Chapter 2PwC Response - Key issues and committee view
Introduction
2.1This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023 (the bill) relating to the PwC response measures. These provisions are contained in Schedules 1 to 4 to the bill.
2.2This chapter summarises the key issues regarding those measures that were identified during this inquiry by stakeholders and concludes with the committee’s views on these schedules.
2.3This chapter is informed by the views of stakeholders expressed through written submissions to the inquiry and evidence provided at a public hearing held on 9April 2024 at Parliament House.
Views on the PwC response provisions
2.4There was broad support from a variety of stakeholders for the passage of Schedules 1–4 of the bill.
2.5Professor James Guthrie and Dr Adam Lucas expressed their full support for the amendments to the tax promoter penalty laws, the powers of the Tax Practitioners Board (TPB), and the information sharing arrangements between relevant bodies and authorities regarding suspected breaches of tax law and professional codes and standards. They also expressed their full support for the proposed protections for whistleblowers, and suggested additional protections that could improve attitudes towards whistleblowers in Australia.
2.6The Tax Institute expressed their support for the intent behind these measures in elevating the professional standards expected of advisers operating in the tax system and providing public assurance. They also generally welcomed the changes to the whistleblower protection regime, and amendments to the TPB register which would enhance transparency of and public trust in the TPB and the tax profession.
2.7Some submitters suggested amendments to these schedules to strengthen the investigative powers and to enhance the intended deterrent effect even further.
2.8On the other hand, some stakeholders considered that further consideration of issues such as the magnitude of penalties, the application of penalties to technical breaches, and the overall approach to whistleblower protection is needed.
Schedule 1 – Promoter penalty law reform
Scope and effects of penalties
2.9Stakeholders generally recognised that these measures would be beneficial in providing stronger deterrents to tax practitioners from engaging in misconduct.
2.10The scale of penalties was a key topic of commentary from multiple submitters. The Law Council acknowledged the need to deter entities from treating penalties as a cost of doing business but expressed concern about the increased scale of the proposed penalties. Relatedly, concerns were raised about the application of larger penalties to partners uninvolved in contraventions.
2.11The Tax Institute considered it imperative to clarify the scope of conduct intended to be captured, so that advisors are not inappropriately exposed to potentially devastating penalties. They also suggested further clarity is needed regarding the relevant income years when calculating a promoter’s turnover for the purposes of imposing penalties, noting that court processes will take time and penalties could be imposed years after breaches occur.
2.12Tax Astute Training (TAT) described concerns regarding the magnitude of penalties and reputational damage for practitioners, as well as practical effects, such as the increased cost of professional indemnity insurance, as a result of these changes. They warned that this may lead to unreasonable compliance burdens on the vast majority of compliant tax professionals.
2.13In contrast, TJNA and CICTAR remarked on a case where a senior tax partner of KPMG broke US law by recommending not to register a tax shelter with the US Internal Revenue Service. They stressed that this senior tax partner calculated the revenue benefits of breaching the law as far exceeding the penalties that could be incurred from promoting it. They strongly supported the bill increasing maximum penalties to deter this kind of conduct.
2.14TJNA and CICTAR also expressed their strong support for schemes that are not implemented to be included within the scope of tax exploitation schemes.
2.15Some stakeholders questioned whether there would be undesirable effects from the increased scope and scale of penalties.
2.16The Law Council of Australia, TAT, and the Tax Institute each identified that technical breaches without an intention to promote a scheme may be captured under Schedule 1.
2.17While the Law Council of Australia supported deterring the promotion of tax avoidance and tax evasion schemes, they cautioned against an approach that could deter desirable behaviour and underscored the importance of taxpayers obtaining tax advice.
2.18The Law Council also questioned whether the dissemination of information by tax advisers regarding the outcomes of court cases could be captured by penalty provisions where the court’s decision is later reversed.
2.19The Tax Institute was particularly concerned about the potential capture of independent, objective tax advice, and suggested that the intention of achieving a tax benefit is introduced as an element for consideration when determining whether a breach of the PPR has occurred.
