PwC advised Lendlease on the billion-dollar tax scam which is now subject to Australian Tax Office audit. As Lendlease whistleblower Tony Watson fights the giant in court over his dismissal as a tax lawyer, documents obtained by MWM show Watson warned a PwC tax partner and group finance chief Tarun Gupta the tax scheme was a rort. Michael West reports.
In the week before Christmas in 2017, whistleblower Tony Watson met Tarun Gupta, then CFO of Lendlease, and Paul Abbey, a global tax partner of PwC. Watson explained to them in detail how Lendlease was breaching the tax laws on an aggressive retirement village deal. “The ATO will not fall for it,” he advised them subsequently by email.
The Tax Office did not fall for it. Although, in the face of exhaustive lobbying and butt-covering by PwC and Lendlease, the ATO has dithered on enforcing the law, it has told Lendlease their tax approach was wrong and is now – albeit 6 years later – auditing the company.
PwC was adviser to Lendlease on the scam, so its tax partner Paul Abbey should not have been surprised by anything said at that meeting. After the meeting, Watson wrote to Tarun Gupta and the Lendlease Board on 31 December 2017:
- Next steps
You will assess the immediate next steps after Paul Abbey reports back to you. I fear we have placed him in a difficult position..Paul Abbey will either have to call his own partner as having produced an incorrect opinion under duress, or himself embrace the hopeless tax claim that the law does not apply to reduce the cost bases by the deductions claimed. If he exchanges professional integrity for group loyalty, we will obtain one or several (if you need them) opinions from tax counsel on the point. But I will not let you or the LL Board fall for this. In my long career in tax, I have not been more certain of anything than I am of the way the law works here. And far more important to realise is that the ATO will not fall for it!
Paul Abbey is a partner in PwC’s global tax division, the very division embroiled in the scandal which has erupted over PwC selling confidential Australian Treasury plans to big US corporations to evade Australian tax. It is understood that Abbey is one of the 9 partners of the firm to have been “put on gardening leave” in the wake of the scandal this year.
MWM has previously reported that Lendlease became Australia’s largest owner of retirement villages as a means to an end: to increase profits by double dipping on its tax claims. Lendlease double-counted the amount outlaid in acquiring over $1b of retirement villages.
(If you borrow to buy a share portfolio, your loan documentation will set out the forecast interest payments. You actually claim the interest as a deduction – against your dividend income – when you pay the interest. But you cannot add the interest to the cost base of the shares as well. What Lendlease did was add the total future payments to cost base, and claim the same amounts as deductions when the payments were made.)
A “work-around” or a cover-up?
Reports of the present PwC treacherous behaviour have not identified a single person who put their hand up, and said This is not right. How can it be that of all the people who received the emails, who worked on the ‘workaround’ (a euphemism for scheme), not one person thought that what he or she was doing was wrong? If Mr Ziggy Switkowski is looking for an indicator of culture, stop right there.
rather than admitting the double-dip, and correcting it, Paul Abbey, PwC, and Lendlease dug in.
But back to the Watson advice; rather than admitting the double-dip, and correcting it, Paul Abbey, PwC, and Lendlease dug in. On 10 February 2018 Watson again wrote to the Lendlease Board:
I think LL has published at least 7 sets of accounts that are materially incorrect, starting no later than June 2014. To ensure the 2017 half-year accounts to be released 21 February are correct, in light of what you now know, and having regard to what I set out below, each board member will need time to familiarise herself or himself with the issue. The Board will need to understand the issue, to take independent advice on it, and to be satisfied, in light of that understanding and advice, that the accounts are correct.
Any Opinion obtained in circumstances where those with an interest in the outcome – LL Group Tax and PwC at least – have a role in the Opinion should not be the basis of the Board approving the half-year accounts. And those identified (PwC and Group Tax) can hardly brief the opinion-giver, any more than they could give an independent opinion themselves. Indeed, it should be the Board members, and not management, who instruct any adviser or barrister from whom an opinion is to be sought. The others have too much skin in the game.
Enter Minter Ellison
Watson’s suggestion that the Board themselves should undertake an independent review was ignored. Perhaps they were busy. Rather, Group Tax was tasked with obtaining a further opinion. Enter Minter Ellison, who duly agreed with Group Tax.
In his Final report on Crown Casino, Commissioner Finkelstein found that it was not only the Crown executives who were at fault:
The lawyers (both in-house and external) played their part.. Strategies were adopted to thwart and frustrate the regulatory process. All too often, these strategies were devised by lawyers or, at least, they were willing accomplices…At no point did any lawyer say, ‘This is improper’…Not only did the in-house lawyers fail to take this position, but [Minter Ellison partner] Mr Richard Murphy, an external lawyer, justified the approach. He was asked whether Crown Melbourne should have been told not to engage in conduct that was potentially illegal. Mr Murphy’s answer was: ‘I didn’t see that to be my role as the external lawyer.’
“Put more directly, rather than a lawyer simply advising a client whether a given course of action is completely legal, in an appropriate case (and whether the case is appropriate will usually be self-evident) the lawyer could ask their client of the proposed conduct: ‘Is it right?’, ‘Is it honest?’ and ‘Does it thwart the purpose of the law?’”
“If the lawyers who were involved in Crown Melbourne’s misconduct had adopted this attitude, much of what has happened, and most of the dishonourable conduct, would not have occurred.”
Blowing the whistle
Having unsuccessfully tried on multiple occasions to get the Lendlease Board to correct its ways, Watson told the ATO.
