As my tax law mentor and brilliant onion 🧅 peeler, TOR, observed so many times - good law is administerable law. . .
Five years before the PwC tax leaks scandal, there was an earlier Big Four consultation that prompted a wild feeding frenzy that cost billions. Decoding the machinations back then show why Treasurer Jim Chalmers picked Rob Heferen as next tax commissioner:
The crisis that forged the new tax commissioner
Days into his new job at Treasury almost 13 years ago, Rob Heferen faced a huge tax scandal after consultations with the big four firms backfired.
The future of the Australian Tax Office continues to be shaped by a crisis over botched tax amendments that confronted the incoming tax commissioner Rob Heferen 12 years ago, days after he took a senior Treasury role.
Heferen had barely put his feet under the desk in his new post as deputy secretary, revenue, in March 2011 when he received an urgent ATO memo warning of an explosion of claims from tax amendments that had not been costed when introduced nine months earlier.
A group of aggressive big four accountants that included Jeremy Hirschhorn, the then-leader of KPMG’s financial services tax division, had exploited loopholes in the 2010 tax amendments to claim more than $10 billion in ATO refunds for their clients – and the Tax Office warned the eventual cost could be a multiple of this.
In a note that reads close to panic, ATO chief counsel Andrew England wrote that although the Tax Office was stalling, “in many cases we will have to allow taxpayers’ claims. Fundamentally, there is a problem with the legislation”.
The network that this crisis brought together, which included Heferen, current tax commissioner Chris Jordan, tax lawyer Keith James and later Treasurer Jim Chalmers, has had a critical and largely unreported influence since then on who runs the ATO.
Hirschhorn, now second commissioner at the ATO and the man who had been favourite to succeed Jordan, will be Heferen’s deputy when he takes over on March 1.
The 2011 blowout was concerning because it was the first time Treasury had worked with consultation groups containing partners from the big four accounting firms to advise on new tax laws. These were a forerunner of the 2013-17 consultations on multinational tax laws that produced the PwC tax leaks scandal.
Setting up a new consultation system
The 2010 amendments grew out of a 2005 announcement by the Howard government of a series of technical changes to tax-consolidation rules, which allowed a corporate group to be treated as one company for tax purposes.
This coincided with a new consultation system introduced by the Howard government in which senior accountants and lawyers would be asked to provide confidential advice without pay on proposed tax legislation, as a public service.
But those who took part in the consultations say the ATO was not helpful, responding to queries: “We can only give advice on active legislation.”
“At one consultation I said, ‘Do you know how much this is going to cost?’ ” reported a big four tax partner who took part. “And Treasury and the ATO didn’t seem to be on top of it.”
The Gillard government, which inherited the process, introduced legislation to parliament in early 2010, saying it would produce a “small but unquantifiable cost to revenue”. That was later amended to a “significant but unquantifiable cost to revenue”.
How the amendments worked
The amendments focused on how consolidated groups accounted for takeovers and mergers. This involves a process to set the tax costs of the combined group, to align assets such as trading stock, plant and equipment with the cost of the merger.
One amendment extended this resetting to include a broader class of assets including intangibles, which could be written off over 10 years.
As the legislation was retrospective to 2002, this meant in some cases virtually all the acquisition cost could be claimed immediately as a write-off for tax purposes, producing not only an instant tax refund, but interest payments payable by the ATO.
A variation of this was “rights to future income”, sourced from work and provision of intangibles, which could also be written off. In some cases goodwill was reclassified into other assets and claimed as a deduction.
This was not apparent when the law came into effect on June 3, 2010. But by late 2010, it was out of control.
The amendments triggered furious activity across all the big four firms that targeted financial institutions in particular, offering “no-win, no-fee” terms for advice on the new laws.
‘They all did it’
“All of the big four were among the players saying we’ll do it on a ‘no-win, no-fee’ basis,” a senior tax lawyer told The Australian Financial Review. “Some were more active in it than others, but they all did it.”
One insurance industry chief financial officer who received proposals to exploit the amendment says: “The great tax minds were rubbing their hands together. They were saying, ‘We’re going to take it for all it’s worth’.”
The government had expected $3 billion in deduction claims. Instead, it got $30 billion in claims from just 60 large corporations, dating back to 2002, with the number climbing constantly.
Partners across the big four firms, including Hirschhorn, offered aggressive tax advice.
“He [Hirschhorn] saw an inch and took it a mile,” said a former big four partner. “He understood the tremendous value that was being offered by the federal government, and he quite frankly did his job. On one level [the job] is to deliver extreme value for clients and get paid for it.”
“Jeremy was pretty aggressive,” a former rival of Hirschhorn said. “He was known then as an aggressive tax adviser; he’s an aggressive ATO officer now, it’s just his nature. He’s a smart guy, and he was an aggressive player.”
A former colleague recalls: “Jeremy was brilliant as a partner at KPMG, particularly the international area;, he was always very ethical”.
In PwC Senate hearings last year – after former partner Peter Collins leaked confidential consultations he attended with Treasury to advise on the laws – Hirschhorn was scathing about the speed with which the firm devised schemes to sidestep the Multinational Anti-avoidance Law when it was introduced in 2016.
An ATO spokesman confirmed that Hirschhorn had provided advice on how the 2010 legislation applied to his clients but had denied offering a “no-win, no-fee” service.
“Tax advisers have a legitimate role in Australia’s self-assessment system and their job is to provide advice on the law as it is, at the time of the advice,” the spokesman said. “Advice on how a change in law applies to a taxpayer’s historic affairs is not a ‘scheme’.”
