Given that the ATO already has information from a number of sources, the addition of a Mandatory Disclosure Regime should be carefully crafted so that (i) it does not require duplication of information which has to be provided for the purpose of other regimes, and (ii) where information is provided under those regimes, it should be regarded as satisfying this regime as well.
The regime should respect the privilege attaching to legal advice (including the extension of that concept made in the ATO's Accountants' Concession).
The regime should be carefully targeted just to the affected advisers and kinds of transactions we have been identified in Part 3 of this submission.
Ensuring a design which avoids duplication
Given how much information the ATO already has access to, there must be a question whether Australia needs to implement yet another disclosure regime. The evidence that the ATO already has access to, or is provided with, information from a wide of sources is apparent from the face of the Discussion Paper:
Australian firms already disclose information to the ATO about their own tax affairs
voluntarily, in making private ruling requests, under Annual Compliance Arrangements, in applications for Advanced Pricing Agreements and in Pre-Lodgement Compliance Reviews;
in answering the multitude of questionnaires sent by the ATO on taxpayer-specific and industry-wide matters;
in the formal reporting requirements for tax returns including the International Dealings Schedule and Reportable Tax Position Schedule; and
under the ATO's formal investigative powers in Div 353 of the Taxation Administration Act 1953 and the offshore information notice rules in s. 264A Income Tax Assessment Act 1936.
Australian firms already inform the ATO about the situation of other taxpayers
pursuant to FATCA and the Common Reporting Standard which will soon start operating; and
under the third party reporting such as no-ABN withholding, PAYG withholding and the new third party reporting regime in Div 396-B Taxation Administration Act 1953.
foreign tax administrations disclose information to the ATO
under the soon-to-commence country by country reporting regime, facilitated by the recently signed Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports;
under automatic, spontaneous and requested exchanges of information made pursuant to our bilateral income tax treaties, our Tax Information Exchange Agreements and the Convention on Mutual Administrative in Tax Matters; and
pursuant to FATCA and the Common Reporting Standard which will start soon.
In particular, the Discussion Paper refers to advisers who are involved in the `design, distribution and management of aggressive tax arrangements' which suggests that the key target of the Discussion Paper is mass-marketed products with tax components. The impression is confirmed by the passages which refer to the ATO providing a reference number which the tax adviser must notify `to the end users of the aggressive arrangements.' This would align with the target outlined in Chapters 1 and 2 of the OECD Report namely the kind of regimes seen in the UK, US, Canada, South Africa, Ireland and Portugal which are all designed with mass-marketed products in mind. Given that audience, the main overlap will be between the proposal in the Discussion Paper and the Product Ruling (PR) regime. Australia has taken the position of offering a `carrot' in the form of a PR to a person who is seeking to market a product with tax consequences for the benefit of their investors, rather than adopting the `stick' approach seen in the OECD Report. It is hard to believe that there is a sizeable market for mass-marketed arrangements that hasn't already come to the attention of the ATO through Product Ruling applications.
The logical implication of this discussion is that any regime which might be implemented should be deliberately and explicitly limited so that it does not extend to reporting information which the ATO already possesses. The Discussion Paper says,
arrangements which have already been comprehensively disclosed through other disclosure tools or through private rulings should not be subject to further disclosure under Mandatory Disclosure Rules [page 17]
We agree, but this proposition should be given effect to in the basic design so that it is a comprehensive exception advisers should not be liable to penalties where the information is already known to the ATO. In the era when taxpayers had to make a `full and true disclosure' of their tax affairs to the ATO, our Courts took the view that the ATO did not have to be repeatedly informed about information already in its possession. In Foster  HCA 18, the High Court said,
Disclosure consists in the statement of a fact by way of disclosure so as to reveal or make apparent that which (so far as the `discloser' knows) was previously unknown to the person to whom the statement was made. Thus the taxpayer could not add anything to the commissioner's knowledge with respect to the appeal. In my opinion in these circumstances it should be held that the failure of the taxpayer to repeat to the commissioner what he already knew did not constitute a failure to disclose material facts.
While the Discussion Paper acknowledges that advisers should not have to report information if the taxpayer has already applied for a Product Ruling, in our submission the adviser should be immune for both (i) all matters already reported to the ATO or (ii) which the ATO already knows. That is, advisers should also be immune from penalty if the matter has been raised in Annual Compliance Arrangements, applications for APAs, PreLodgement Compliance Reviews, in answering questionnaires, the information is apparent from a position taken in a tax return (either of the taxpayer or an affected party), or if it has come to the attention of the ATO from another source.
