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Why adviser misconduct crackdown must focus on miscreant minority
22 September 2023
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The Albanese government announced on 6 August that it would “oversee the biggest crackdown on tax adviser misconduct in Australian history” and early this week released its draft package of reforms for public consultation.
The package of reforms covers three priority areas:
- Strengthening the integrity of the tax system.
- Increasing the regulators’ powers.
- Strengthening regulatory arrangements to ensure they are fit for purpose.
The first priority will focus on ensuring tax agents and others who advise their clients to avoid Australia’s tax laws are penalised. Incentives to use confidential government information to help clients avoid tax will be reduced by:
- Increasing the maximum penalties for advisers and firms who promote tax exploitation schemes from $7.8 million to more than $780 million.
- Expanding the promoter penalty laws so they are easier for the ATO to apply to advisers and firms who promote tax avoidance.
- Increasing the time limit for the ATO to bring proceedings before the Federal Court on promoter penalties from four years to six years after the conduct occurred.
As part of a whole-of-government response to concerns that some of our regulatory frameworks are not fit for purpose, Treasury will conduct a review of the “promoter penalty laws to ensure they address the types of promoter activity prevalent today, including schemes that are bespoke, complex, and/or operate across jurisdictional boundaries”. Eight other reviews are planned over the next two years.
The announcement and the scope of the proposed changes have, understandably, troubled tax practitioners who are concerned that giving advice may be treated as promoting a tax avoidance scheme which could result in promoter penalties being applied.
Before considering the proposed changes, understanding the current rules is appropriate.
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What are the current rules?
The promoter penalty provisions are contained in Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA). The civil penalty regime was introduced with effect from 6 April 2006 to deter the promotion of tax exploitation schemes and realign the risk exposure that previously saw promoters of tax exploitation schemes obtain substantial profits while subjecting investors to penalties under the TAA.
The regime was designed to address the previous imbalance of sanctions imposed whereby taxpayers solely bore the risk while promoters of tax exploitation schemes escaped any liability.
Broadly, an entity must not:
- Engage in conduct that results in that or another entity being a promoter of a tax exploitation scheme.
- Implement a scheme that has been promoted on the basis of conformity with a product ruling in a way that is materially different to that described in the product ruling.
Meaning of “tax exploitation scheme” and “promoter”
A scheme is a “tax exploitation scheme” if, at the time the scheme is promoted:
- It is reasonable to conclude that an entity that entered into or carried out the scheme has a sole or dominant purpose of getting a scheme benefit; and
- It is not reasonably arguable that the scheme benefit is available under the tax laws.
An entity is a “promoter” of a tax exploitation scheme if:
- The entity markets or encourages the scheme;
- The entity or an associate of the entity directly or indirectly receives 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.
Powers of the Commissioner of Taxation
Under the provisions, the Commissioner has the power to:
- Seek an order from the Federal Court to impose a civil penalty on the entity.
- Seek an injunction from the Federal Court to restrain the entity from promoting a scheme or implementing a scheme that does not conform to its product ruling.
- Require the entity to enter into voluntary undertakings about the way in which schemes are being promoted or implemented.
Practice Statement PS LA 2021/1 provides guidance to ATO officers on the application of the promoter penalty laws.
Penalties
Currently, the maximum penalty the Federal Court can impose under the promoter penalties regime is the greater of:
- 5,000 penalty units (currently equal to $1.565 million, based on the value of one penalty unit being $313) for an individual or 25,000 penalty units (currently equal to $7.825 million) for a body corporate. When the regime was introduced in 2006, these penalties were equal to $550,000 and $2.75 million respectively; and
- Twice the consideration received or receivable, directly or indirectly, by the entity or its associates in respect of the scheme.
The government wants to increase the maximum penalty to 2.5 million penalty units, or $782.5 million.
Case law
The current promoter penalty provisions have remained largely untouched since their introduction and have been applied only six times in their 17-year existence:
- Commissioner of Taxation v Ludekens [2013] FCAFC 100 — involved two individuals, Ludekens and Van de Steeg, securing investors to invest in a managed investment scheme and receiving sales commissions and GST refunds.
- Commissioner of Taxation v Barossa Vines Ltd [2014] FCA 20 — involved three product rulings in respect of viticultural managed investment schemes.