But he said: “We do not apologise for, or resile from, the ATO’s assertive position when it comes to holding large taxpayers to account.”
The ATO spokesman said Hirschhorn had not been involved in consultations on the 2010 amendments before they were introduced. He had strongly rejected any suggestion or insinuation of anything other than appropriate professional conduct in providing advice to his clients on these matters.
Sounding the alarm
In February 2011, as refund claims began to explode, members of the original consultation group sounded the alarm.
“They were embarrassed about the outcome,” says a senior tax figure who was familiar with the concerns. “They actually were the ones who blew the whistle by going and speaking to the ATO.”
Andrew England, the ATO’s chief tax counsel, told Chris Jordan and Keith James, who would shortly become chairman and deputy chairman of the Board of Taxation, that the rights to future income regime was out of control.
On February 24, 2011, the Board of Taxation wrote to then-assistant treasurer Bill Shorten, urging quick action. When Treasury responded on March 3 with a “go slow” approach, England penned a memo to Treasury on March 7 that landed on Heferen’s desk just after he had arrived in the job.
The ATO memo noted “the aggressive activities of some tax practitioners, who have been offering tax services on a contingency fee basis to review their clients’ tax returns back to 2002 to find deductions for rights to future income”.
The ATO called this rifling through past returns “grave-digging” to find new and unexpected items to claim as deductions. Some firms even had flyers advertising contingency funding, said one party to these early discussions.
‘No administrative fix available’
This practice was so widespread and so profitable that it had begun to affect the purchase price in takeover and merger discussions, factoring in the value of the rights to future income, the ATO warned.
England’s memo to Treasury warned that “there is no administrative fix available”. “In many cases, we will have to allow taxpayers’ claims. Fundamentally, there is a problem with the legislation,” it said.
At the time, the ATO said the claims had cost $3.5 billion, while it was holding up another $2 billion in claims as “under consideration”.
The best known claimant was Westpac, which on October 26, 2010, announced a $685 million reduction in tax payable for the 2009 and 2010 years, from rights to future income related to its takeover of St George.
On March 11, 2011, four days after the Tax Office memo to Treasury, Westpac said the ATO had confirmed a further $1.11 billion tax saving for 2011 to 2014, taking its tax refund to $1.795 billion.
On March 30, then-assistant treasurer Shorten announced the Board of Tax would conduct an urgent review of the amendments. The review would be led by Dick Warburton and later Keith James, and included Jordan and PwC partner Wayne Plummer, with Freehills partner Andrew Mills as a consultant.
By May, tax refund claims had jumped to more than $10 billion from $3.5 billion. And the meter was still running for thousands of other public and private company groups that had executed mergers and could now claim huge deductions.
‘Gobsmacked how this could happen’
The Australian Financial Review has spoken to several members of the Board of Tax review. “We were gobsmacked how this could happen,” one said. But whose fault was it?
“This was not a scam that was cooked up by dodgy tax firms, it wasn’t a scheme,” said another member of the review, who saw it as a failure of Treasury and the ATO.
Behind the scenes, Heferen liaised closely with Jordan and James in the Board of Tax review of the amendments and other tax matters.
“I have a lot of time for Rob Heferen,” says James. “He’s extremely strong intellectually. He was a good communicator too. He always wanted to make a contribution to good tax policy.”
In 2012, the government introduced retrospective legislation that blocked claims relating to before 2010 or that had been lodged after March 2011 when Shorten signalled the Board of Tax review. But those groups that moved early kept most of their gains. Westpac’s windfall was wound back to $1.63 billion.
By this time, treasurer Wayne Swan and his chief of staff, Jim Chalmers, were looking for alternatives to reappointing Michael D’Ascenzo for another term as tax commissioner.
They gave Heferen the task of finding suitable candidates. It was Heferen who recommended Jordan, with whom he had worked closely during the amendments crisis.
Jordan was an unlikely candidate, not just because he would be the first outsider to head the ATO, but because he had been on John Howard’s staff in 1987 and was Howard’s personal tax accountant.
‘Poacher turned gamekeeper’
But Swan says it was an excellent choice. “I always called him my poacher turned gamekeeper,” he tells the Financial Review.
One of Jordan’s first big moves as commissioner was to appoint Andrew Mills, with whom he had worked on the Board of Tax review, as second commissioner. Months later, in July 2014, Hirschhorn was also head-hunted for the ATO. (Mills has just been appointed to the Board of Taxation by Chalmers).
Heferen left Treasury in 2016 for the Department of Environment and Energy, where he was deputy secretary, energy, and later went to the education department. Since 2021, he has headed the Australian Institute of Health and Welfare.
This year, Treasury and the ATO once again confronted a failed consultation process. A decade ago, it had been generally agreed that the consultation process that produced the 2010 tax amendments had been a disaster, and Treasury must ensure nothing like that ever happened again.
In late 2013 Treasury launched its next consultation, for new laws to target multinational profit shifting. They turned to tax advisers including PwC’s Collins.
Last year’s exposure of how badly that turned out – the revelations that became the PwC tax leaks scandal – complicated the decision of who would succeed Jordan as tax commissioner when he steps down on February 29.
Chalmers turned to a familiar pair of safe hands. On December 7, he passed the baton once more to Heferen.
Neil ChenowethSenior writerNeil Chenoweth is an investigative reporter for The Australian Financial Review. He is based in Sydney and has won multiple Walkley Awards. Connect with Neil on Twitter. Email Neil at nchenoweth@afr.com.au