2.20The Tax Institute highlighted that certain rulings, such as edited private binding rulings published on the ATO’s register, omit factual details to protect the identity of taxpayers and cannot be relied on by taxpayers other than those to whom the ruling applies. They recommended further clarity regarding how the provisions interact with rulings where no scheme is explicitly described.
2.21TAT also expressed reservations about the scope of these changes. They considered whether a tax professional could be captured by the new PPR if they were to suggest a technical interpretation of a particular ruling at a tax seminar, which subsequently proves materially different than the ATO’s approach. They also highlighted potential ambiguity regarding which schemes are ‘materially different’ to relevant rulings of the Tax Commissioner, noting there are slight differences between actual fact patterns and the scenarios provided in rulings.
2.22TAT argued that these matters, combined with the expanded definitions of ‘tax exploitation scheme’ and ‘promoter’, could invoke the Promoter Penalty Rule (PPR) in respect of most tax practitioner advice, despite there being no wrongdoing in the majority of cases.
2.23TAT also observed that the current exception provisions were designed for the more limited existing PPR. They suggested that it was essential to include ‘bright line’ thresholds, exception rules, or both, to avoid otherwise untenable compliance and commercial risks and costs for practitioners from an expanded application of the PPR.
2.24Dr Terence Dwyer expressed grave concerns about the proposed increased scope of penalties. He argued that the amendments are designed to inhibit the capacity for entities to provide independent and objective tax advice, and noted the bill would lessen the threshold for culpability from ‘receiving consideration’ to ‘receiving a benefit’.
2.25Dr Dwyer asserted that the provision of advice which the Tax Commissioner does not like could open a lawyer to being attacked as a promoter of a tax exploitation scheme, on the basis of the lawyer having received a benefit, being fees for advice. He also identified the retrospectivity of the proposed measures.
2.26At the public hearing, the ATO explained that promoter penalty provisions had applied very effectively, making mass market tax avoidance schemes a non-feature of the Australian tax environment. They also identified that more bespoke tax avoidance schemes exist, with the firms promoting such schemes able to charge large and lucrative fees, warranting the introduction of the amendments proposed by Schedule 1.
2.27The ATO also reiterated their view that it is important for people to have access to tax advice, and the importance of the promoter penalties not interfering with people accessing tax advice.
Limitation period
2.28At the public hearing, TJNA expanded on their submission which suggested that the ATO should have 10 years to act regarding tax promotion offences, rather than the six years proposed by the bill. They spoke of the complexity of cases which might arise, and the fact that matters may come to light only after whistleblowers are terminated by an entity. In support of this, they pointed to the ‘Uber files’, which largely came from a whistleblower who was aggrieved with regard to his previous role at Uber.
2.29The ATO explained the rationale behind why the limitation period was increased to six years, and why this was not extended to a longer period. They explained the timelines for investigating schemes, stating that the marketing of schemes generally become apparent sometime after the marketing when tax returns are lodged, and involve years to investigate both the taxpayer and the potential promoter.
2.30They also pointed to the fact that evidence and accurate memories can be harder to obtain the longer an investigation continues and asserted that there is potential merit in placing urgency on the regulator to conclude and finalise investigations. The ATO expressed their view and expectation that ‘there is a very significant difference, in practice, between having four years and six … there would not be much incremental benefit, and there would potentially be some downsides, in going up to 10’.
Joint and several liability of partners
2.31A number of stakeholders expressed concern about the potential for partners in business partnerships to be held liable for penalties due to the conduct of another partner.
2.32The Law Council of Australia identified the changes would mean that each partner in a partnership of a significant global entity is potentially subject to penalties of 2.5 million penalty units or 10 per cent of the partnership’s turnover. Where each partner may be liable, the Law Council considered that a maximum penalty for each partner is likely to be bankruptcy and loss of professional career of each partner including those not involved in a breach.
2.33Combined with the fact that there may be hundreds or thousands of partners in large partnerships, the Law Council of Australia considered that such proposed penalties may be disproportionate to the conduct and excessive. At the public hearing, they expanded on this position, describing the provisions as effectively deeming partners to be guilty even where they did not know about the conduct, had not been engaged in the conduct, and had done everything reasonable within their firm to prevent the conduct from happening.
