Whopper Returns: Tax Office fee bonanza the latest in the privatisation of government

by | Jan 3, 2022 | Government

There are few government agencies which have escaped the privatisation fetish of the Coalition. Callum Foote and Michael West report on the hypocrisy of the “personal responsibility” mantra amid concerns raised by Australian Tax Office insiders over the surging use of external consultants and lawyers.

Around the world, governments deliver free Covid testing. So the news did not go down well that Harvey Norman and Chemist Warehouse, allies of the Coalition (and in Harvey Norman’s case, grand JobKeeper spongers too), were looking to turn a profit by selling Rapid Antigen Tests.

As the pandemic has spiralled out of control over the past two weeks, we have heard a lot about “personal responsibility” from Coalition leaders Scott Morrison, Dom Perrottet and others.

But what of the politicians themselves? What of their “personal responsibility”? What of accountability and responsibility in their one role, governing?

“Small government” and privatisation remain central creeds of neo-liberalism. Outsourcing of government functions has been a feature of Australian political life since the Hawke era but it has accelerated rapidly in last the eight years of Coalition government.

Yet government efficiency has not improved. Quite the opposite in fact. We are now governed by the highest taxing regime in Australian history, despite the efficiency rhetoric, and consultant fees are through the roof as barely a government department has escaped the outsourcing epidemic.

The irony of course is that, while our governors are demanding the governed to take “personal responsibility”, they have not only been shirking it by outsourcing, but this shirking of their one role – to govern – has turned out to be a costly failure.

The Federal government alone has tried to privatise the provision of visas, sell off the Australian Securities and Investment Commission database; they privatised QE (quantitative easing) by delivering new “printed money” to the banks; they privatised pandemic measures such as JobKeeper by giving employers the public money to dole out rather than giving it straight to staff. Some $40bn of wastage there.

“Personal responsibility” for people, not politicians

And through all this, despite empty claims to the contrary, Australia has slid down the rankings of world economies, corruption has surged and the accountability of politicians has vanished.

In thirty years of privatisation, there has never been one solid study done to demonstrate the benefits of privatisation, of soaring consultancy costs. They have not bothered to justify their fetish, not even to take stock of it in a Treasury report or half-decent inquiry.

And now, the cherry on top of this mountainous cake of deceit, is the narrative that everything is everybody else’s fault. Nothing is the fault of the political classes. It’s “personal responsibility” for people, not politicians.

No matter that political leaders in a democracy ought to be the very ones bearing “personal responsibility”, not those whose lives depend on their decisions, their management. Rarely are any of them held to account for the gutting of government, for the hundreds of millions of fees which go each year to consulting firms, for the corporate handouts.

Where is the cost-benefit study, whither the efficiency audit? Nowhere, that would require “personal responsibility”. How can it be more efficient to pay professional firms thousands of dollars an hour to find out how to do a bureaucrat’s job? Outsourcing is all about avoiding personal responsibility. Bureaucrats don’t have to own their decisions. They can blame PwC or EY, who are in turn never held accountable for their work either.

Politicians too simply call on an independent expert to corroborate some policy or another; presto: Deloitte or KPMG bowl up whatever findings are necessary. Again, zero personal responsibility all around.

Against this backdrop of the spectacular hypocrisy which is “personal responsibility”, the doctrine of Ministerial Responsibility is pushing up the daisies. Dead. Look no further than Christian Porter and his secret $1m in funding via a “blind trust”.

Even the Australian Tax Office

Over the years, we have investigated outsourcing at a number of government agencies and departments such as ASIC, Treasury, the Australian Administrative Tribunal (AAT). Today we look at the Australian Tax Office (ATO), following concerns from insiders of rising use of consultants.

The ATO is a unique beast as far as government departments and agencies go in that it is quite efficient, perhaps the most efficient agency of all. Yet even it  too is being swept up in the outsourcing craze, despite the secrecy obligations.

