Proposed reforms to address tax adviser misconduct

The Albanese Government has released its plans for what it calls the ‘biggest crackdown on tax adviser misconduct in Australian history’, to address tax adviser misconduct and perceived shortcomings in regulatory frameworks in the wake of the PwC tax leaks scandal.

The Government will introduce legislation later this year.

The Government’s proposed reforms

The proposed reforms focus on three priority areas:

• Strengthening the integrity of the tax system
• Increasing the powers of the regulators
• Strengthening regulatory arrangements to ensure they are fit for purpose.

1.             Strengthening the integrity of the tax system

The Government proposes to reform elements of the promoter penalty laws.

Background

The promoter penalty laws — found in Div 290 of Schedule 1 to the TAA — provide that an entity must not engage in conduct that results in:

• that or another entity being a promoter of a tax exploitation scheme, or
• a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling.

Exclusions and exceptions include:

• employees or other entities that have only minor involvement
• conduct that occurred by reasonable mistake or accident
• something outside an entity’s control and the entity took reasonable precautions.

Proposal — increasing maximum penalties

To increase maximum penalties for advisers and firms who promote tax exploitation schemes from $7.8 million to over $780 million.

Current law

The ATO must apply to the Federal Court of Australia to impose a civil penalty. (The ATO may also consider various forms of corrective action.)

From 1 July 2023, a penalty unit is equal to $313 (previously $275 from 1 January to 30 June 2023).

Currently the maximum penalty is the greater of:

• twice the consideration received or receivable by the entity or its associates — directly or indirectly — in respect of the scheme, or
• per the following table

While the media release does not provide details of the proposed new penalty regime, it is clear that the number of penalty units imposed will increase 100-fold for a body corporate, which is $782,300,000 at the current penalty unit value (i.e. the ‘over $780 million’ per the media release). The announcement is silent as to how much — and whether — the maximum penalty for individuals will increase.

Proposal — expanding the scope

To expand their scope so they are easier for the ATO to apply to advisers and firms who promote tax avoidance.

Current law

An entity is a promoter of a tax exploitation scheme if:

• the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and
• the entity or an associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and
• having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement.

An entity is not a promoter of a scheme merely because it provides advice about the scheme.

An employee is not taken to have had a substantial role in respect of the marketing or encouragement merely because they distributed information or material prepared by another entity.

It is currently unclear as to which elements will be amended to expand the scope of the promoter penalty regime.

Proposal — increasing time limit

To increase the time limit for the ATO to bring Federal Court proceedings on promoter penalties from four years to six years after the conduct occurred.

Current law

The Commissioner must apply to the Federal Court no later than four years after the entity last engaged in the relevant conduct. However, there is no time limit where the scheme involves tax evasion.

2.             Increasing the powers of the regulators

The below is a summary of the proposed reforms (what we know so far) compared to the current rules:

Proposal — tax secrecy laws

To remove limitations in the tax secrecy laws that were a barrier to regulators acting in response to PwC’s breach of confidence.

Current law

The tax law secrecy rules in Div 355 of Schedule 1 to the TAA provide that it is an offence for an ATO officer to disclose ‘protected information’. There are existing exceptions for certain disclosures made to a law enforcement agency, court or tribunal for the purposes of law enforcement.

Proposal — referral of ethical misconduct

To enable the ATO and Tax Practitioners Board (TPB) to refer ethical misconduct by advisers — including but not limited to confidentiality breaches — to professional associations for disciplinary action.

Current law

Where the TPB finds that a practitioner’s conduct breaches the Tax Agent Services Act 2009 (TASA), the TPB is required to notify any recognised professional association of which the practitioner is a member.

Proposal — whistleblower protection

To protect whistleblowers when they provide the TPB with evidence of tax agent misconduct.

Current law

There are existing whistleblower protection laws for eligible disclosures under Part IVD of the TAA. To qualify for protection the disclosure must be made to an eligible recipient, which includes the ATO and certain entities associated with the entity the subject of the disclosure, but does not include the TPB.

Proposal — more time for TPB investigations

To give the TPB more time — up to 24 months — to complete complex investigations.

Current law

The TPB has the power to investigate breaches of the Code of Professional Conduct (which is codified in the TASA) but it must make a decision about the outcome of an investigation within six months after the investigation commences.

Proposal — improving public register

To improve the TPB’s public register of practitioners, so that people have more transparency over agent and firm misconduct.

Current law

The register discloses any conditions of registration, period of and reasons for suspension, sanctions imposed, and date of and reason for termination. The TASA requires the TPB to maintain a register. Regulations prescribe the details disclosed.

3.             Strengthening regulatory arrangements

Treasury will be co-ordinating a whole of Government response to the PwC matter and the systemic issues raised. This work will deliver options to Government progressively over the next two years.

Consultation on the following options will begin in the coming months:

• implementing remaining recommendations from the independent review of the TPB, including strengthening the range of sanctions available to the TPB (see the final report of Treasury’s Review of the Tax Practitioners Board)
• a Treasury review of the promoter penalty laws to ensure that they address the types of promoter activity prevalent today — including schemes that are bespoke, complex, and/or operate across jurisdictional boundaries
• a Treasury review of emerging fraud and threats to clamp down on systemic abuse of our tax system perpetrated by tax agents and other bad actors
• a Treasury and Attorney‑General’s Department joint review of the use of legal professional privilege in Commonwealth investigations, with options for Government to respond to concerns that some claims of privilege are being used to obstruct or frustrate investigations
• a Treasury examination of the regulation of consulting, accounting and auditing firms to consider whether reforms are needed. This work will require collaboration with states and territories, given cross‑jurisdictional regulation of partnerships, as well as engagement with ongoing Parliamentary committee inquiries
• a Treasury review of the compulsory information gathering powers of the ATO to ensure it has the right tools to perform its role effectively and enable it to assist law enforcement agencies to investigate serious criminal offences perpetrated against the tax and superannuation systems
• a Treasury review of the secrecy provisions that apply to the ATO and TPB to consider whether there are further circumstances in which it is in the broad public interest for information obtained by these regulators to be shared with other regulatory agencies
• a Department of Finance review into the use of confidentiality arrangements across all Government agencies to ensure they are fit for purpose, legally binding and enforceable. The review will also identify opportunities to strengthen the management of conflicts of interest in contracts
• a Department of Finance review to explore options to increase the transparency and visibility of where Commonwealth contracts have been terminated for material breach.

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