This will address at least in part one likely problem with the regime that the ATO will receive multiple notifications from multiple advisers involving multiple clients. This may reflect just one client and one transaction, or multiple clients with the same transaction or multiple clients with multiple transactions. It is almost inevitable that the ATO would end up issuing multiple identification numbers for the same thing, and not to be able to discern and properly classify just what it is seeing.
We note the Discussion Paper suggests at one point that the system might work in the other direction
the taxpayer would not be required to provide the same information as reported by the tax adviser [page 18]
In our submission, this statement puts the responsibility in the wrong place. Responsibility for making disclosures should be always lie with the client.
3 Impact on tax administration
The Discussion Paper makes no comment on whether the proposed regime will override a client's privilege attaching to legal advice. The issue also arises with respect to the Commissioner's administrative concession known as the Accountants' Concession.
It is clear from our jurisprudence that Parliament can strip a client of legal privilege, but only by the clearest words. In Baker v Campbell  HCA 39, Deane J said
It is a settled rule of construction that general provisions of a statute should only be read as abrogating common law principles or rights to the extent made necessary by express words or necessary intendment... Both logic and authority support the present-day acceptance of the preservation of that confidentiality as a fundamental and general principle of the common law. It is to be presumed that if the Parliament intended to authorize the impairment or destruction of that confidentiality by administrative action it would frame the relevant statutory mandate in express and unambiguous terms.
The reason for this principle of interpretation is that there is a public interest in allowing full and frank communication between clients and their advisers. In Grant v Downs  HCA 63, Stephen, Mason and Murphy JJ said
The rationale of this head of privilege, according to traditional doctrine, is that it promotes the public interest because it assists and enhances the administration of justice by facilitating the representation of clients by legal advisers, the law being a complex and complicated discipline. This it does by keeping secret their communications, thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure of the relevant circumstances to the solicitor. The existence of the privilege reflects, to the extent to which it is accorded, the paramountcy of this public interest over a more general public interest, that which requires that in the interests of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available. As a head of privilege legal professional privilege is so firmly entrenched in the law that it is not to be exorcised by judicial decision.
A similar view was expressed by Gleeson CJ, Gaudron and Gummow JJ in Esso Resources Australia  HCA 67:
Legal professional privilege (or client legal privilege) protects the confidentiality of certain communications made in connection with giving or obtaining legal advice or the provision of legal services, including representation in proceedings in a court. In the ordinary course of events, citizens engage in many confidential communications, including communications with professional advisers, which are not protected from compulsory disclosure. The rationale of the privilege has been explained in a number of cases, including Baker v Campbell, and Grant v Downs itself. The privilege exists to serve the public interest in the administration of justice by encouraging full and frank disclosure by clients to their lawyers.
In our submission, the requirement to report should not override the client's entitlement to claim privilege, for the same reasons. It seems to us that it is almost always preferable for taxpayers to have and be able to seek good advice about their affairs. A requirement on an adviser to report a client's affairs carries with it the danger that clients will be less likely to seek proper advice. In our submission, any rule which diminishes a taxpayer's desire for proper advice potentially diminishes rather than enhances the good administration of a tax system. Matters which may be rectified by good advice may now not come to light.
We acknowledge that this argument is less relevant for those who are involved in marketing schemes to a mass audience and we make no case for them. Our concern is for those who advise individual clients and seek to assist them meet their tax obligations. We think it is in the best interests of the tax system that taxpayers who may have difficulties are not discouraged from seeking advice and rectifying their tax problems in an orderly way through fear that their adviser will now be placed in a position of conflict where the adviser's exposure to penalties is now being put against their duty to work for the best interests of the client.
4 Design issues
This part of the submission considers some of the practical design questions noted in the Discussion Paper (and others) which will need to be addressed.
Issue 1. Who should be required to make disclosures under the Mandatory Disclosure Rules?
The Discussion Paper says the burden of disclosure will primarily rest with the tax adviser involved in the `design, distribution and management' of the relevant aggressive tax arrangement, but where a tax adviser is offshore, the taxpayer may be required to satisfy the disclosure requirements on their behalf.
The Discussion Paper says there will be `a clear definition of targeted tax advisers' but in our submission it should be made clear that the only `tax adviser' who can potentially be within the rules is one who undertakes, `design, distribution and management.' That is,
advisers who merely advise on the tax consequences of proposals put to them, including giving second opinions, and
return preparers who report the consequences of transactions on which others have opined,
should not be within the scope of the rules.