Outsourcing Government itself: the hidden privatisation of the public service

A few eyebrows have been raised by ATO insiders at the use of consultants and outside lawyers. For lawyers particularly, this has led to a huge uptick in fees.

The corporate interface with the Tax Office is inevitable. Chris Jordan, who became Tax Commissioner in 2013, was a partner of Big Four tax avoidance facilitator KPMG. Two commissioners on the ATO Executive Committee are ex-KPMG. Current and recently departed Deputy Commissioners also ex-KPMG and moving to Minter Ellison. 

Despite fears a few years ago that the KPMG connection would compromise the tax dodging enforcement of the agency however, the ATO’s relationship with the Big Four has been commendably prickly. Following the corporate tax reforms of the Abbott and Hockey government in 2015 (and in the wake of a gutting of ATO staff in previous years, the new laws and ramped-up enforcement on multinational tax avoiders has brought in some $10bn.

Tax reform needs to go a lot further, to be sure. But with the resources at hand, the ATO has clearly been an efficient government operation compared with other regulators.

Still, it too has succumbed to the outsourcing craze. The dangers are not just the extra cost on the public but conflicts of interest. For example, private solicitors with knowledge of ATO tactics retain experts on transfer pricing to prevent the ATO doing the same. According to sources, private solicitors now have too much insight into the inner workings of the ATO because of these conflicted arrangements. 

In the past, most of this had been managed by ATO senior litigators and the Australian Government Solicitor (AGS). An example of blowout in costs, according to one insider, is the Stallion Pty Ltd vs Commissioner of Taxation, regarding dodgy dealings with the Luxury Car Tax.

The amount of tax allegedly avoided was relatively small, yet due to legal fees paid to MinterEllison exceeding $1 million it became one of the ATO’s most expensive cases.

MWM has been told that the ATO finance team raised the alarm over this expenditure though little came of it. For its part, the ATO was detailed in its responses to questions for this story. To its credit, it is unusual for a government agency to display accountability to this degree, to engage with questions of public interest and regulatory responsibility in such detail.

So this investigation does not ping the ATO for misuse of public money, which is so prevalent in other parts of government, particularly the legislators with their pork barrelling and reckless spending. Yet it sounds the alarm bells for all of government, the continued, relentless outsourcing of the public service.

The ATO annual report details expenditure on external legal consultants as compared to internal. See the chart above.

In 2020-21, $55.8 million was paid to external legal consultants as compared to $34.3 internally. Determining how much is paid to individual legal firms in which year requires manually sorting through tenders

Many of the contracts under this arrangement are effectively open ended, as they are amended towards the end of the contract period for greater and greater amounts. 

For instance, this contract with MinterEllison for the provision of legal services has been running since 2016, and has now been extended to June 2022.

The original contract has been extended by $10 million to $52 million over the contract period.

The amounts paid to other providers are less, for example to contract with Gadens Lawyers reached up to $8 million by 2016, however since then the ATO has decided to employ the services of other firms.

Standing Offer Notices are how the ATO keeps firms on ‘retainer’. There are currently six ‘panel providers’ under the SON3696212 which are:

  • Gadens Lawyers
  • Hall & Wilcox
  • HWL Ebsworth Lawyers
  • McInnes Wilson Lawyers Pty Ltd
  • MinterEllison
  • Norton Rose Fulbright Australia

MinterEllison receives the greatest amount out of the six on the panel. The graph above only considers available competitive tenders as seen on AusTender, and not the money paid through Standing Offer Contracts.

Outside of Standing Offers, each contract undergoes a rigorous assessment process by a panel and is awarded on merit and cost.

Under a Standing Order, this process is undertaken by an assessment on the part of the ATO legal services team headed up until recently by Jeremy Geal ex-KPMG and who now works for MinterEllison.

The ATO gives cases to one of the six firms and then asks that firm to appoint a specific lawyer as counsel on the case. MWM has asked the ATO what the value add under this arrangement where the contracted firm simply appoints counsel which the ATO team would have done, then the ATO legal and audit team work directly with counsel to prepare the litigation strategy or inform the legal advice on legal interpretation or prospect of success. 

