Labor policy to double maximum ‘civil penalties’ for ‘promoting’ ‘tax exploitation schemes’ to $10m – against the backdrop of the Appleby leak of client documents in Bermuda, including the now contentious Glencore restructuring and allegations the ‘Big 4’ accountants could have been ‘promotors’

On 11 October 2018, the Labor party announced that it would double ‘promotor penalties’ from a maximum of $1m for individuals and $5.25m for corporations to $2m and $5.5m respectively. This might be fair enough, but it is important to have a sense for how low the bar is set for these penalties (it is way lower than the ‘defraud the commonwealth’ or Crimes (Taxation) Offences Act bar’s set previously – where, amongst other things, the Crown has to prove its case ‘beyond reasonable doubt’ rather than just on the balance of probabilities).

The ‘Promoter Penalties’ laws are in Div 290 of the TAA53.

• s290-50(4)(a) prescribes a maximum penalty for individuals is 5,000 penalty units, which, at the current level of $210 is $1.05m (see s4AA of the Crimes Act 1914).
• The maximum penalty for companies is five times that, at $25,000 penalty units, currently: $5.25m (s290-50(4)(a)).
• However, there is an alternative maximum penalty, which is the same for individuals and companies, and it is “twice the consideration received or receivable (directly or indirectly) by the entity and *associates of the entity in respect of the *scheme”. Depending on the ‘scheme’ this can be devastating large.
• The primary prohibition is: “An entity must not engage in conduct that results in that or another entity being a *promoter of a *tax exploitation scheme”. This sounds simple enough, but it’s ambit and effect depend on the definition of two key terms: ‘promoter’ and ‘tax exploitation scheme’.
• A Tax Exploitation Scheme is defined in s290-65 in terms no more grave than promoting a ‘tax avoidance’ scheme (the word ‘exploitation’ might seem to imply something more grave, but it does not).
• The term Promoter is defined in s290-60 as having a ‘substantial role’ in ‘marketing’ or otherwise ‘encouraging’ the ‘growth’ of the scheme. It is true that a person is not a ‘promoter’ “merely because the entity provides advice about the scheme” but it would be easy to slip past that – perhaps, for instance, by drawing the enabling documents.
• All of this is put into perspective by the Commissioner successfully applying the Promoter Penalties provisions to a Queensland adviser for marketing even tailored arrangements individual clients (see related Tax Technical Article).
• The only thing to be said about these provisions is that the Commissioner does still have an onus to prove his case (even if only on the balance of probabilities). The luxury he gets of, generally, putting the onus of proof on taxpayers, does not apply. Initially, this was a cultural/technical issue for the Commissioner, but it is one that he seems to have overcome.
• In addition to imposing ‘civil penalties’ the other powers this gives the Commissioner is to seek injunctions (to restrain promotion before there is ‘exploitation’ or to stop it getting worse) and seeking ‘voluntary undertakings’ (which is a lesser but quicker, and more conciliatory version of an injunction, with possibly positive requirements, as well – for instance, further education requirements). We need to be mindful, though, of the trouble ASIC got into, before the Hayne Royal Commission Into the Financial Services Industry, for becoming too conciliatory and, effectively, a captive of the population it was meant to be policing. From what I’ve seen, however, the Commissioner is keen to make people examples, by litigating (and reasonably successfully, too).

This is against a factual backdrop, which is worth understanding and is summarised in the following ABC article.

• There was a second massive leak of documents from a Bermudian legal firm: Appleby (see Related Tax Technical article).
• One big matter, to come out of this leak was a massive (multi-billion dollar) restructuring, undertaken by Glencore, which the Commissioner wants to now challenge.
• Glencore has launched legal proceedings trying to get the Commissioner to give back documents it got through the Appleby leak, on the basis of ‘legal professional privilege’ or LPP – even though key documents, at least, are in the public domain and have been published in newspapers. On my understanding of the law of LPP, once the documents are in the public domain, the ‘genie is out of the bottle’ and there’s nothing that the Court can or will do.
• The Commissioner has been ‘sabre rattling’ in suggesting that the ‘Big 4’ accounting firms, who have advised on these matters, could, themselves have been ‘promotors’ of ‘tax exploitation schemes’ and have the Promotor Penalties provisions applied to them.
• That, in turn, has produced much ‘squawking’ by the Big 4, denouncing that as impossible (or, unthinkable, at least to them). They say that ‘merely advising’ does not make them a ‘promotor’, which is true, but doesn’t admit how easy it is to go beyond that.
• There is a Parliamentary Committee hearing (the Senate Estimates Committee) hearing into all this, and the Labor representatives, at least, are interested in whether there should be any change in the Legal Professional Privilege laws. Not that they need changing bearing in mind the ‘public domain’ point above and also that there is a ‘crime, fraud’ exception, where the bar is set at much lower levels of wrong doing than that.
• The Big 4 say that the LPP laws don’t need changing (which I agree with). But it important that it is ‘legal’ professional privilege, and it doesn’t apply to dealings with accountants (even if they are giving legal/tax advice). The accountants have been routing all their communications through the legal firms, hoping that will ‘do the trick’, but this is a fraught strategy.
• And to cap all of this off, there is a Federal election due by May 2019 (next year) on the back of which Labor wants to be seen to be doing things (not that they are the only political party wanting to look active in the policy space).

So, all in all, this is the tip of a really interesting ‘iceberg’.

[LTN 197, 12/10/18; Tax Month – October 2018]

FJM 15.10.18

CPD questions (answers available)

1. What is the current maximum civil penalty for companies (in dollars), under the Promoter Penalties regime?
2. Is Labor proposing to double this penalty?
3. What is the alternative maximum civil penalty (not measured in ‘penalty units’)?
4. Is this the same for individuals and companies?
5. Is this to be doubled?
6. Is ‘promoting’ include merely giving advice about a scheme?
7. Is it easy to do more than give advice?
8. Does the Civil Penalties regime go beyond imposing civil penalties?