The ATO ran two independent streams. One stream focused on Lendlease. The ATO is undertaking an audit of Lendlease’s double dipping.
The second stream ATO was public-facing. The ATO issued a draft determination in 2019, confirming that a taxpayer cannot both include an amount in cost base and claim a tax deduction for it. The draft determination was subject to public comment. Lendlease, PwC, KPMG (Lendlease’s auditor for 60 years) and Minter Ellison all lodged submissions critical of the ATO’s view.
But here is where the strategies to thwart and frustrate – as Commissioner Finkelstein identified them – became evident. Because both the Law Council of Australia and the Tax Institute also lodged critical submissions.
David and Goliath
The Law Council, in its own words, is the peak representative body of the Australian legal profession, working for the improvement of the law and the administration of justice. The Tax Institute is Australia’s leading professional association in tax.
Minter Ellison had primary carriage of the Law Council submission, and PwC hijacked the Tax Institute submission. And just like PwC in the current Treasury fraud, those firms acted to ingratiate themselves with a tax-avoiding client, and so generate more fees. Do you discern a pattern?
The Tax Institute, to its credit, reviewed its original submission. Upon realising that PwC had acted for the benefit of itself and Lendlease, and so fabricated views to energise its submission, the Tax Institute withdrew the original submission, and submitted a new, objective piece.
Sacked for “nearly losing the biggest client”
Lendlease prevailed on Watson’s employer (now owned by PwC) to remove him as lead partner from the Lendlease account. He was subsequently sacked for ‘nearly losing the biggest client of the firm’.
Australia’s whistleblower laws were introduced in 2019 and should be available for proceedings commenced after that time. Watson commenced an action against PwC and Lendlease last year, relying on Australia’s whistleblower laws. Since that time, PwC and Lendlease have taken every point, and argued every position, to deny Watson protection under Australia’s whistleblower laws introduced in 2019.
To be clear, the Full Federal Court case heard recently is simply PwC and Lendlease seeking to deny a whistleblower protection under our whistleblower laws. More thwarting and frustrating.
Why whistleblower protection laws are a wreck
Australia’s current whistleblower laws were introduced into the Corporations Act and the Taxation Administration Act by Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019. The product of a plethora of inquiries, reviews, submissions, drafts, and amendments, the Enhancing Whistleblower Protections Act received Assent on 12 March 2019.
Although it then became law, the Enhancing Whistleblower Protections Act was not then binding or capable of producing effects. An Act does not become binding until it ‘commences’ or ‘comes into force’.
This is called the temporal operation of legislation – the period during which the rules embodied in legislation are legally effective. The Enhancing Whistleblower Protections Act provided that it was to come into force on 1 July 2019. On 1 July 2019, the amendments it made took effect, and it became binding on those to whom it applies, and its rights and privileges could be claimed.
The temporal application of legislation refers to the range of facts to which the legislation may be applied. According to the Office of Parliamentary Counsel: The purpose of an application provision is to provide exactly how the “new” law will apply and how the “old law” will cease to apply. This is different to the temporal operation, which is simply the point in time when the text is written into the statute book.
Sometimes the temporal application will coincide with the temporal operation of a new law. But consider the following example: On 1 January 2023 a provision comes into force in the following terms:
Any person convicted of a sexual offence against a child cannot be a teacher in NSW.
Obviously, the provision will apply to anyone convicted of an offence from 1 January 2023. But what of someone who was convicted of an offence before 1 January 2023? Parliament would want to protect children from all paedophiles, irrespective on when they committed their offence. In these circumstances there is a real possibility that the temporal application of the legislation will not coincide with the temporal operation.
Whistleblower prosecutions only enhance corporate misconduct
The Enhancing Whistleblower Protections Act inserted an Application Provision into the Corporations Act, which states that the enhanced protections apply in relation to disclosures of corporate and tax misconduct. Which makes sense. Parliament wants disclosures of corporate misconduct. To encourage disclosures, Parliament offers protection to those who make the disclosures. And so the temporal application of the amendments is determined by the making of disclosures.
But PwC and Lendlease argue that the application of the amendments is determined by when they inflicted the detrimental conduct on the whistleblower. On PwC’s reading, the timing of the protected disclosure is irrelevant. PwC and Lendlease want the Court to rewrite the application provision so that our whistleblower laws only apply to detrimental conduct they inflict from 1 July 2019. What PwC wants is a wholesale rewriting of the statute.
Just why Parliament would have been concerned to look out for the tax evader and PwC, and deny the whistleblower the promised protection, is at the heart of the case.
The Full Federal Court has reserved its decision.
Lendlease is obliged to inform the market when it receives the amended assessments from the ATO.
Meanwhile, it is worth noting, given the present Senate Inquiry into consulting firms, that while PwC signed off on the Lendlease double-dip rort, the auditor was KPMG who signed off on the financial statements – accounts which may have to be restated for the past 7 years.
And in whistleblower prosecutions, ATO whistleblower Richard Boyle is still being pursued. A trial date for his appeal (for failed plea for immunity) has been set by Justice Doyle with a full-day hearing on Wednesday, 9 August 2023.
Surely all this only encourages the type of Big End of Town shenanigans which are now the subject of the explosive Senate Inquiry into consultants. How will bad behaviour, indeed illegal acts, ever be addressed if corporate whistleblowers risk their livelihoods for doing the right thing?
Everything to play for: whistleblower’s home on the line as Lendlease makes merry with tax code
Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.