Dear Senator Pocock
My name is Ian Bartley.
I am a retired (2010) ATO officer but have kept in contact with several ATO officers since retirement. For most of my career I worked in areas of audit and criminal investgaton and prosecution and dealt regularly with senior leadership (SES officers) of the ATO so am familiar with ATO cultural and behavioural characteristics. I have been following with interest the Senate inquiry into the PwC mater and in particular the interactons between senior leadership of the ATO and the Tax Practitioners Board (TPB). From my ATO experience and observations of senior ATO and TPB CEO and Chairman at the inquiry, can I suggest the following courses of action by the Senate inquiry would be useful in determining the actons, aims and motivatioons of relevant senior ATO and TPB personnel in the PwC mater:
1. If not already requested, seek all ATO internal communications and briefings given to ATO Commissioner Jordan and Second Commissioner Hirschhorn in respect of and prior to the ‘robust’ meeting of 1 September 2021 atended by them at the TPB. Such communications are likely to, I believe, reveal the true concerns and aims of the ATO Senior leadership on this mater.
2. Require atendance of former TPB chairman Ian Klug at the Senate inquiry along with any notes or communications Mr Klug had with Second Commissioner Hirschhorn or other senior ATO personnel regarding the future role of TPB CEO Michael O’Neill.
3. Senate inquiry questions relevant to relationships between the ATO and TPB or any actions or comments by the ATO senior personnel in respect of the TPB should be directed at TPB CEO Michael O’Neill even where current TPB Chair Peter de Cure has sought to answer those questioons. Recollections and interpretation of interactions with ATO senior leadership could vary between the TPB Chair and TBP CEO.
From my observations of revelations from this Senate inquiry, I believe that it may be reasonably inferred that there is a concerted campaign to remove the TPB CEO Michael O’Neill despite ATO senior leadership protestations and statement of confidence and support from the current TPB Chair.
To understand why, it is instructive to understand the possible motivations of the various parties. Based on my 32 years ATO experience and observations, I have reached the opinion that primary motivations of ATO senior leadership individuals fall into two general categories:
a. Ensuring the efficacy and reputation of the institution of the ATO as a valuable pillar of society in collecting taxes in a fair and equitable manner so that government services may be provided to the Australian people; or
b. Ensuring the protection and reputation of the Commissioner of Taxation and other senior ATO leadership.
In my experience, those whose prime motivation is in category (b) will (if need be) do this at the expense of the integrity of the tax system. This has proven all too often to be the pathway to promotion. Those whose prime motivation is category (a), all too often find themselves sidelined or eased out if they seek to raise systemic issues that uncover shortcomings in the tax system. Such shortcomings are usually not the news that senior ATO leadership wish to hear or acknowledge as it is viewed as threatening reputations or promotion prospects.
It is apparent that Mr O’Neill motivations fall into category (a). It also appears that his actions in addressing the unethical PwC behaviour to ensure the efficacy of the tax system have diminished to zero his career prospects at the ATO. This I believe was established beyond doubt by recent senate inquiry reveltioons of suggested protocol changes seeking to enable the TPB to sack the TPB CEO and prevent his return to the ATO.
The motivations of the actions of senior ATO leadership do not appear as clear cut. Their ‘robust’ criticism of the legal and justified TPB actions do not align with bolstering the integrity of the tax system. Later atempts to introduce new protocols to remove the current TPB CEO may be seen as retribution against the person identified as responsible for the perceived embarrassment to ATO senior leadership of their contentious ‘in-house’ handling of the egregious PwC conduct when first identified. In short actions of the ATO senior leadership in dealing with the TPB in this mater may be seen as aimed at, not protecting the tax system, but rather protecting ATO leadership reputations.
Should you have any queries, please do not hesitate to contact me by email or by phone
Kind Regards
Ian Bartley
28 February 2024
Answers to Questions on Notice – Parliament of Australia (aph.gov.au)
Professional Accountability: Structural
Challenges in the Audit, Assurance and
Consultancy Industry, 22 April 2024
(Check against delivery)
Good morning, thank you for the opportunity to appear today, to expand on our previous submission to this Committee, and to share perspectives gained from our role in administering Australia’s tax system.
The ATO considers it can directly contribute to the terms of reference for this inquiry by providing our perspectives on the ‘Big 4’ firms as:
• tax advisers and consultants: by making some observations around their governance and culture
• taxpayers: by making some system-level observations around the tax compliance of the firms and their partners.
We believe our interactions with, and observations of, Big 4 behaviour will be useful across the range of professional services under the committee’s remit.
Firstly, some observations around firm governance and culture, with a particular focus on ‘systemically important’ firms.
We refer to firms as being ‘systemically important’ where they have industry or economy wide effects in a local jurisdiction. When we look at the Big 4 firms in Australia, we see this across four distinct markets: financial statements audits, large market tax advice, private sector consulting and government consulting.
We see the big firms primarily through the lens of the behaviour of their tax divisions, including how they operate internationally. We also see some of their interactions of the firms with government: both in consultation on new law and service offerings, and as a provider of services to government agencies.
Even though it is not directly in our remit, we have sought to play a significant role in positively influencing the ethical and professional standards of the Big 4 tax divisions given their impact on the tax behaviour of the largest companies operating in Australia. This has most notably been through encouraging the development and adoption of the Large Market Tax Advisor Principles, which are a credible standard for governance frameworks over the tax functions of a large firm.