2.34They also identified the potential existence of a principle that insurance, such as professional indemnity insurance, against illegal activities can be void. Combined with the proposed scale of the penalties and size of some partnerships, this means that it would be harder for tax practitioners to obtain professional indemnity insurance.
2.35The Law Council of Australia acknowledged that the partnership law concept of joint and several liability is perhaps appropriate for ‘legitimate’ business debts and obligations. However, they asserted it was not clear whether it was appropriate in the case of every civil wrong committed by a partner. They underscored their belief that it is not realistic or fair to impose civil liabilities on partners who could not have known or done anything to prevent the wrong, and that the proposed provisions go beyond what is normal.
2.36TAT identified that under this bill, certain partners and trustees would not be able to use the reasonable mistake of fact defence, the reasonable precaution PPR exception/defence, nor the lack of knowledge exception/defence.
2.37The Law Council of Australia echoed concerns regarding the unavailability of these defences and exceptions, arguing that these defences should be available to partners in at least some circumstances.
2.38The Treasury justified the proposed joint and several liability of partners on the basis that it is a fundamental principle of partnership law, expressly provided for in state and territory partnership acts, and they viewed the Schedule 1 amendments as aligning with the well-established principle in general law. They also identified that the amendments would be somewhat limited, where liability would extend only to the actions of partners within the ordinary course of the partnership business, or with the authority of other partners.
In-house tax professionals
2.39TAT identified concerns with how in-house tax counsel may be captured by the penalty provisions. They drew a line between partners, who are business owners with greater ability to make or veto business decisions, and in-house tax professionals who are employees answerable to the board. TAT warned that it may be difficult to identify where an idea comes from, identifying example scenarios in the EM.
2.40TAT outlined a potential power imbalance between large organisations and in-house tax advisors under the proposed changes. An idea that is non-PPR compliant would attract a lesser penalty if it originated from an individual rather than if it originated from the organisation itself. TAT suggested that a board’s need to protect the company’s interest will mean that large businesses would argue that a tax counsel employee generated a non-compliant idea, to the significant detriment to the employee.
Schedule 2 – Extending whistleblower protections
2.41Submitters endorsed the measures which would extend whistleblower protections to disclosures that are made to a wider range of recipients.
2.42The Centre for Public Integrity highlighted two ways in which the whistleblowing regime would be enhanced by this bill. The first is that it would expand the range of protected disclosures by expanding the range of protected recipients of disclosures. The second is that, in proceedings against a whistleblower, it would reverse the burden of proving a whistleblower’s claim in the whistleblower’s favour.
2.43The Human Rights Law Centre outlined their support for extending whistleblower protections to an expanded range of eligible recipients. They outlined the importance of providing flexibility for whistleblowers to have access to these extended recipients and to be able to speak to the Tax Practitioners Board. They also noted that including additional recipients in the legislation sends a clear message to whistleblowers that they are supported and protected.
2.44The Tax Practitioners Board welcomed the expansion of whistleblower protections and noted that this expansion removed a barrier for people when they want to disclose information. They also outlined that these changes would provide potential whistleblowers with clarity regarding what protections are available to them if they are thinking of providing information.
2.45Witnesses from Treasury also outlined that these whistleblower reforms would extend authorised disclosures for people looking to provide the TPB with information. Treasury witnesses also noted that the prescribed entities that whistleblowers will be able to consult regarding disclosures will be outlined in regulations following the passage of this bill.
2.46TJNA and CICTAR supported the extended whistleblower protection provisions. They stated their belief in the importance for whistleblowers to be able to provide information to the TPB. They also considered that the scope of protections should be expanded to protect from legal liability any entities who assist disclosers in a professional capacity, and any legal practitioners in receipt of protected disclosures for the purposes of providing legal advice or representation.
2.47The exposure draft proposed to extend protections to disclosures made to several types of associations, bodies and organisations listed in the bill, but this extended range of entities are now to be prescribed in the regulations.
