Sydney businessman Nahi Gazal’s $44M tax debt sees him banned from flying overseas for medical treatment
A businessman who is part of one of Sydney’s wealthiest families has been stopped from flying overseas for medical treatment because of a large tax debt
The year the ATO came out on top – again
Tax Office decisions make a difference to the day-to-day running of every practice, so it's little wonder whatever it does attracts outsized interest.
Everyone knows the old chestnut about certainty, death, and taxes, but there’s a third thing about which Accountants Daily can have absolute confidence: the most read reports every year will be those directly relating to activity by the Australian Taxation Office.
A quick scan of 2023 numbers revealed a familiar pattern: the talent drought, big four firms, and shenanigans at professional bodies account for about half of the top 20 most popular stories; the rest revolve around what ATO did next.
One very popular topic was the expansion of the revised client linking system to include all businesses with an ABN (aside from sole traders), which became mandatory on 13 November.
The new system, with its six-step procedure and reliance on a client to act, was a bone of contention between professional bodies and the ATO from the beginning of the year. Many felt it was too complex and clients would baulk. To BAS agents, who could be inadvertently delinked from a client by an unwitting accountant, it turned an annoying quirk in the system into a major headache.
Feelings ran high, with some participants at ATO working groups on the topic promising to die in a ditch rather than see the system get up without changes. We can only hope they are in good health; the final score was ATO, 1: tax professional representatives, 0.
Information campaigns by bookkeepers’ bodies and the ATO itself have attempted to lessen frustration with the system and the office was unable to say how many agents had actually been inadvertently disconnected. But it did say that up to Christmas almost 40,000 taxpayers had successfully nominated a tax or BAS agent online.
“Of these nominations around 30,000 have been accepted by the nominated tax or BAS agent noting that the nominated agent has up to 28 days to accept the nomination from the taxpayer to successfully complete the linking process,” the ATO said, highlighting a concessional expansion to the original deadline of just seven days.
Another deadline of interest involved the amnesty for small-business lodgement penalties, which ended on 31 December. Announced in the March budget, it was available to businesses with less than $10 million in annual turnover when the lodgement was due and came into force on 1 June. It applied to income tax, FBT, and BAS lodgements originally due between 1 December 2019 and 28 February 2022.
In early December the ATO issued a prompt that the scheme would soon end that included measures of how popular it had been. More than $48 million in failure-to-lodge penalties had been waived for 14,000 small businesses, the ATO said.
However, missing from the numbers was context, such as the usual level of penalties or how many businesses had been encouraged to lodge by the amnesty that might otherwise have sat on their hands. Accountants Daily awaits the final tally – taking in the last 25 days of the scheme – with interest.
Small-business lodgements were of special interest to the ATO because the amount small businesses owed had ballooned in the wake of COVID-19. At every opportunity, it seemed ATO execs pointed a finger at the nation’s most recalcitrant sector, which owed $33 billion of the $45 billion of business collectable debt.
By September, Commissioner Chris Jordan and Deputy Commissioner Vivek Chaudhary made it clear the gloves were off, especially when it came to long-term debt worth at least $4 billion owed by 40,000 businesses.
The ATO would use budget funding of $82 million to crack down on thousands of businesses with debts of $100,000 and above or older than two years.
Mr Chaudhary said leniency during the pandemic had lulled business owners into a “whenever” mentality when it came to tax obligations.
“Businesses appear to be de-prioritising payment of tax and super when they should be provisioning for these bills like they would with any other business expenses,” he said.
“For these clients, concessions are no longer available and their debts will progress straight to firmer actions.
“We will continue to apply a full range of firmer actions including garnishees, directions to pay, director penalty notices, disclosure of business tax debt, and prosecution actions, to ensure payment.
“Over the life of this program, we expect to action just under 40,000 accounts with overdue tax and super debts and collect around $640 million. We also expect that there will be exits.”
The ATO’s stronger recovery stance had “shifted the business landscape in relation to ATO debt recovery” in the past 12 months, he said.
“It’s not fair for businesses with large outstanding debts to continue to use the ATO as a low-interest loan facility. It is now time to re-establish the culture of paying tax on time,” he said.
