How far back does the PwC tax leaks scandal go? The battle between the ATO and PwC has been going for at least six years.
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 28 in our series for 2023 and today’s date is Friday August 11.
First, I’ll be talking to Barb Hyman from Sapia.ai – an AI-driven recruiting program being used by some of Australia’s biggest companies. And I’ll talking to CommSec chief economist Craig James about what’s ahead in the market this week.
But first, let’s talk to Barb Hyman
So what’s happening in the news?
The Tax Office first raised its concerns related to the conduct of PwC’s tax division with Luke Sayers on August 29, 2019, when second commissioner Jeremy Hirschhorn urged the firm’s then-CEO to “personally review the internal emails”. This was the first of three meetings between the two men detailed in a timeline of \ The timeline provides new details of the years-long fight between the Tax Office and PwC executives over the actions of the firm’s tax division. The Tax Practitioners Board ruled that a former partner in that division, Peter Collins, shared secret government information that was by PwC personnel to advice clients on how to side step new tax laws. The extent of the breach of confidentiality was revealed in May, when The Australian Financial Review reported on a cache of internal PwC documents showing dozens of partners and staff were involved the marketing Multinational Anti-Avoidance Law (MAAL) tax schemes based on information provided by Mr Collins. The ATO timeline shows that at a second meeting, held on February 20, 2020, Mr Sayers discussed the upcoming election of PwC’s chief executive with Mr Hirschhorn, two weeks before the then head of the firm’s tax practice, Tom Seymour, was elected CEO of the firm. During the meeting, Mr Hirschhorn advised Mr Sayers that it was neither the Tax Office’s role nor was it appropriate for the agency to comment on the firm’s election processes. The timeline also states that Mr Hirschhorn told Mr Sayers that “the PwC board should ensure that it is fully abreast of the range of concerns the ATO has had with PwC Tax Group’s behaviour.” A source at PwC at the time said that the first meeting between Mr Sayers and Mr Hirschhorn was to help resolve the tension between PwC and the Tax Office relating to issues such as the firm’s LPP claims and its aggressive tax structures. The source said the second meeting involved Mr Sayers informing the Tax Office that Mr Seymour was likely to be the CEO. Mr Sayers relayed the Tax Office’s concerns about the firm’s tax division to the firm’s governance board, the sources say. Labor senator Deborah O’Neill said that Mr Sayers either “ignored this advice, or the entirety of the PwC board failed to act on this information”. “It is now beyond doubt that for more than five years PwC had knowledge that senior members of their tax practice had inappropriately misused government information in an attempt to benefit private companies.” Mr Sayers, who is now president of the Carlton Football Club and the founder and head of the Sayers consulting firm, has previously said he was “not aware of the confidentiality issues that have since emerged within the international tax practice at PwC”. The details in the 14-page response to questions by Senator O’Neill reveal that the ATO’s concerns about PwC’s tax division date back to August 29, 2016. In this meeting with PwC tax partners and an unnamed client, the advisers confirmed that they were responsible for a scheme to sidestep the Multinational Anti-Avoidance Law (MAAL) using foreign partnership. Uber restructured its Australian operations through a series of Dutch partnership in December 2015, days before the MAAL came into effect. Former deputy commissioner Mark Konza told the firm and its client that “structuring to avoid MAAL using foreign partnerships was seen as tax avoidance”. The following day, Mr Hirschhorn met with PwC partner Pete Calleja, then the firm’s tax leader, and Tom Seymour, who was then the firm’s Asia Pacific Americas Tax Leader, to discuss his concerns about the firm’s MAAL scheme. On September 19, 2016, the ATO issued a formal order for PwC to provide “information and documents” about six tax schemes it had marketed, include at least three related to the MAAL. This began a battle between the ATO and PwC which ran from October 2016 and 2022 during which the firm claimed legal professional privilege over tens of thousands of documents in response to 16 “compulsory information gathering notices”. The ATO contested the legal professional privilege claims and tested several of the claims in Federal Court. By October 4, 2017, the Tax Office had become aware that PwC partner Peter Collins “was involved in MAAL consultation[s with Treasury] and may have shared information subject to confidentiality obligations.” In August 7, 2019, the ATO formally advised “PwC that it [was] investigating the application of the promoter penalty laws regarding the marketing of MAAL schemes.” Two weeks later, on August 29, Mr Hirschhorn held the meeting with Mr Sayers where he advised him to personally review the internal emails.In September 