Contingency fees for tax practitioners a ‘fundamental failing’, says senator
Senator Deborah O’Neill has raised concerns about fees contingent upon tax savings corrupting the profession.
The chair of the Parliamentary Joint Committee on Corporations and Financial Services, Deborah O'Neill, has questioned whether certain types of remuneration such as performance-based fees or fees contingent on tax savings are incentivising misconduct among tax practitioners.
As part of public hearings for the Senate inquiry into consulting services, Ms O’Neill referred to the Tax Practitioner’s Board (TPB) submission earlier this year that discussed how remuneration involving fees based on tax savings can create potential conflicts of interest.
The submission by the TPB stated that tax practitioners must carefully consider remuneration that is performance-based or contingent upon tax savings.
“Such arrangements raise an inference that the tax practitioner’s financial and professional obligations may conflict, in perception if not in reality, with other obligations to their client, their ethical or legal responsibilities,” the submission stated.
“For example, some tax advisers who design tax schemes, involving avoidance or evasion, may seek consideration based on a percentage of the ‘tax saving’.”
Commenting on the submission in a public hearing this week, Senator O’Neill said arrangements such as this are a “fundamental failing in the system” where practitioners are being rewarded for tax schemes.
TPB chair Peter de Cure said there were examples of tax practitioners operating ethically under contingency fee arrangements, but aknowleged in some cases these types of arrangements may be incentivising the wrong behaviour.
“Contingency fees have been around in the profession for some time,” Mr de Cure told the Senate Inquiry.
“It’s not impossible to work on a contingency basis ethically, but there’s a clear monetary incentive to push the envelope.
“I’ve seen very ethical jobs done on a contingency basis but there’s a lot of work that’s been done in the R&D space in particular, [with] concessions, where I think it would be fair to conclude that it’s incentivising the wrong sort of behaviour.”
Senator O’Neill said the recent tax scandal involving PwC partner Peter John Collins was the perfect example of “the pursuit of profit over ethical behaviour driven by financial gain”.
“There’s nothing wrong with profit, but profit when ethics is jettisoned is another matter,” said Ms O’Neill.
Mr de Cure said while he didn’t believe there were incentives or contingency fees involved in the Collins matter, there were firms with a “strong culture around profitability”.
Proposed TPB reforms to enhance transparency and investigations
The TPP also explained how draft legislative measures released this month in response to the PwC scandal would assist the TPB and improve the profession.
Treasury released four sets of draft legislation last week for public consultation around information sharing, whistleblower protections, promoter penalty laws and reforms to the TPB.
Mr de Cure said the extension in the timeframe for completing investigations from six to 24 months will reduce the pressure on preliminary inquiries and allow the TPB to move into a formal investigation sooner.
“It also means that we can extend the focus of a formal investigation,” he said.
Mr de Cure said while the TPB may have strong evidence for one or two breaches of the Code of Professional Conduct by a practitioner, during an investigation the TPB may find evidence of other potential breaches.
“With a longer investigation timeframe, we might be able to do a more thorough job.”
Other reforms to the TPB such as enhancements to the information provided in the TPB Register will help improve transparency, said Mr de Cure.
“These changes mean that if there’s a sanction imposed on a practitioner, that sanction can stay on the register for up to five years, which is the maximum length of a termination,” he explained.
“Previously there was a restriction of 12 months for that to stay on the register. So, it gives greater clarity and gives us a greater ability to disclose and retain on the register things that are of interest to the public who might be searching it with a view to taking on a new tax practitioner.”
Senator Deborah O’Neill said the sooner the draft legislative measures were passed by Parliament, "the better integrity there will be in the system".
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