Individual taxpayers also got their share of attention. A few months earlier in June, the ATO had alerted taxpayers good or bad that it had added more data-matching protocols to its compliance arsenal, with landlords a special target.
The wider data matching system would provide access to information from property managers, landlord insurance providers, financial institutions providing loans for residential investment properties, sharing economy providers, and income protection policy information.
ATO Assistant Commissioner Tim Loh said the expanded capabilities would expose anyone trying to get away with dodgy data.
“Our sophisticated data matching programs provide us with all the clues we need to track down taxpayers with incorrect information in their tax return,” said Mr Loh.
The ATO said nine out of 10 rental property owners were currently getting their returns wrong and the information would be used to “educate” them.
“Around 80 per cent of taxpayers with rental income claimed a deduction for interest on their loan and this is where we’re seeing mistakes,” said Mr Loh.
“For example, you can’t refinance an investment property to buy personal items, like a holiday to Europe or a Tesla, then continue to claim the interest expenses as a tax deduction.
“This new data provides us with crucial intelligence to paint a picture of what’s true and accurate in tax returns.”
Also in its information gathering net from July were those earning from ride-sharing and accommodation apps such as Uber or Airbnb, as the Sharing Economy Reporting Regime commenced.
With record numbers of taxpayers earning from side hustles, the rest of the sharing economy regime is on notice it will have to start reporting from this July.
The ATO would also be cracking down on work-from-home claims and a change to reporting requirements that began – controversially – more than halfway through the tax year in March would catch many taxpayers out, observers thought.
HLB Mann Judd tax consulting director Bill Nussbaum said many taxpayers would be unaware that the 80¢-an-hour shortcut method introduced during COVID-19 had been discontinued and that a different approach – a diary of actual hours – was now essential under revised fixed-rate rules.
“A lot of people won’t be aware of the changes, which is concerning given the ATO has indicated work-related expenses are an area of focus this year,” he said.
Another ATO concern centred on schemes aiming to tempt SMSF trustees into illegal early release arrangements or inappropriately channelling money or assets into an SMSF to pay less tax. It warned that illegal access or use of an SMSF could result in the loss of some or all of an individual’s retirement savings and the possibility of being disqualified as a trustee.
Around the same time, employer superannuation contributions were being subject to unprecedented scrutiny following criticism by the National Audit Office. Accountants reported a huge increase in superannuation audits along with a change in what would trigger ATO scrutiny. RSM global employment services partner Rick Kimberley said his firm had been involved in 20 superannuation audits in the past year, double what it would typically experience.
“I have never seen this level of auditing before,” he said. “In the last 12 months it really has ticked up a gear. Every day I’m getting an email about another organisation getting audited.”
However, amid all its strident wins the ATO did suffer one modest setback when it came to debts on hold. In late November, it was forced to slam the brakes on an awareness campaign that had dispatched 28,000 letters to accountants alerting them to clients with debts on hold, some amounting to no more than a few dollars or even cents. Readers said some involved defunct businesses or even deceased former clients and would cost more to reconcile than the amounts involved – if the paperwork still existed.
“We accept that our communication approach caused unnecessary distress – especially for those debts incurred several years ago,” the ATO said. “We will review our overall approach to debts on hold before progressing any further.
“No further action is required by anyone who has received a letter. However, if you have questions about your existing tax debt, you can contact the ATO for further information.”
The Accountants Daily report of the campaign got about the same number of views as another ATO story a few months earlier: “Don’t call us! ATO tells agents, just go online”.
The year that rocked foundations of big 4
Fix the guardrails and carry on seems to be the approach of PwC, but its tax secrets scandal has changed the game forever.
If there were enduring images from 2023 that sum up the year in professional services, then it’s hard to go past the chief executives from the accounting big four squirming awkwardly under questioning before the Senate inquiry into consulting.
Who – outside the leadership teams of PwC, KPMG, EY, or Deloitte – could fail to enjoy the sight of Greens senator Barbara Pocock or Labor senator Deborah O’Neill training a spotlight on their manoeuvres in the dark?
The parliamentary scrutiny made household names of high-flyers who had become used to operating under the radar of public opinion or corporate accountability. The big four partnerships lack the reporting strictures of a listed company, yet operate as trusted assessors of their financial probity. No one votes them into power, yet they are relied upon to help steer public policy. They had become used to operating with a latitude they would be unlikely to sanction in anyone else.
