T he biggest tax scandal in Australia in decades has many Australians worried that their tax system has fallen prey to a peculiar type of "down under" crony capitalism. Their wake-up call came earlier this year with the arrest of Nick Petroulias, the Australian Taxation Office's former intelligence chief, on charges of fraud.
At the center of the Petroulias case is the way the ATO regulates the tax affairs of companies and individuals with its system of "private binding rulings." Private binding rulings, or PBRs, were established in 1992 as a new bureaucratic tool to give businesses more certainty in their tax decisions.
The original motive behind the PBR system was well intentioned. If a businessman was concerned about the tax implications of a new investment decision, he could approach the ATO and ask for an advance ruling, which, once granted, had the status of law.
But things have soured since then. Over the last three years, the PBR system has helped the promoters of aggressive tax minimization schemes to siphon off as much as $1.1 billion in tax revenue. The result is that various voices in Australia are calling for changes that make ATO tax rulings more transparent, removing the temptation for deals to be struck on the sly between favored businesses or individuals and the ATO. Others are calling into the question the ATO's authority to make private rulings at all.
Unlike public tax rulings, which are recorded on a database, private binding rulings represent a hidden realm of Australia's private tax law. They are offered to individuals or companies who apply for the tax ruling or who can afford to push for one.
In fact, businesses regularly "forum shop" at different ATO offices around Australia in search of the most favorable PBR. And with nearly 1,800 ATO officials authorized to issue them, it's not that hard to get a good ruling.
Not only has the Commonwealth lost billions in revenue as a result of PBRs, it is fairly apparent that senior ATO officials knew the PBR system was helping the "boutique" end of town at the expense of the average business.
The biggest argument in favor of reforming the PBR system is the scandal surrounding Mr. Petroulias, the former assistant commissioner of taxation, who was arrested earlier this year for allegedly defrauding the Commonwealth and for using the PBR system for his own financial gain.
Barely 30 years old, Mr. Petroulias was the head of the ATO's Strategic Intelligence Unit for seven months before quitting in April 1999 to pursue a private career in taxation law. He allegedly planned to set up an offshore merchant bank to peddle tax-deductible schemes he had ruled on in his former job.
Mr. Petroulias was no mere cog in the wheel of Australian tax revenue collection. Inspired by the methods of the Central Intelligence Agency and the Federal Bureau of Investigation, the self-confident, entrepreneurial tax lawyer eagerly established an informer's network among the nation's growing class of "aggressive" tax-minimization advisers.
Thus, sitting atop an extensive intelligence network, Mr. Petroulias became Australia's top tax spy, someone who, according to the authorities, broke the rules when it came to dealing with the enemy -- accountants offering mass-market tax-minimization schemes to executives -- and anyone else hoping to reduce their tax bill.
These were schemes that allowed individual contributors to claim tax deductions by contributing to employee benefit trusts or special superannuation schemes, such as the one offering tax-free gains located offshore in New Zealand. But their use exploded when aggressive tax planners used PBRs to market them around the nation. An estimated $1.1 billion was funneled through the New Zealand scheme before the ATO effectively ended the show for Australian contributors
Mr. Petroulias's network of informers was based on a very old principle. He put the message out to Australia's tax planners: Come forward and inform on your competition and you will receive favorable treatment from the ATO; stay away and the ATO will punish you. His intention was to get "real time" intelligence by trading favorable PBRs for information. It was a way of reducing revenue loss through compromise and keeping up with new tax schemes instead of waiting for their effects to unfold.
With the PBR system backing him, Mr. Petroulias clearly enjoyed his work and what he has described as the "intoxicating" power he had over tax planners. "Someone from the profession commented that there was a conga line to Petroulias's door -- and that's exactly the point, that's what I wanted. It was a rush. It was a thrill," Mr. Petroulias said after his arrest.
But Mr. Petroulias's "street methods" were more suited to anti-terrorist or espionage cases; they angered many in the game of devising new ways to minimize tax, and they worried ATO officials watching the new spying game from afar.
Ultimately, Mr. Petroulias appears to have gone into business for himself while working for the ATO. Or at least that's what the Australian Federal Police originally believed to be the case when they launched a massive nationwide operation against him that culminated in March.
Although the original fraud charge has been dropped, Mr. Petroulias is still waiting trial on other charges, including allegedly using his position to benefit from his own minimization schemes at a cost of about $11 million in tax revenue.
But it is doubtful Mr. Petroulias is the real problem so much as it is the potential for favoritism within the PBR system. This is something that even Mr. Petroulias, who denies any wrongdoing, has recognized.
"If you start thinking about [PBRs] as a concept, then basically it's the power to a certain bunch of tax officials -- and we're talking about thousands of tax officials -- able to rewrite tax laws for specific people that ask for it," Mr. Petroulias said. "Now, what goes on behind closed doors we can never quite know. But do you understand the potential that's created by the system?"
Moreover, tax minimization schemes are just one of the problems with PBRs. A good PBR can also make or break a bottom line for a struggling business. What some businesses are naturally concerned about is just what advantages their competitors are getting from their secret deals with the ATO.
Apart from the issue of transparency, PBRs are supposed to be for individual cases but increasingly they are being used for mass-marketed schemes that apply to hundreds of people but which are of a dubious legal basis. That puts at risk the retirement savings of many investors who might get caught in retrospective rulings against the original PBR.
These problems were supposed to be addressed in an investigative report on the PBR system commissioned by Tax Commissioner Michael Carmody. But no one really knows what the so-called Sherman Report says because it too remains under lock and key, out of public view
In fact, the lack of transparency is the real problem at the ATO. Mr. Carmody should reveal the contents of the Sherman Report as soon as possible or risk facing the allegation that the ATO is indulging in crony capitalism, Canberra-style.
-- From The Asian Wall Street Journal