2.48The Tax Institute suggested further consultation should be undertaken regarding the selection criteria for prescribed disciplinary bodies to whom confidential information may be shared, to ensure transparency and appropriate debate regarding their selection.
2.49Mr Anthony Watson noted that the whistleblower protections would only operate to protect whistleblowers who suffer a detriment after Royal Assent to the bill, and that the timing of disclosures made by whistleblowers would be irrelevant.
2.50Mr Watson was of the view that two significant protections for whistleblowers, the reversal of the burden of proof and the non-award of costs, would be important only regarding compensation in proceedings. He cited questions of law which arose in Federal Court proceedings which he instituted against Lendlease and PwC. He described the Federal Court in these proceedings as having ‘rewritten and replaced Parliament’s test’, referring to the TA Act whistleblower protections, on the basis that these protections are available only to those who suffered detrimental conduct on or after 1 July 2019.
2.51He pointed to these proceedings and identified that Schedule 2 of the bill would operate in an identical manner, where disclosures made to the TPB would only attract protection if detriment was suffered after commencement of the bill.
2.52He suggested that the protection should be extended to whistleblowers on their making of the protected disclosure, and to make the timing of any detrimental conduct irrelevant.
2.53HRLC, CGPP, and TIA considered that core categories of disclosure recipients should be stated in the bill rather than left for regulatory discretion.
2.54The Law Council of Australia, on the contrary, supported prescribing these entities in the regulations for clearer, narrower definitions of these entities. They asserted this would better protect sensitive information, ensure that disclosures are not incorrectly made, and enable Parliamentary scrutiny of the types of entities that may receive disclosures.
2.55However, they also maintained that additional restrictions should be imposed on recipients of information from whistleblowers regarding the further disclosure of information by the recipients.
2.56The Tax Institute considered it important for professional associations to be protected when on-disclosing information originally disclosed to them by their members, especially where the original disclosure may be protected.
2.57The Tax Institute also identified that the Tax Agent Services Act 2009 (TAS Act)imposes breach reporting obligations on tax practitioners. They contended that, where a good faith disclosure is not substantiated in TPB investigations, the tax practitioner may be subject to legal action by the practitioner named in the disclosure. They considered it would be unreasonable that tax practitioners would be under legal obligations to make such disclosures without protections from potential prosecution, loss or harm, and that the whistleblower protections should cover tax practitioners who must make such disclosures.
2.58The Victorian Legal Services Board and Commissioner stated their strong support for the information-sharing amendments in the bill. They stated their intention to apply as a ‘prescribed professional disciplinary body’, noting that their ability to receive protected information relating to breach of professional standards would enable them to act earlier and more effectively to prevent consumer harm and uphold the integrity of the legal system.
Broader whistleblower law reform
2.59Several submitters argued that, while the bill is a positive step in introducing measures protecting whistleblowers, broader reform of whistleblower law is needed.
2.60At the public hearing, Mr Anthony Watson identified the power imbalances between whistleblowers and the subjects of whistleblower disclosures, which are typically big corporations.
2.61In his submission, Mr Watson pointed to a Human Rights Law Centre review of every whistleblower case to go to judgment in Australia. He stated that review found there had not been ‘a single successful judgment for a whistleblower under our public or private whistleblower regimes.’
2.62Mr Watson also pointed out that the United States Internal Revenue Service offers bounties for those who disclose information about tax fraud which results in successful prosecution.
2.63At the public hearing, both Mr Watson and the HRLC identified a lack of support for whistleblowers, and practical difficulties that whistleblowers face after making disclosures.
2.64Mr Watson spoke of the daunting experiences faced by whistleblowers, and expressed his view in favour of establishing a whistleblower authority to support whistleblowers through disclosure processes. HRLC highlighted the need for advice, guidance and practical support for whistleblowers. HRLC stated that they had been inundated by requests from whistleblowers for pro bono support after launching the first legal support service for whistleblowers, the Whistleblower Project.
