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.”

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