However, 2023 will be remembered as the year that the gap between public expectations and actual practice at the big four was exposed like never before. An almost routine sanction by the TPB of a former PwC partner Peter Collins broke the seal on a scandal: the tax whisperers to Treasury had been playing a double game. The Australian Financial Review broke the story and the more the media looked, the more there was to see. Before long, there were tranches of internal emails that began to reveal the extent of the problem and how PwC had used the information to benefit clients. A whole pandora’s box was opened by the Senate inquiry that took in how the ATO and TPB operated in light of what they knew and it cast an enduring pall of doubt over whether the big four deserved the trust placed in them.
In his message for PwC’s Transparency Report in November, CEO Kevin Burrowes again offered a mea culpa for behaviours of the firm that “threw into question our governance, culture, and accountability practices”. He referred to a number of partners – the dozen or so forced to leave – who “had failed in their professional, ethical, or leadership responsibilities” and the spur to change from a review by former Telstra boss Ziggy Switkowski that reported in September and found multiple flaws in PwC’s results-focused culture.
“We are sorry for our failings and for the culture that allowed these behaviours to go unchecked for many years,” Mr Burrowes said. “We are committed to taking the actions required to rebuild trust” and 2023 would be remembered “as the year significant action was taken in order to reset”.
As well as spinning off its consulting division into Scyne Advisory – along with 1,500 staff and a substantial revenue stream – it had developed five key commitments to change and a “comprehensive action plan that provides a roadmap to becoming the leading professional services firm”.
But those reassuring words, from a CEO parachuted into the Australian operation to prevent the scandal from going global, really served to highlight how the mood around the big four has changed and their blinkered ability to carry on as though it’s just a case of fixing the guardrails.
The PwC scandal highlighted how much Australia’s public service has grown to rely on consulting services rather than developing its internal expertise and the sheer amount of taxpayer money involved. The result has been a huge retreat from the use of consultants and a question mark in the public mind over every future contract, such as Deloitte’s $70 million deal with the Defence department in the financial year 2023.
It also revealed the inherent conflict of interest in multidisciplinary firms where auditing and consulting operate alongside one another.
This contradiction, which constrains a firm’s ability to pitch for work, was recognised by fellow services giant EY, but an attempt to divide itself in two was stymied by its US division. Project Everest was a year in the planning and failed at a cost of US$600 million; widespread job cuts have been the result.
So EY failed to split when left to its own devices while PwC was forced to split when it had little choice; it’s difficult to imagine a situation better designed to feed the fire of public scepticism. It also sounds like a story whose ending has yet to be written.
In the meantime, other strands of the PwC fallout narrative are being written by stakeholders. The gilt-edged job offer from a big four firm has lost its lustre, with mid-tier and smaller firms increasingly preferred by graduates, futurist Ben Hamer told the Intuit Get Connected event in November.
“More and more workers are pulling away from working for large corporates,” he said. “Instead, they’re wanting authentic organisations that live their mission and values.”
Many graduates who do join the big four will be incentivised to defer their start dates and join operations with high turnover rates or existing staff facing lay-offs.
The professional body most closely aligned with the big four, CA ANZ, investigated PwC following the TPB sanction early in the year and handed down a $50,000 fine in November that showed it was “committed to ensuring the highest standards of professional ethics and performance”, CEO Ainslie van Onselen said.
The maximum fine it can impose will rise to $250,000 in the wake of a review of its disciplinary procedures after its much-criticised handling of the KPMG exam cheating scandal last year. In reality, neither amount looks sufficiently potent next to the revenue of any big four firm.
Instead, the real upshot of the industry’s inability to police itself is a government determined to drive through a massive shake-up of the profession. It announced in August a whole suite of measures that tighten regulations, hugely increase penalties, and strengthen the regulatory bodies. The profession, and the professional bodies, have been left to respond within short consultation periods and with the overwhelming weight of public and government sentiment against any dilution of the crackdown.
The initiative has been lost by the big four and it now looks like an open question whether their partnerships structures can survive the wave of negative opinion that looks certain to keep rolling through 2024.