2.65The Law Council of Australia spoke of their long-held concerns regarding the operation of the Public Interest Disclosure Act 2013 (PID Act), which is currently subject to review by the Attorney-General’s Department. They pointed to potential conflicts between the PID Act, the Taxation Administration Act 1953 (TA Act) and the Corporations Act 2001, combined with the forthcoming statutory review of tax and corporate whistleblower legislation by the Treasury. The Law Council considered these legislative inconsistencies demonstrate the need for a centralised and consistent whistleblower protection authority and whistleblower regime.
2.66The Centre for Public Integrity also identified a fragmented legislative landscape for whistleblowing across sectors. They emphasised that legislative fragmentation risks confusing and discouraging those with legitimate wrongdoing to disclose. They suggested harmonisation and simplification would clarify whistleblower protection law for its intended beneficiaries and would reduce the funds required to administer whistleblower schemes.
2.67These suggestions were echoed by the joint submission of HRLC, CGPP and TIA, who identified that the current whistleblower protection framework is inconsistent, with overlapping regimes, and is suffering from the absence of an oversight body.
2.68In the absence of a centralised scheme, they suggested expanding protections to recipient entities who assist disclosers, ensuring conduct reasonably necessary for the making of a disclosure is protected, clarifying jurisdictional matters arising out of immunity claims, and updating Commonwealth whistleblower laws to make them fit-for-purpose, as outlined in Protecting Australia’s Whistleblowers: The Federal Roadmap.
2.69At the public hearing, HRLC spoke of the Office of the Whistleblower Ombuds, a body within the United States Congress which supports congresspeople in their dealings with whistleblowers. They identified that, while it is a relatively new body, it has provided relevant expertise to committees and congresspeople regarding the operation of privilege and the support mechanisms to help whistleblowers.
2.70The Treasury explained at the public hearing that prescribed entities are intended to be prescribed in the regulations to ensure the full list of professions can be covered to provide necessary support to potential whistleblowers, and to ensure groups which are added to the list have appropriate codes of conduct in place for protection of information disclosed to them.
Schedule 3 – Tax Practitioners Board reform
2.71TJNA and CICTAR supported the passage of Schedule 3. As well as assisting consumers to be informed about previous misconduct, the TJNA and CICTAR considered that the publication of information about investigations would be a further deterrent to those who might breach the TAS Act and the Code of Professional Conduct.
2.72They supported discretion for the TPB over the length of time to publish information on the register, and the default period of time for an investigation being 24 months before needing an extension.
2.73At the public hearing, the TPB explained how the extended investigation period would help them undertake more complex investigations, and that the extended period would be subject to controls to ensure it is only extended where necessary and appropriate. They also expressed their view that publication of findings for a five-year period, from the current one-year period, would be more of a deterrent.
2.74The Law Council of Australia supported the reforms proposed to the TPB, but advised against the proposed publication of adverse decisions against entities whose registration has been deliberately allowed to expire, noting that the proposed subclause would conflate registration, investigation, and publication. They submitted that the proposed subclause is drafted too broadly, appearing to allow unrestricted publication of contravention details as an alternative to imposing sanctions or seeking court action.
2.75They suggested that an alternative would be to insert a new provision which would mean ‘registration would not expire at the end of the current period if the TPB considers that due to a current investigation or any new investigation within 30 days it would be inappropriate for such registration to expire’.
2.76The Tax Institute expressed their view that unregistered entities found to be in breach of TAS Act should be included on the register. They also supported the inclusion of further information on the register, namely the status of sanctions that are lapsed or remediated, and any steps taken by practitioners to address issues. They asserted these measures would provide assurance and transparency for the public, deter unregistered entities from breaching the TAS Act, and would enhance the integrity of the register.
Schedule 4 – Disclosure powers of ATO officers and TPB officials
2.77Submitters generally supported the passage of Schedule 4.
2.78TJNA and CICTAR highlighted their belief in the need for taxation officers and TPB officials to share protected information with the Treasury about misconduct arising out of suspected breaches of confidence. They indicated their support for enabling the on-disclosure of information by the Treasury, the Minister or Finance Minister to law enforcement agencies. They also expressed an assumption that such a power is already available and therefore not needed in this bill.
