ATO Wins Right To Force Disclosure By Tax Practitioners

by Mary Swire, Tax-News.com, Hong Kong

08 February 2002

In a landmark ruling which will deeply worry tax practitioners, the Australian Tax Office has obtained a Court ruling allowing it to force Ernst and Young to disgorge lists of its clients who have participated in certain types of tax-saving scheme

In dismissing Ernst & Young's application to set aside a Tax Office request for a list of clients participating in aggressive tax planning schemes, Justice Ronald Sackville in the Federal Court has strengthened the Tax Commissioner's powers.

Notices demanding a list of tax clients were issued to three Ernst & Young tax partners under section 264 of the Tax Act last July. Section 264 of the Tax Act says: "The commissioner may by notice in writing require any person, whether a taxpayer or not, including any officer employed in or in connection with any department of a government or by any public authority ... to furnish him with such information as he may require."

One of the three partners, Colin McCormack, launched a test case in the Federal Court opposing the notice issued to him. The big accounting firms have previously fought off Tax Office demands that they reveal client names, but the ruling, if not appealed to a higher Court, will make it far easier for the ATO to audit taxpayers who participated in aggressive tax planning schemes, with the result, presumably, that Australian investors will be highly motivated to invest anywhere at all other than in Australia. There's no free lunch, even for a tax inspector.

In September 1999 Tax Commissioner Michael Carmody, in a speech on mass-marketed tax schemes, warned that he needed to take a strong stand against schemes which were structured in such a way that they had little, if any, prospect of commercial gain, other than the tax benefit. He said the ATO had identified $3.5 billion in deductions claimed by taxpayers participating in such schemes which were likely to be denied.

In January 2000 the Tax Office began an audit of Ernst & Young in respect of the tax years 1996 to 2000. The Tax Office said it had come to the audit team's attention that Ernst & Young had advised clients in the use of certain tax planning products, including equity linked bonds, dividend assignment schemes, division 10B film schemes, assignments of income schemes, service entity arrangements and certain agricultural plans.

The ATO asked the firm to indicate whether it maintained a client list or client advice files and, if so, to summarise the general contents of such files. Ernst & Young baulked at the request, claiming it did not market schemes or solicit clients for schemes but merely tailored schemes if a client came to it for advice. The firm also claimed that the notices were excessive in that they required information identifying clients of the firm regardless of whether it had given advice to those clients on schemes of concern or not.

Justice Sackville rejected Ernst & Young's submissions, noting that "the Commissioner may utilise the power in s.264(1)(a) to make wide ranging inquiries which do not have to relate to a particular taxpayer. I do not think that the decision to issue the notices, or the manner of implementing the decisions, were excessive," he said, and ordered Ernst & Young to pay the Tax Office's costs.

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