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The Albanese government is moving quickly on penalties and secrecy laws in response to the big four firm’s confidentiality breaches, but is taking it slow on reviews for legal privilege and tax office powers.
The Albanese government has released draft legislation to impose penalties of up to $780 million for tax promoter breaches as part of its response to the PwC tax leaks scandal.
The four sets of legislation include the new promoter penalties, changes to Tax Office secrecy and wider powers for the Tax Practitioners Board, in the first stage of what the government has described as the biggest crackdown on tax advisers in Australian history.
The government hopes to put the legislation to parliament by the end of the year.
But more contentious issues flagged by the government last month as part of its review face slower going. Industry consultations were to begin “in coming months”, Treasurer Jim Chalmers’ office said in a statement.
These include changes to legal professional privilege, more information-gathering powers for the ATO and new governance rules for big four accounting firms, which have brought industry pushback.
Separately, a joint parliamentary inquiry will examine the partnership models of the big four consulting firms, their disclosure obligations, and explore how regulators and the government can impose penalties on their personnel for bad behaviour.
“The PwC scandal exposed severe shortcomings in our regulatory frameworks that were largely ignored by the Coalition, and we continue to take significant steps to clean up the mess,” the statement said.
“The reforms we’re progressing today are the beginning of a comprehensive process the government is undertaking to rebuild community confidence in the systems and structures that keep our tax system and capital markets strong.”
The government is seeking feedback on the initial four sets of draft legislation in the next nine days, by September 29.
They include a major revision to the tax promoter penalty laws. In addition to raising the maximum penalties from $7.8 million to more than $780 million, they will broaden the definitions of advisers and firms linked to avoidance schemes, to which the new penalties will apply.
Applying existing promoter penalties could be prohibitive, MinterEllison head of tax Adrian Varasso told the Financial Review last month.
The existing definition of a promoter excluded a party who simply offered tax advice, while a scheme based on advanced knowledge of a change in the law (as in PwC’s schemes) would not be caught as a tax exploitation scheme.
In addition, the time limit for when the ATO can begin court action on penalties has been raised from four years to six years after the action took place.
A second piece of draft legislation will ease tax secrecy restrictions that will allow the Tax Office to share information with other regulators more readily.
In the PwC case, the Tax Office said it was barred from providing full information about PwC’s use of leaked information to the Australian Federal Police or to Treasury, which continued to consult with PwC partner Peter Collins well after the time the ATO had discovered Mr Collins had breached confidentiality.
The change to secrecy laws will also allow the Tax Office and the TPB to refer ethical breaches by advisers (including confidentiality breaches) to professional associations for disciplinary action.
Separately, new legislation will protect whistleblowers when they breach confidentiality restrictions to provide the TPB with evidence of misconduct by tax agents.
Finally, the time limits for TPB investigations will be doubled to two years, while allowing the TPB to provide more information in its online register about tax agents which it has sanctioned.
Under current law, the TPB must take down its current notifications about PwC and Mr Collins by the end of December.
Partners in big four accounting firms could be on the hook for nine-figure payouts from new tax promoter penalties, although draft legislation released on Wednesday shows the maximum sanctions will be less than the $780 million figure previously flagged by the government.
Treasurer Jim Chalmers told an event held by The Walkley Foundation in Sydney that the government remained committed to what he again called the biggest crackdown on misconduct by tax advisers in Australian history in response to the PwC tax leaks scandal.
The draft legislation explicitly rules out exemptions for members of a partnership that is a “significant global entity” who were not aware that tax exploitation schemes were being marketed by other partners.
“What is particularly concerning is the fact that a partner in a partnership cannot rely on the exception for having no knowledge where the conduct of a partner in the partnership results in the partnership contravening the promotor penalty provisions,” MinterEllison head of tax Adrian Varrasso said.
“It appears that all partners might therefore be jointly and severally liable for any penalty that may be imposed due to the conduct of a single partner.”
This applies even if the partner who promoted the scheme has left, and to uninvolved partners who have left the partnership.
Regarding the size of the penalties, a leading tax lawyer told The Australian Financial Review: ”The message is, don’t even think about it. It puts pressure on firms to create internal controls that will ensure that advice on tax will be very conservative.”
The draft leaves penalties for individuals (measured in penalty units) unchanged at $1.56 million, while penalties for companies or accounting firms are doubled to $15.65 million. Alternatively, the penalty may be three times the benefits received from promoting the scheme.
But the new penalty for a significant global enterprise (a group of entities consolidated for accounting purposes with an annual global income of $1 billion or more) can be up to 10 per cent of their total turnover the year before the offence. The maximum is 2.5 million penalty units, which would equate to $782.5 million, but that would only apply when a firm earns $7.8 billion.
None of the big four firms bills anything like this. PwC recently reported $3 billion turnover for the 2023 year, which would make $300 million its maximum payout, unless international partners are involved. The Federal Court is more likely to impose a portion of this as penalty, but partners could still face a nine-figure payout.
The promoter label now applied to parties who benefited from a scheme, as opposed to receiving a consideration, Mr Varrasso said. The explanatory memorandum said this could include “other intangible or disguised benefits that are less obvious but arise from the scheme”, including increasing their client base.
Tax exploitation is expanded to include schemes that satisfy or are capable of satisfying the Multinational Anti-Avoidance Law or Diverted Profits Tax provisions, as well as schemes that have not been implemented, Mr Varrasso said.
The draft legislation also empowers the ATO to share information about breaches of confidentiality with Treasury, the treasurer and the finance minister.
The ATO and the Tax Practitioners Board can also disclose taxpayer information to professional disciplinary bodies such as the Chartered Accountants ANZ which relates to suspected misconduct.
CA ANZ senior executive Simon Grant welcomed the move, which he said would enable earlier investigation and disciplinary action.
However, he said that “many in the tax profession – particularly those in small and medium-sized practices – will question whether the published proposals and those foreshadowed represent a proportionate response in the context of the broader tax system.”
Separately, the draft legislation also introduces minor changes for the operation of the Tax Practitioner Board and extends whistleblower protection for those who provide information to the TPB.
Existing legislation has been extended to allow ATO whistleblowers to share their confidential information with their trade union, their doctor or a psychologist.
The deadline for submissions on the draft legislation has been extended to October 4.