ATO Cautions The Big Four To Be Responsible With Their Clever Ideas

The year 2019 has by far been a year of scrutiny and change in Australia. The Royal Commission era has embarked a sense of constant vigilance and corrections, to enhance the Australian economy, amid the ongoing global economic slump. The country is surrounded with a robust governance mechanism, and these regulatory authorities ensure seamless commercial and non-commercial activities in Australia.

In this article, we would discuss a case wherein the Australian Taxation Office has warned the Big Four Consulting Firms. Why? Let us understand, but foremost, an acquaintance with the ATO and Big Four would set the context clearer:

The Australian Taxation Office

Rooted in the Land Tax Act 1910, Australian Taxation Office (ATO) has come a long way and was formerly referred to as the Federal Taxation Office also, as Commonwealth Taxation Office. Australian Taxation office is a non-corporate Commonwealth entity within the Treasury portfolio and serves as a primary revenue collector for the Aussie government. An Australian government statutory agency, ATO is accountable for managing the federal taxation, superannuation legislation and other matters related to them.

The Big Four Consulting Firms

(Source: Companies’ Website)

The above image needs no introduction as these four companies have made a rock-solid stance in the global business world and these logos speak for themselves. The four biggest professional services networks in the world, the Big Four Consulting firms comprise of KPMG, Ernst & Young, Deloitte and PricewaterhouseCoopers.

The companies have taken consultancy services to an altogether different level and offer an extensive range of financial auditing services, comprising of audit, business consultancy, risk assessment, management consultancy, taxation and cater primarily to the set of Fortune 500 clients. These giants employ numerous people at different levels and are tech-savvy, effective and efficient, when it comes to handling management consulting.

ATO’s warning to the Big Four

In a paper delivered to the large market tax advisory players, ATO’s Second Commissioner for Client Engagement Mr Jeremy Hirschhorn mentioned that the tax advice rolled out through the systematically important firms would be a focal point for the Tax Office at a greater degree than the advice laid down by the smaller players. Addressing the Big Four firms, the Commissioner stated that the concept of a ‘systemically important’ firm plays out even more at a broader level, in terms of the impact on the capital markets. The intensity of this affects the license to operate across a range of areas, though it provides a further system constraint on ‘clever’ advice.

In a nutshell, the tax-minimisation strategies which were formulated for big players by partners at Australia’s big four accounting groups were accountable for wearing down the integrity of the country’s robust tax system, and this would require action against any misconduct done, which implies that tax ­advisers needed to be cautiously vigilant while they market new minimisation strategies.

In this regard, it is important to be aware of the structure of the big four firms in limelight. They have a series of overlapping partnerships and this provides the respective advisers with a substantial degree of freedom in the way they operate.

Having said this, he warned the advisors who were overconfident and deemed themselves to be above the tax system. The warning is a consequence of the Commissioner’s belief and vision that advisers who operate almost on the basis - that tax is discretionary for customers, who are not as clever as the taxation firms or governing system, fail to provide robust technical analysis, are driven by their overconfidence. Hence, the firms practicing this notion should be wary because in the event of a non-policy outcome, very few of the ideas would be discovered to be completely new, as there is a huge possibility that the so-tagged new idea would be an old provision that would have been forgotten with time.

Pacifying the matter, the Commissioner admitted that there was a broad chunk of advisors who were good, and almost 95% of the big companies were tax-complaint.

A heightened level of scrutiny on the Big Four?

Australia has had a robust year when it comes to governance and commercial corrective measures this year. Amid a swing of parliamentary inquiries, focussing on the Big Four’s shift from audit to consultancy and contracting work, these companies are witnessing a heightened level of scrutiny. With the parliament on it toes to analyse the relationship between government officials and the advisory businesses and the ATO’s warning regarding the impact on capital markets, the scrutiny persists. Commissioner, Mr Hirschhorn believes that a in the current times, a good large-market ­adviser should focus on being wise rather than trying to be clever.

The importance of this scrutiny also lies in the fact that in the event of a poor tax advice provided to a foreign company or investor, the offshore markets would have Australia facing tax risk ­premium for investing. Therefore, professional integrity was the need of hour, and the radar was on the big four firms because they dominate the tax market in Australia.

ATO Aspires for good changes in the system

Recently, Mr Hirschhorn stated that ATO was open to constructive feedback, and has always been, when it comes to implementing new changes that would boost good changes in the system. Therefore, it encourages people to voice out the good changes which should ideally dominate any negative voices prevailing during the discussion. The Commissioner also stated that ATO’s intention was to help businesses thrive via exchange of data with practitioners, while catalysing on the digital environment to tap potential practitioners and businesses.

Role of a large market tax adviser or tax firm

On his paper delivered to large market tax advisory firms ‘Reflections on being a large market tax advisor’, Mr Hirschhorn stated that the role of a large market tax adviser was certainly not an easy one. It requires navigation and application of difficult tax law in the dynamic business world, and the pressure from the industry always persists. The Tax advisers play a critical role and are the first line of defence of the tax system, providing high quality advice, eradicating loopholes in the system while facilitating investment. The Commissioner believes that Australia was blessed with a robust tax system and an effective tax administration which supports the social benefits that Australians enjoy. However, despite the strength of Australia’s corporate tax system, ATO stated that only about 40% of big businesses are believed to be paying the correct amount of tax, which calls for scrutiny.

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