The appointed solicitor under the SON acts as a middleman between the ATO and legal counsels.

Since Jordan and Hirschhorn joined the ATO there has been a major push to outsource legal work, facilitated by Kirsten Fish and Jeremy Geal as head of law and disputes respectively. Jeremy Geal is ex-KMPG and now works for MinterEllison as of August 2021. 

According to an insider, under Geale the ATO litigation team was directed to steer work away from AGS to private providers sometimes to the detriment of the audit legal case. The audit and legal teams build up rapport and expertise with AGS in transfer pricing matters only to have to re-engage with another firm and start again.  

For its part, the ATO provided a detailed response on the integrity of its outsourcing system and says conflicts of interest are managed appropriately. Nonetheless, it is worth pointing out the potential pitfalls.

As with other branches of government, the outsourcing effectively de-skills the AGS – simply by virtue of work being done by external parties rather than internally – and it can tie the hands tactically of internal enforcers in major cases due to conflicted arrangements. For the major law firms, like the Big Four, corporate tax avoidance is a large part of the business model. Tax advice income is enormous. It involves saving the world’s largest corporations billions of dollars a year.

The six panel providers can be used by any government department; however this is an ATO panel arrangement where firms must demonstrate the requisite tax law skills.   

Minters is the largest provider under this SON.  With recent recruits of Geal and former ATO Deputy Commissioner Mark Konza who have the inside knowledge on tax avoidance taskforce planning and case strategy (Konza) and litigation and disputes strategy under Part IVC (ITAA 1936) objection process weaknesses (Geal).

“Minters will be in the box seat to attract more big business transfer pricing disputes,” says an insider. 

Where is it headed?

It is hard to begrudge consultants and law firms jagging as much government work as they can get. It is hard to begrudge the ATO and other agencies from deploying external expertise. It is not a good versus bad scenario. It is a relentless systemic change however and, once the public service is gutted, internal expertise gone, there may be no way back but to fork out top tier legal and consulting fees which would dwarf public service costs.

Indeed, plainly, the cost of government has risen, not shrunk, with all the outsourcing. Taxes as a proportion of GDP have never been higher. Debacles the likes of Robodebt, radical Defence spending blow-outs and the present Pandemic debacle are routine.

Moreover, “personal responsibility” in government is a thing of the past and conflicts of interest between public agencies are private fee-takers are now entrenched. Many of the contractors such as Big Four are large donors to the major political parties. The jag enormous contracts, another blatant conflict of interest.

The Big Four, for their part, started life as audit firms, then multinational tax avoidance became a large part of their business mix and now government work is bigger than both – although their own transparency is so poor they don’t even disclose a revenue breakdown, how much money they actually make from given advice to assorted governments state and federal.

Considered at its most elementary level, it is hard to see how a partner in a private firm charged out at $1,000 an hour could be more efficient, except in special instances, than a well trained public servant at a fraction of the cost.

And more broadly, the foxes are taking over the henhouse. Major law and consulting firms make large profits selling advice to multinational corporations on how to avoid tax while also making large profits telling governments how to conduct their affairs. Meanwhile they audit, supposedly independently, just across the other side of what can be rice-paper-thin Chinese Walls, the financial reports of these same companies.

It would be a no-brainer to stop political party donors getting government work, and also a withholding tax would be in order too, to ensure these masterminds of tax avoidance pay tax themselves. If its good enough for tennis stars, it’s good enough for the stars of paper shuffling.

It’s probably too much to hope for, after 30 years of privatisation, and the past 8 years of a rapidly escalating consultancy fee-fest, that somebody in government will demand a decent analysis of the costs and benefits of outsourcing and flogging publicly owned assets to private interests.

Callum Foote is a journalist and Revolving Doors editor for Michael West Media. He has studied the impact of undue corporate influence over Australian policy decisions and the impact this has on popular interests.

Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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