Government releases new legislation in response to tax scandal

20 September 2023 3 min. read
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Large global entities caught promoting tax evasion schemes could face penalties of up to $780 million as per new legislation released by the government in response to the PwC tax policy breach.

The Australian federal government has released its new draft legislation in response to the PwC tax scandal, with massive potential penalties to be put in place for any future misconduct.

With direct reference to PwC, the new law would see the maximum penalty for large global firms caught promoting tax avoidance schemes increase 100-fold, from $7.8 million to over $780 million, with uninvolved colleagues potentially still on the hook.

Government releases new legislation in response to tax scandal

“The PwC scandal exposed severe shortcomings in our regulatory frameworks that were largely ignored by the Coalition, and we continue to take significant steps to clean up the mess,” stated federal treasurer Jim Chalmers. “The reforms we’re progressing today are the beginning of a comprehensive process the government is undertaking to rebuild community confidence in the systems and structures that keep our tax system and capital markets strong.”

In addition to the increased financial penalties, the new legislation also aims to enhance the power of regulators and enable easier prosecutions, including through the removal of certain secrecy laws which have hampered investigations on the PwC case, and by extending the time in which the Australian Taxation Office can launch official court proceedings from four to six years. Whistleblowers who share confidential information will also be granted greater protections.

In what the government describes as the biggest crackdown on tax advisers in Australian history, the expanded definition of a ‘tax promoter’ in the new laws will effectively mean that any party who benefits from a scheme such as the one that occurred at PwC can be considered liable, whether they were aware of the actions or not, and even if they have since left the partnership. This includes ‘intangible’ benefits arising from the offending, such as landing new clients.

Speaking with the AFR, MinterEllison’s head of tax Adrian Varrasso stated: “What is particularly concerning is the fact that a partner cannot rely on the exception for having no knowledge, where the conduct of a partner in the partnership results in the partnership contravening the promoter penalty provisions. It appears that all partners might therefore be jointly and severally liable for any penalty that may be imposed due to the conduct of a single partner.”

While a significant increase, the headline $780 million maximum penalty is  unlikely however to apply any time in the short-term, except in some extraordinary instance of massive global collusion.

According to the legislation, significant global entities (SGEs) with a turnover in excess of $1 billion could face a penalty equal to 10 percent of their previous year’s revenues, yet PwC for example, still the largest of the local Big Fourf or now, reported 2023 revenues of $3.4 billion.

With their separate legal structures in place, prosecuting a multi-jurisdictional case and enforcing a maximum penalty on one of the Big Four at the international level would be imaginably much more problematic, although the legislation describes an SGE as including members of groups which have global parent entities. Meanwhile, the penalty for individuals remains mostly the same, capped at $1.57 million, or three times the benefits received from the offence.

While the new penalties appear largely aimed at deterring misconduct among partnerships, the government will separately review such entities over the coming months, stating that, “Treasury will examine the legal, policy and governance frameworks of the firms to identify gaps and potential improvements, including whether there are appropriate governance obligations on these firms in areas such as transparency, executive responsibility, and management of conflicts of interest.”