12, 2019, Mr Hirschhorn gave a scathing speech to PwC tax partners where he warned them that the big four firms harboured a small number of arrogant partners who disrupted the tax system with overly risky advice. The following day Mr Seymour told the Financial Review that “community expectations” had changed about what was acceptable tax advice. He also said the firm would rein in the aggressiveness of its advisers. On June 5, 2020, the ATO formally advised PwC that it had concluded its “promoter penalty laws review and would not take further action against the firm. “Notwithstanding the conclusion of the review, the ATO raise several concerns” with the firm, the timeline states. On July 2, the ATO formally referred Mr Collins for investigation by the Tax Practitioners Board. More than two years later, November 21, 2022, the ATO told PwC it would apply a penalty against the firm for false LPP claims. The ATO settled the penalty confidentiality on March 20, 2023, but did not inform the TPB or the Senate about this until June 5, 2023. From March 14 of this year, senior tax officers, including Mr Hirschhorn repeatedly pressed the TPB to withhold a cache of PwC emails requested by Senator O’Neill. “The settlement did not contain an undertaking or agreement to withhold information from the TPB or other agencies,” then ATO statement said. “Nor did it include an undertaking or agreement to influence disclosures by the TPB to the Senate.
KPMG over-billed and incorrectly charged Defence for hours that were never worked, reportedly wasting “significant” public funds on contracts that were extended with “little or no scrutiny”. The accusations, aired in an episode of ABC’s Four Corners on Sunday night, alleged KPMG sought to overcharge Defence by $1 million on a single proposal, charged for work never completed, and once billed for a consultant who wasn’t on the project. Two anonymous whistleblowers told the program that Defence personnel were complicit in blindly awarding multiple contract extensions to KPMG, and claimed connections helped the firm win a big contract with the government. “We discovered that every KPMG invoice reviewed was incorrect … Defence had been consistently overcharged. KPMG … wasted a significant amount of public funds enabled by Defence personnel … complicit in blindly awarding multiple contract extensions to KPMG … with little or no scrutiny,” the first whistleblower wrote in a statutory declaration provided to the ABC. The second whistleblower, who spent two years working on defence projects, said there was “a lot of rule-breaking being normalised.” The revelations come after a huge scandal engulfed PwC when senior partners were found to have misused confidential Australian government information to assist multinational companies avoid paying more tax. The second whistleblower said KPMG were “prepared to break the rules” to win more business from the government. “Ultimately it’s the taxpayers who are paying for this,” he said. He also outlined a culture of harassment and bullying within the workplace. “I tried to raise that within KPMG and it was rebuffed,” he said. When he tried to report the matter to the KPMG whistleblower hotline, he claimed his contract was cancelled and he received no more work with the firm.
Consulting firms caught promoting tax exploitation schemes will be fined up to $780 million, a 100-fold increase, under the Albanese government’s sweeping response to the PwC tax leaks scandal. A two-year Treasury review of the regulation of all professional firms; the removal of secrecy laws hampering the Tax Office and more power for regulators are also part of changes designed to fix a system deemed “not fit for purpose”. The big four firms on Sunday all welcomed the potential reforms, which Treasurer Jim Chalmers, Finance Minister Katy Gallagher, Attorney-General Mark Dreyfus and Assistant Treasurer Stephen Jones said amounted to the biggest crackdown on misconduct by tax advisers in Australian history. “The PwC scandal exposed severe shortcomings in our regulatory frameworks,” the ministers said in a statement. “By increasing penalties, giving regulators stronger teeth to investigate and prosecute perpetrators and boosting transparency, collaboration and co-ordination within government, we are acting to restore public confidence and help prevent this from happening again.” It marks the most substantive reaction to the PwC leaks which have also triggered a criminal investigation by the Federal Police, two federal and one state parliamentary inquiries, and caused federal departments to terminate contracts with the big four firm. Tax promoter penalties for firms and individuals who market tax avoidance schemes have only been applied six times since they were introduced two decades ago, in part because of the high bar set in the legislation. The government has also flagged that the overlapping and largely ineffective regulation of Deloitte, EY, KPMG and PwC could be coming to an end. Treasury will examine the governance obligations of these firms in areas such as transparency, executive responsibility, management of conflicts of interest and dealing with misconduct.