We of course also seek to work closely with other organisations and bodies who have ethics and professional standards directly in their remit, such as the professional bodies and the Taxation Practitioners Board, who play a valuable role in this area.
Moving beyond Australia, we are working with our international counterparts in the Large Business 5 and the Large Business International Programme, and organisations such as the International Ethics Standards Board for Accountants (IESBA) to influence global minimum ethical standards.
We recently spoke to IESBA about firm culture and governance based on experience in Australia and some lessons from the past 12 months or so.
In that session we posed some questions to the Board to consider in ensuring the big firms operate at the highest ethical standard:
1. Can firms get too big to manage conflicts effectively, and does consulting to Government give rise to particular challenges? We have historically observed tensions between maintaining independence of the tax and audit functions within a firm. We also see that there is a qualitative difference, and potentially irreconcilable conflicts of duties (between duties to the client and the public interest) where a systemic firm advises government on the rules applying to their clients. At the very heart of consulting there is also a tension between relevant experience and expertise and client specific information, with an onus on the client to understand where potential conflicts may arise.
2. Can international firms reconcile different cultural perspectives and challenges? We observe tensions within firms where they cannot identify whether they are truly an international firm, or just a network of firms, or switch between the two. Further, issues emerge where the leader of a local firm must reconcile differing public interests and ethical standards or norms across jurisdictions.
3. Do incentives drive inappropriate behaviour? Our perspective is that incentives (both financial and internal recognition) really matter. Incentive structures seem to us to have been in practice primarily revenue based, and revenue ‘success’ seems to be very important for both remuneration and promotion into management roles, which can also bring further governance problems down the track.
4. Does firm weighting impact how they think about ethics? In Australia the Big 4 firms have a (relatively) high weighting to ‘non-traditional’ (consulting) as opposed to ‘traditional’ (audit and accounting) businesses as compared with their equivalents overseas. There is the risk of the concept of ‘partner’ or ‘partnership’ changing from being steward for the next generation to a highly paid executive, which has a flow on impact for how a firm thinks about ethics.
5. As large firms continue to operate as partnerships but adopt more corporate-style governance arrangements, do the key partnership linked disciplines of a ’signing partner’, and of joint and several liability fall away? But do corporate-style governance frameworks ‘work’ where the leadership is determined by the very group being led? We have observed in Australia and overseas that where problems emerge, it may well be the people who were originally responsible for those problems who are now in the very management positions
that are meant to resolve them, or internal political considerations make it difficult to discipline or rein in powerful partner blocs.
6. Does the firms’ ethical framework ensure there are effective consequences and appropriate signalling of those consequences? We have observed issues arise where firms attempt to quietly manage matters in house, where limited transparency in managing ethical breaches may signal to others that there are no consequences for poor behaviour.
7. Is there a tendency for big firms to become rules-based only focusing on the rules and law breaches and lose sight of the ethical overlay? It is a challenge for the firms, but also for regulators and standard-setters, to ensure firms (and partners within those firms) to remain principles-based and not just shape themselves around the strict words of a rule. Secondly, if I can also touch briefly on professional services firms’ own taxation affairs in Australia, including the Big 4 accounting firms and the ATO’s compliance approach to the industry.
We have provided the Committee with a comprehensive submission for this inquiry. I would reiterate the largest professional firms in Australia typically operate through a national partnership and associated service trust, and it is through this partnership and service trust structure that the bulk of the firm’s income is generated. Under Australia’s tax law the taxable income of the largest professional firms’ partnerships and related service trusts is taxed in the hands of the ultimate holders of interests in the partnership and the ultimate beneficiaries of the service trusts.
It is a common practice for the partners in large professional firms to direct a share of income or profit to taxpayers who are not partners of the firm through the use of service trust arrangements, and less commonly through assignment of all or part of their partnership interest (commonly referred to as an Everett assignment).
I would remind the Committee that the High Court has drawn a key distinction between income arising from a business structure (which can legally be assigned to others for tax purposes), and income from personal exertion (which cannot be ‘split’ or assigned to others). These principles apply to both big and small businesses. In practice, it can be hard to draw a clear line between permissible and impermissible ’income splitting’.
That said, we have acted on some arrangements that may constitute tax avoidance. We have also issued guidance to the market through rulings and practical compliance guidelines on what arrangements are acceptable. We note that similar ‘income splitting’ considerations arise where firms are structured as companies, albeit through different legal mechanisms.
The Committee may also be aware we recently provided some aggregate information about the tax paid on distributions to partners of the Big 4 firms in response to a question on notice. This showed that, for the 2022 income year:
• the Big 4 firms distributed $2.7 billion of taxable income to equity holders, with taxable income of $1.7 billion distributed from the main partnerships and $1 billion of taxable income distributed from their associated service trusts or similar entities • the taxable income of individual partners who received distributions from the Big 4 firms was $1.8 billion, with tax payable of $700 million.
Conclusion
We welcome the opportunity to discuss our observations on the culture and governance of the firms, including their role as tax advisers, and our approach to the tax compliance of those firms, to help ensure a high standard of ethics and accountability of firms operating in Australia.