2.79The Law Council of Australia stated that further clarification is required regarding the proposed Treasury disclosure powers and protections over the information that would be shared. They identified that the Treasury would be permitted to consult with other agencies to respond to a suspected or actual breach, and that prescription of those agencies to which protected information may be disclosed would help confine disclosure of confidential information.
2.80They highlighted the possibility that the Law Council may be considered to be an entity which provides advice to Government on behalf of the legal profession. They noted that, while it may be unlikely for the Law Council to be an ‘entity representing a taxpayer’, it would be helpful to expressly exclude peak professional bodies, such as the Law Council from the scope of these information sharing provisions to promote certainty about when obligations of confidence may arise.
2.81Further, the Law Council of Australia commented on the proposed permission for disclosures to a professional disciplinary body that is prescribed by regulation for such purposes. As well as questioning the need to apply to be a prescribed disciplinary body, they also indicated that the requirement to provide relevant information to the ATO or TPB regarding legal or ethical breaches may be inappropriate for professions which are not fully self-regulated, such as the legal profession.
2.82The TPB, at the public hearing, endorsed information sharing for the purposes of the Tax Act and the TAS Act. They viewed the proposal as providing guidance to any person involved regarding whether it is appropriate to share information.
2.83The Tax Institute suggested that information should only be shared under these provisions for the purposes of rectifying breaches of Commonwealth confidence or assisting prescribed disciplinary bodies in completing investigations of code of conduct or professional standards breaches, and guidelines should be published for where these powers may be exercised.
2.84Both the ATO and the Treasury explained reasons that the TPB and the ATO would be given a discretion, and not a positive duty, to share protected information where there are breaches or suspected breaches of confidence. The ATO explained that the aim is to share to the maximum extent but identified that some criminal matters might need to be resolved before information is on-disclosed regarding other matters, such as licencing.
2.85The Treasury echoed this view, stating that a duty to disclose may result in some downsides in situations where information needs to be either withheld, or disclosure delayed. They expressed the view that it was preferable for regulatory agencies to make judgements on a case-by-case basis.
Committee view
2.1The committee believes that schedules 1-4 are important to ensure that tax practitioners are deterred from abusing confidential government information. The committee further believes this bill will introduce appropriate measures to respond to tax practitioner misconduct, to protect whistleblowers bringing misconduct to light.
Schedule 1: PwC Response—Promoter penalty law reform
2.86The committee notes that the 100-fold increase of promoter penalties will act as an effective deterrent against tax adviser misconduct.
2.87The committee also welcomed the views of the ATO, who noted that the extended investigation and enforcement powers support application of the promoter penalties.
Schedule 2: PwC Response—Extending tax whistleblower protections
2.88The committee welcomes evidence heard that these whistleblower protections will remove barriers for people thinking of disclosing information, and will provide clarity around what protections they have available.
2.89The committee notes the extension of protections to an expanded group allowing whistleblowers to disclose information to psychologists and medical professionals.
Schedule 3: PwC Response—Tax Practitioners Board reform
2.90The committee heard from witnesses that these reforms to the TPB will enhance public confidence in tax professionals by extending timelines for investigation and publishing misconduct on the register.
2.91The committee welcomes the evidence that outlines how the publication of information about misconduct for five years will help to increase deterrence of misconduct.
2.92The committee notes that the extension of TPB investigation timelines will allow them to undertake more complex investigations.
2.93The committee expects these reforms to enable the TPB to investigate and respond more effectively regarding wrongdoing by tax professionals, including where tax practitioners’ registration has lapsed.
Schedule 4: PwC Response—Information sharing
2.94The committee heard from witnesses about the importance of information sharing between the ATO, the TPB and prescribed bodies to allow for effective disciplinary action.
2.95The committee is assured that the information sharing reforms in Schedule 4 will help prevent similar situations to that which emerged during the PWC scandal, when relevant protected information was not shared between government entities.
2.96The committee heard from submitters and witnesses that this schedule strikes the right balance between sharing protected information with government entities without mandating disclosures of this information.