems. The more complex the level of engagement, the higher the standard required in terms of reasonable care.

4. Take reasonable care to understand the client’s situation and with this understanding, apply the law correctly. For more about applying the law, skip ahead to the next section.

If you have any grounds to doubt the information that a client provides, you must make enquiries to satisfy yourself as to the completeness and accuracy of that information. On the other hand, if the information from the client seems plausible and consistent with previous records, and you have no basis on which to doubt your client, you’re okay to accept the information provided by the client without further checking.

Ensuring tax laws are applied correctly

Item 10 of the Code of Professional Conduct states that ‘you must take reasonable care to ensure that taxation laws are applied correctly to the circumstances in relation to which you are providing advice to a client’. (What a mouthful!)

The last part of this sentence is crucial for you, and relates to the services that you’ve agreed you’ll provide. For example, if your letter of engagement says that you’ll be responsible for monthly bookkeeping, including GST and employee super, you must take reasonable care to apply taxation law correctly in this regard. However, if the client’s external tax agent is responsible for all other taxation matters, such as income tax returns and FBT returns, ensuring that tax laws are applied correctly in this regard is not your responsibility.

Understanding the limits of your advice

If a client seeks advice, ask yourself first whether you’re qualified to respond. Remember that as a BAS Agent (as opposed to being a tax agent), you’re not qualified to advise on income tax matters, fringe benefits or the tax deductibility of certain expenses.

Even if you’re 100 per cent confident that you know the correct information on something, don’t go beyond the limit of your scope as a BAS Agent. If you think a client is doing something wrong, or could structure their tax affairs in a more beneficial way, suggest that your client seeks some additional advice from their accountant.

Setting Up Systems

In the last section of this chapter I provide some tips about creating a letter of engagement, and also give some advice about looking after your client’s data.

Writing an engagement letter

As part of a strategy to avoid compromising or difficult situations, the Tax Practitioners Board suggests that you provide clients with a formal letter of engagement. While I’m sure you recognise that this is a good idea in theory, you may feel quite reserved about the idea of such a letter. Maybe you’re worried about putting the client off by being over-formal, or maybe you’re worried about how to phrase such a letter.

Probably your best starting point is to hunt down a template. (The Institute of Certified Bookkeepers, for example, provides a template for members to use. This template is a bit too wordy for my liking, but provides a good reference for something you can adapt and personalise.)

For the record, here’s what I believe an engagement letter should include:

• A warm and friendly opening sentence in which you say that you’re looking forward to working with the client.
• A description of the services you have agreed you’ll supply, how often you intend to visit the business, how many hours you estimate the work will take, and what your hourly/daily/monthly fee will be (and whether or not this fee includes GST).
• A description of the extent to which you intend to check the work of others. For example, if someone else in the business is going to be responsible for entering supplier bills, you may want to state that you don’t intend to double-check each supplier invoice for its validity, but that you will spot-check bills from time to time to check they are allocated correctly.
• Where your work begins and ends. For example, if you’re not a tax agent, you won’t be preparing tax returns for this client. So you may want to say something like ‘My bookkeeping services include reconciling bank accounts, processing and reconciling payroll, lodging quarterly Business Activity Statements, preparing draft financial reports and liaising with the accountant to provide the information necessary to complete tax returns’.
• If you’re not a tax agent, clarification that you’re able to advise regarding everyday transactions and GST coding, but that you can’t advise regarding income tax matters, including FBT and the deductibility of expenses.
• A reassurance that you value the client’s business and that you will treat any information you learn about the business (whether bookkeeping-related or not) in strict confidence.

Other information you may want to include (but then again you may feel isn’t relevant):

• A confirmation that you are a registered BAS Agent (alternatively, you could include your BAS Agent registration details on the header or footer of the engagement letter).
• Your payment terms. (This information is displayed on your invoice anyway, so is arguably not a necessary part of this letter.)
• If you’re doing the books from home or on your own computer, a clarification of where you’re storing their financial data, what format it is in (MYOB, QuickBooks or whatever) and what backup systems you have in place.
• If you’re doing the books on the client’s premises, a clarification of what backup systems you will put in place (if indeed, you intend to take responsibility for backing up the accounting data), and where backups will be stored.

Finally, don’t forget to close your letter with something warm and friendly, such as ‘Please don’t hesitate to call me on my mobile on 0400 000 000 if you have any questions at all.’

Protecting client data

If a client trusts you with their precious data, you have a big responsibility to look after this data in an even more conscientious manner than if it were your own. By protecting data, I mean both protecting client data from loss or corruption, and protecting client data from the prying eyes of unwelcome stickybeaks.

Some words of advice:

• If you store client data on your own computer system, ensure you have superb backup systems in place. You must be confident that if your office (or home office) burns to the ground tomorrow, your client won’t lose a single bit of information.
• If you pay the monthly subscription for a client’s accounting software, you must explain that in the event this client terminates your services, closes their business or doesn’t pay your fees, they also lose access to their business records. Your client will need to initiate their own software subscription or, in the event that their business has closed down, ensure they archive all essential financial reports for previous years.
• If you store your client data in the cloud, I suggest you generate PDFs of key financial reports each quarter (a minimum of a transaction report plus a Profit & Loss report) and store these in a safe location.
• If you store client data on your own computer system, password-protect both your computer and the client’s company files so that if your computer is stolen, nobody can access your client’s data. (Incidentally, the Privacy Act also sets out a number of principles that govern the collection and storage of personal information, particularly in regards to employee details and taxation information.)
• If you take any printed information away from the client’s premises, look after this information with great care. (Leaving a bunch of confidential financial statements in the back of your car simply isn’t good enough.) In fact, I suggest you try to minimise any information you take offsite, and either work electronically or make scans of key documents.