The former supreme court judge who oversaw the inquiry into the rape trial of former Liberal staffer Bruce Lehrmann may be referred to the ACT Integrity Commission and could face criminal charges over his dealings with the media. ACT director of public prosecutions Shane Drumgold, SC, who resigned on Friday following publication of damning findings about his conduct during the trial, may also face charges and could be struck off as a lawyer. A visibly angry ACT Chief Minister Andrew Barr on Monday formally released the 839-page report of the inquiry, along with his government’s response, and expressed disappointment with its author, Walter Sofronoff, KC. Mr Barr said Mr Sofronoff had admitted to regularly briefing journalists during the inquiry and to handing over the final report to two outlets, resulting in the findings being published ahead of schedule He described both as “significant lapses of judgment”, which could have serious consequences “There are many possible pathways,” Mr Barr said. “It might be that a full refer to the Integrity Commission to examine the conduct of the inquiry may be a pathway. Or it may not. The government will seek advice on that.” Asked whether he would like to see Mr Sofronoff charged, the chief minister said the government was considering its options. The report, delivered to the government last Monday, found Mr Drumgold lied to Supreme Court Chief Justice Lucy McCallum during the abandoned trial of Mr Lehrmann, “preyed on” inexperienced prosecutors and acted in a way that was “grossly unethical” In a statement on Sunday, Mr Drumgold slammed the conduct of the inquiry and disputed many of its adverse findings; however he acknowledged his position as DPP had become untenable and resigned effective September 1. ACT Attorney-General Shane Rattenbury made clear Mr Drumgold would not return to the role and indicated the matter was being considered by the Bar Association and Law Society, which have powers over legal practice. Geoffrey Watson, SC, director at the Centre for Public Integrity, said he was “absolutely appalled” that Mr Drumgold had not been offered natural justice, a lapse that could undermine the whole inquiry. “There’s also a chance that he could go to a court now and have it set aside because he wasn’t given natural justice,” Mr Watson said on ABC radio. The final report made 10 recommendations to improve the administration of justice in the ACT, eight of which the government adopted in full and two of which it has adopted in principle subject to broader consultation. The recommendations broadly cover possible amendments to ACT laws, development and refinement of guidelines and policies, and training for those involved in the criminal process, including lawyers and police. Mr Lehrmann, whose rape charge was dropped after a mistrial last year, has always maintained his innocence. Mr Barr, asked whether he still had confidence in Mr Sofronoff’s judgment, said he was “confident in the recommendations” but “not confident in relation to the process around providing the information to journalists”. Despite calls for all Mr Drumgold’s past cases to be investigated, Mr Barr said a review of the 18 cases he handled since becoming DPP in 2019 indicated that that was not necessary. Other matters involved either agreed facts or guilty pleas. When asked about earlier cases, Mr Rattenbury said defendants in historic cases could raise specific concerns through existing judicial processes. The report found the investigation into the allegations concerning the Lehrmann trial was thorough but “caused unnecessary pain to Ms Higgins and others”, while ACT Victims of Crime Commissioner Heidi Yates had been subject to unjustified public criticism because of a lack of understanding over her role. The report also found Mr Drumgold’s allegations about the conduct of ACT Police, which sparked the inquiry process late last year, were not substantiated. “The adverse suspicions that Mr Drumgold formed during his early interactions with the investigators predisposed him to see non-existent malignancy in benign interactions between the police and the defence at the trial,” the report said. “The cost of a six-month public inquiry – in time and money, in lost work and personal and professional consequences – has been huge.”
