David McBride Starting to Wish He’d Just Leaked Confidential Tax Information for PwC Instead
Promoter penalties, whistleblower, TPB reforms pass Parliament
Labor’s bill containing reforms that respond to the PwC scandal and PRRT amendments has finally passed both houses after a deal was struck with the Greens.
The government’s bill on tax adviser misconduct has passed both houses of Parliament, introducing tax promoter penalties of up to $780 million and stronger protections for whistleblowers in the wake of the PwC scandal.
A deal between Labor and the Greens on Thursday secured the bill’s passage along with changes to the Petroleum Resources Rent Tax and fuel efficiency standards.
It comes over one year since news broke of PwC using confidential government tax briefings for its own gain.
In response to the news, the government committed to overseeing “the biggest crackdown on tax adviser misconduct in Australian history”.
The government released draft legislation reforming the Tax Agent Services Act and Taxation Administration Act in September and introduced it in the lower house the following month.
Its passage was recommended by a senate economics committee on May 10, despite pushback over the fact it also contained unrelated changes to the PRRT.
The PwC reforms, found in schedules 1-4 of the bill, would scale up maximum penalties for advisers and firms that promoted tax avoidance schemes by 100-fold (from $7.8 million to over $780 million).
Tax whistleblower protections would be extended under schedule 2, reversing the burden of proof for certain claims of protection to ensure disclosures can be made without detrimental conduct such as termination or litigation. If detriment was suffered, it would allow whistleblowers to seek compensation.
Schedule 3 of the bill would give the TPB more powers, allowing it to publish more details of its investigations and decisions publicly and increasing investigation time frames from six months to two years, enabling it to investigate a wider scope of issues raised by a potential breach.
Schedule 4 would remove limitations on information sharing between government agencies. This would help prevent a PwC-like scandal from happening again, the senate committee said.
While schedules concerning PwC reforms received broad support, some MPs pushed back against its final schedule which amended the PRRT to limit the assessable income able to be offset by deductions to 90 per cent.
Independent Senator David Pocock, who wanted the rate of PRRT raised from 40 per cent up to 60 per cent, said the government was ramming through an omnibus bill that combined “important changes off the back of the PwC scandal and puts them with a dud deal when it comes to the export of our gas”.
Despite the pushback, the bill was passed along with amendments to fuel efficiency standards and offshore gas approvals through a deal with the Greens which involved removing more contentious parts of the offshore gas approvals bill.
A parliamentary hearing has heard testimony that abuse of legal professional privilege will continue so long as the big four accounting firms are allowed to own law firms.
Nick Wilson20 May 2024 • BIG LAW
Asked how to avoid abuses of legal professional privilege (LPP) among the big four consulting giants, University of Wollongong associate professor Andrew Schmulow said the answer was an outright ban on allowing them to own law firms.
“They should never have been allowed to own law firms in the first place. In fact, lawyers and auditors will at times be on opposite sides of a conflict. I think of trading in insolvency. I think of faulty or defective financial statements,” he told a recent hearing of the Parliamentary Joint Committee on Corporations and Financial Services.
“To have lawyers in the same firm as an audit firm is absolute lunacy; it should never have been allowed to happen, and it is very quick and easy to unwind.”
Schmulow’s solution may be more extreme than most, but his concerns echo those raised throughout the parliamentary inquiries triggered in response to the PwC tax leaks scandals.Several witnesses have raised concerns that legal practices within advisory divisions of multidisciplinary firms may offer the cloak of privilege as a selling point for their non-legal services.
Legal Consolidated partner, Brett Davies, opposed Schmulow’s calls for a forced split of multidisciplinary firms.
“What are you going to do? You’ll allow a doctor’s surgery to own a law firm, but you won’t allow an accounting house to own a law firm?”
“I think it’s ridiculous … I think it’s discriminatory to suggest accountants have a lower standard than a financial planning group,” he said.
Asked whether the law should go further in protecting against abuses of LPP, Davies said the laws were already in place.
“Your right as a client to prepare information which may go to court is protected by [LPP] and whether it is or it isn’t is a question for a judge in a court of law to decide,” he said.
“So, what the judge will do is say, ‘OK, you’re claiming [LPP], show me the information in confidence and I’ll tell you whether it’s subject to LPP or not’ … Everyone does it.”
ATO second commissioner Jeremy Hirschhorn recently told the Senate the Tax Office had been “disappointed” by the test of legal professional privilege applied by in-house and independent law firms.
“We [the ATO] have been disappointed with the law firms, whether that is the law division of multidisciplinary firm or a law firm itself, in how they have gone about doing the test as to whether something truly is privileged,” he said.
“Instead, in some cases almost viewing it like a negotiating tactic by making a blanket claim and forcing us to go document-by-document.”
Hirschhorn said he had observed a strategic blurring of the lines between consulting and legal functions, with consultants claiming their services had been offered under the “aegis of a law firm.”
“When I read that, I worry that the exact same problem that we had with the big four accounting firms will be replicated in the big law firms,” he said.
Misuse of LPP among large consulting firms is not a new observation. Both reports of the Senate Finance and Public Administration Reference Committee on the integrity of consulting services featured detailed accounts of the issue.
Both referred to the findings of Justice Mark Moshinsky in the 2022 Federal Court decision of the Commissioner of Taxation v PricewaterhouseCoopers that PwC had incorrectly applied LPP to more than half of the 15,500 documents requested by the ATO.
The first report wrote that PwC’s approach to LPP was “striking,” adding that the Senate committee believed that approval for the privilege claims “must have” been approved from the “most senior levels” of the firm.
After reviewing its approach to LPP claims, PwC Australia said it had identified “certain engagements that were not being directed by legal practitioners as described in the engagement letters.”
It added that these incidents were contrary to the firm’s values and policies.