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Client alleges ex-EY partner took secret payments on tax scheme
A wealthy client is suing the EY Australia partnership alleging a partner earned $700,000 in secret commissions as part of a failed tax-loss scheme.
The now-former client is suing the now-former partner and the entire EY partnership after the Tax Office reviewed his corporate and family’s tax affairs and increased his taxable income, documents released by the NSW Supreme Court reveal. The ex-partner denies the allegations.
EY and the former partner are suing each other in the Supreme Court.
The ATO review resulted in the family’s taxable income being increased by $18 million, the cancellation of $1.7 million in related-party tax benefits and penalties. The dispute between the former EY client and the ATO is ongoing.
The ATO is suing the former EY partner in the Federal Court, alleging he promoted three so-called “tax loss access schemes” to seven clients over five years ending in April 2021.
The former partner, whose name has been suppressed by the court temporarily pending an appeal, has cross-claimed against EY, claiming the firm is required to pay for his defence.
EY denies any liability and is suing the ex-partner, alleging breaches of the partnership agreement in giving the alleged tax advice. “As the matter is before the courts we’re unable to provide further comment,” an EY spokesman said.
EY sacked the partner in August 2022 after its own review. The ATO launched its case against the ex-partner in August 2023.
The alleged scheme involved the creation of two trusts. When the client’s first trust was due to receive profits, the accountant would line up, for a fee, an unrelated company that had past tax losses.
The first trust would sell an asset to the client’s second trust for a discounted price. The first trust would distribute profits to the company that had the tax losses. The company would pay no tax, keep part of the profit and transfer the rest of the money to entities related to the client. The effect of the scheme meant the client would pay around 10¢ per dollar in profit instead of 30¢, reducing any subsequent tax bill.
The former client alleges the ex-partner took secret payments via a trust that received payments for providing the company with the losses.
The client alleges that the “first secret commission” of $400,000 happened in February 2017 and the second “secret commission” of $300,000 in August 2019 was transferred to a trust, which included the then-EY partner as a beneficiary.
The client alleges the former EY partner had a pre-existing business relationship with the company with the losses and did not disclose the association.
EY alleges in its cross-claim that the partner breached his duties by not disclosing a prior relationship with the person who provided the company with carried forward losses, nor that he had an interest in the trust that allegedly received the secret payments.
The firm also alleges the partner did not seek fully informed consent from the partnership or approval from an independent partner to provide the alleged advice. The former partner denies he was required to disclose or advise on “matters that were not true”.
The former client alleges he met the ex-EY partner after asking his accountant, who is also a defendant, for an adviser about the tax consequences of substantial expected profits from a business deal in November 2016.
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Max Mason covers insolvency, courts, regulation, financial crime, cybercrime and corporate wrongdoing. A Walkley Award winner, Max's journalism has also received awards from the National Press Club of Australia, the Kennedy Awards and Citibank. Connect with Max on Twitter. Email Max at max.mason@afr.com