More than one in 10 firms in the retail, hospitality and construction sectors are at risk of going bankrupt in the next 12 months, as high interest rates and the slowdown in consumer spending pile pressure on company finances. Research from credit bureau Illion, found that 14% of food services firms, 11% of construction companies and 10% of retailers were at high risk of failing in the coming year. A business at high risk of failing has about a 5% chance of going under in the next 12 months, which is about five times higher than a normal business. Illion has access to invoicing and payment data for millions of commercial entities. The release of the research comes as the latest NAB business survey shows companies experienced a sharp increase in labour costs last month as a result of the 6.75% rise in award wages on July 1, which many businesses reported passing straight through to higher prices. The retail, hospitality and construction industries are at the forefront of the economic slowdown triggered by high interest rates and cost of living pressures. An increasing number of retailers, builders and accommodation and food service providers are falling behind on paying their suppliers, according to Illion. About 3.8% of invoices paid in the last three months by accommodation and food services providers were more than 60 days overdue. Among retailers, 2.6% of invoices were paid late, while 2.4% of trade payments in the construction sector were overdue at the time of payment.
Prime Minister Anthony Albanese’s backing of a public holiday for the Matildas – evoking Bob Hawke’s famous declaration after the America’s Cup win – is gaining support from the states but employers say it will cost small business when they are doing it tough. NSW Premier Chris Minns on Tuesday embraced calls by Mr Albanese this week to have a public holiday if the soccer team wins the FIFA Women’s World Cup final , to be played on August 20. Mr Albanese on Monday said he would push the proposal next week at national cabinet and that he expected state and territory governments to “fold like tents” in support. The prime minister’s push for a day off echoes the classic response of former Labor PM Bob Hawke all but declaring a national holiday after Alan Bond’s Australia II yacht won the America’s Cup in 1983, pronouncing that “any boss who sacks anyone for not turning up today is a bum”. n a statement, Mr Minns said that “we’d love to back the Matildas with a public holiday” and he would “work with the other states and the Commonwealth to get the right date”. However, Australian Industry Group chief executive Innes Willox said the proposal would force business to bear lost production, as well as 250% penalty rates for those that need to keep working.
And the profit reporting season continues. Australia’s largest bank, Commonwealth Bank has posted a record profit of $10.2 billion, up 5% on last financial year. Suncorp has posted $1.148 billion in group net profit after tax in its 2023 full-year financial report. That compares to $681 million in the previous full-year 2022 Dexus Convenience Retail REIT (DXC) reported a statutory net loss after tax of $8.4 million for the year ended June 30, due to $41.3 million of asset devaluations. Dexus Industria REIT generated $300,000 in statutory net profit after tax in the 2023 financial year, brought down by $56.3 million of net fair value losses on its investment properties. That equates to a 3.5% decline in the trust’s book value. New Zealand fast food company Restaurant Brands (RBD) is now expecting net profit after tax for FY23 to be in the range of $NZ12 million ($11 million) to $NZ16 million. CLP Group, the Hong Kong-listed owner of EnergyAustralia, said the retailer recorded operating losses of $106m for the six month ended June 30. Building product group James Hardie’s net profit for the three months ended June 30 was down 3% t to $US157.8 million ($240.1 million) compared with the same period a year earlier. Sales revenue was down 5% to $US954.3 million. Myer has upgraded its profit expectations by 15% to 21% to a range of $69 million and $73 million for financial year 2023, according to its latest trading update. While Myer’s net profit for the year will come in at $69 million to $73 million, up as much as 21%, only $4 million to $8 million was generated in the second half, it said in a statement to the ASX.
And that’s it for this week. And next week, I’ll be talking to Rohan Widdison, the managing director of New Laboratories. We’ll be talking about supply chain issues. And I’ll be talking to AMP Capital chief economist Shane Oliver.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week