ATO warns big four on ‘clever’ tax-minimisation strategies
Aggressive tax-minimisation strategies created for large companies by “clever” partners at Australia’s big four accounting groups are eroding the integrity of the entire tax system, the tax office has declared.
In a warning to the four accounting firms — PwC, KPMG, Deloitte and Ernst & Young — ATO deputy commissioner Jeremy Hirschhorn said the tax office would respond “forcefully” to misconduct and cautioned advisers to be “very careful” at marketing “new and clever” minimisation strategies that were at odds with tax laws.
In a series of speeches in recent weeks to the big four firms, Mr Hirschhorn said parts of their taxadvice arms were still behaving like “boutique” advisory firms flogging “clever” tax strategies.
This was at odds with the big four’s role as “systemically” important firms, he said.
“When you have a good idea, be aware it will not be considered by the ATO as a ‘one-off’,” Mr Hirschhorn said.
The structure of the big four firms — which have a series of overlapping partnerships — offers individual advisers a significant degree of freedom in the way they operate.
Mr Hirschhorn stressed that the vast majority of tax advisers were good, as were the majority of large companies, 95 per cent of which were tax-compliant.
However, he added that pockets of bad behaviour should not be tolerated.
In some cases, the high revenue generated by some partners who pushed aggressive strategies had allowed their individual divisions to flourish.
An ATO crackdown on “push transactions”, where questionable tax strategies are marketed to companies by the major firms, has resulted in a number of senior partners exiting the industry — a key performance indicator of the tax office’s work at cleaning up the market.
“There is an open question as to whether a systemically important firm — or sub-franchises of that firm — can safely or sustainably adopt a ‘hired gun’ framework, or have a loose governance framework that explicitly or implicitly allows, or encourages, this ethical framework to be chosen by subfranchisees,” Mr Hirschhorn said.
“Where a partner in a boutique firm comes up with a ‘cute’ piece of tax planning, which is then implemented by one taxpayer, the ATO will see this as a ‘one-off’.
“If, by contrast, a partner in a systemically important firm comes up with the same idea, the potential, or reality, of that idea being rolled out across Australia’s highly concentrated corporate tax base will mean that the ATO must respond more forcefully.”
The big four accounting firms are facing a heightened level of scrutiny amid a slew of parliamentary inquiries into the shift in focus of the firms from audit to consultancy and contracting work.
The parliament is also examining government outsourcing work to the major accounting firms and the relationship between government officials and the advisory businesses.
“For those at the big four firms … you are systemically important in terms of your broader effect on the capital markets, and I would put it to you this affects your licence to operate across a range of areas — as is currently playing out
— (and) provides a further system constraint on ‘clever’ advice,” Mr Hirschhorn said.
Mr Hirschhorn, a former KPMG tax partner, said conservative advisers were often hired by conservative companies, while firms seeking to aggressively minimise tax sought out aggressive tax advisers, who underestimated how aggressive they were.
Mr Hirschhorn said this meant that “few participants in the tax system fully understand where they sit in the risk spectrum”.
“The good large-market adviser of today should focus on being wise, not clever,” he said.
“I have seen some advisers who seem to operate almost on the basis that tax is discretionary or for people who are not as clever as them or their clients.
“In all too many cases, we see taxpayers with stated conservative risk frameworks enter into aggressive tax structures.”
Mr Hirschhorn said that if poor tax advice got a foreign company or investor into trouble, offshore capital markets would “simply view it as a tax risk premium for investing in Australia, to the detriment of all Australians”.
“We also need your help to call out and tackle bad behaviour, for the integrity of your profession just as much as the rest of the tax system,” he said.
Mr Hirschhorn said that, too often, the tax office was being frustrated by spurious blanket claims of legal professional privilege over documents, and that firms often handed over
‘I have seen some advisers who seem to operate almost on the basis that tax is discretionary’ JEREMY HIRSCHHORN TAX OFFICE DEPUTY COMMISSIONER
“summaries” of information rather than original documents when they were the subject of an investigation.
“We also see taxpayers with governance positions which state that they will fully co-operate with the ATO in the provision of information taking aggressive positions around privilege to hold back information,” Mr Hirschhorn said.
“I note that, as in many spheres of life, a cover-up can have worse consequences than the original action.”