- Commissioner of Taxation v Arnold (No 2) [2015] FCA 34 — involved the purchase and donation of pharmaceutical goods to charities with foreign operations.
- Commissioner of Taxation v International Indigenous Football Foundation Australia Pty Ltd [2018] FCA 528 — involved claims for R&D tax offsets.
- Commissioner of Taxation v Bogiatto [2020] FCA 1139 — involved claims in respect of purported R&D activities.
- Commissioner of Taxation v Rowntree [2020] FCA 1322 — involved the sale of interests in carbon credits.
To what extent does the limited application of the provisions speak to their effectiveness? Does this suggest the provisions are too onerous for the ATO to apply?
What are the exceptions?
In addition to the safety net of having a reasonably arguable position, the following exceptions apply:
- The conduct occurred by reasonable mistake of fact.
- The conduct occurred by accident or some other cause beyond the entity’s control and reasonable precautions were taken to avoid the conduct.
- Employees or other entities who have only minor involvement.
- Employees where the Federal Court has ordered their employer to pay a civil penalty under the promoter penalty regime in relation to the same scheme.
- The Federal Court is satisfied that the entity did not know, and could not reasonably be expected to have known, that the entity’s conduct would result in another entity being a promoter of a tax exploitation scheme.
- The entity’s involvement in a scheme is more than four years after the entity last engaged in conduct that resulted in the entity being a promoter, unless there is tax evasion.
Additionally, and importantly, promoter penalties are not intended to obstruct tax advisers and intermediaries from merely providing advice to their clients. The law specifically excludes an entity from being a promoter of a tax exploitation scheme merely because the entity provides advice about the scheme.
Further, under the law, the Commissioner must not seek to apply the promoter penalties to an entity where the scheme is based on the tax law applying to an arrangement in a particular way that accords with either advice given to the entity or the entity’s agent by or on behalf of the Commissioner, or public advice and guidance provided by the Commissioner.
What are the concerns?
Increasing the integrity of the tax system through increased powers for regulators and improved collaboration between government agencies and with professional associations can only be a step in the right direction. The government, its agencies and regulators, professional associations and tax practitioners are all custodians of the tax system. Joint accountability and consistently applied, fair due process is crucial in maintaining trust and confidence in our tax system. Improving the regulatory framework will also enable greater consumer confidence in all tax agents the majority of whom consistently act in accordance with the Code of Professional Conduct in the Tax Agent Services Act 2009.
That said, the package of reforms must be implemented with appropriate consultation, transparency and scrutiny. Striking a balance between imposing penalties on taxpayers for tax shortfalls and ensuring entities that promote tax exploitation schemes do not escape liability is not easy. Taxpayers ultimately sign off their returns and statements to the Commissioner and are therefore generally culpable for the statements they make. Equally, the role of advisers who promote tax exploitation schemes to the detriment of taxpayers should be thoroughly scrutinised. Such advisers should be held to account for their conduct and prevented from profiteering from the arrangement.
As noted above, the promoter penalty provisions currently contain a carve-out for the provision of mere advice by practitioners — it is paramount that the advice exemption be retained as part of these reforms. Expanding the regime so it is easier for the ATO to apply penalties to those who promote tax avoidance is laudable, but practitioners would be rightly concerned if the regime is expanded in such a way that the advice exemption is jeopardised or undermined.
Further, it is crucial that tax practitioners be able to advise on the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 and other integrity rules in the tax law, without fear of prosecution or being liable for promoter penalties. That practitioners need to be able to provide advice and taxpayers need to be able to be advised is fundamental to a mature, transparent and integrous system. Just as we disallow unregistered agents from operating outside the system and regulate those who operate within the framework, advice must also be provided within the system, without fear or favour.
Closing comments
Tax professionals play a crucial role in our tax system. That the vast majority of practitioners do the right thing and uphold high ethical standards should not be overlooked or understated. The Tax Institute, together with the other professional associations, will be working actively through the consultation process to help ensure the reforms are appropriately designed and implemented without unintended consequences.
The government, understandably, seeks to take decisive action in response to the alleged misconduct which has been publicly debated in recent times. However, any suggestion that this conduct reflects the attitude or work of the vast majority of the tax profession, who overwhelmingly conduct themselves with integrity and honesty, would be an overreach indeed.
Robyn Jacobson is the senior advocate at the Tax Institute.
In a future article, Ms Jacobson will unpack the proposed reforms.
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