Instead, the notion which the legislation should capture is similar to the idea of `promoter' as defined in Div 290 Taxation Administration Act 1953 someone who markets a scheme, has a mass audience for the same advice, and is remunerated in respect of their marketing activities. (Indeed, it may make sense for this regime to be located alongside the Promoter Penalty Regime in the Taxation Administration Act to make the linkage clear.) Or to put it the other way, advisers who advise a client on a transaction and are remunerated by a fee (not affected by the amount of tax at stake or the outcome of the transaction) should be outside this regime. This would align the Australian regime more closely to the regime described in the OECD Report.
Moreover, it should be made clear whether the obligation to report is imposed on an individual or a firm. If it is the latter, the legislation should make clear what happens if the relevant individual has left the firm.
Issue 2. What aggressive tax arrangements would trigger the Mandatory Disclosure Rules?
One of the more confusing aspects of the Discussion Paper is whether the proposed regime will require some initiating action on the part of the ATO or will operate automatically.
Initiated model. Some passages suggest that the process will need to be initiated by the ATO:
the ATO should have broad discretion ... in determining which aggressive tax arrangements would trigger the Mandatory Disclosure Rules [page 16]
the ATO would identify the targeted aggressive tax arrangements in a manner similar to how it currently identifies aggressive tax arrangements that become subject to Taxpayer Alerts [page 16]
[advisers are required to report] not be earlier than 90 days from ATO publishing that a scheme is reportable ... [page 17].
These passages imply no adviser could face exposure unless and until the ATO publishes some document which describes a structure or transaction in the kind of detail evident in Taxpayer Alerts.
If that is the intended model, certain matters then follow:
it is important to ensure that the regime will only operate for current and future matters that is, if the ATO publishes a notice, an adviser should not be under an obligation to scour their files to discover if they (or anyone in their office) have ever given advice on a transaction with these features; and
it ought to be the case that the decision by the ATO to issue the notice can be subject to judicial review. The ATO has in the past issued Taxpayer Alerts simply as a `warning shot' without yet having a clear theory about why the transaction is offensive. This situation should not be allowed to occur if penalties can follow for advisers.
Automatic model. On the other hand, other passages in the Discussion Paper allude to the kind of regime which is enlivened automatically based on the existence of observable generic `hallmarks'
Mandatory Disclosure Rules would only be triggered in relation to aggressive tax arrangements with specifically described features. This will ensure the disclosure rules can be limited to particular arrangements implemented by a specific targeted cohort ... [page 17]
This is the model which the OECD Report seems to have had in mind and it is the one evident in the national regimes in Canada, the UK and the US, for example, referred to in the OECD Report. Those regimes operate automatically and are triggered by the existence of indicators such as success premiums, guaranteed refunds, confidentiality agreements, sizeable book-tax differences.
This is a very fundamental difference in approach and in our view, a regime in which the ATO bears responsibility to initiate the process would go a long way to obviating advisers' concerns.
If, however, the legislation is designed to be self-executing around generic hallmarks, then it is imperative that a proper list of risk factors be prepared. The Discussion Paper is notably lacking in any indication about the relevant factors. In our view, it will be essential that one or more specific factors must be met i.e. that the scheme is actively marketed and it is marketed to more than one taxpayer. Precision. In either case that is, whether the regime is initiated by the ATO or is selfexecuting it will be important to ensure that the indicators which trigger the regime are very clear. The existing Taxpayer Alerts are not drafted in a manner that is well suited to the proposed Mandatory Disclosure Rules. They usually refer to the offending arrangements as ones which `typically display' certain features and which display `all or most of the ... features.' If advisers are to be penalised for failing to notify the ATO, then it is incumbent on the ATO to identify exactly what it wants to be notified about.
Issue 6.What should happen if tax advisers do not comply with the Mandatory Disclosure Rules?
Finally, we wish to draw Treasury's attention to another option which, in our submission, represents a better way to approach this issue. The Government has apparently taken the preliminary view that the consequence of non-reporting should be visited on advisers. This is one model but it is not actually required in the OECD Final Report which simply refers to `penalties' and `other sanctions':
What are the consequences of non-compliance: Non-compliance with disclosure rules generally triggers penalties. In addition, countries may apply other sanctions to enforce mandatory disclosure rules and deter noncompliance.
In our view the Canadian model which focuses on consequences for the taxpayer is more promising.
Secondly, we think it ought to be made clear that disclosure has no immediate effects per se; it does not amount to an admission or declaration. The OECD Report makes this point:
Existing regimes already do this with the United Kingdom, United States, Ireland and Canada making it clear that the mere reporting of any scheme does not have any bearing on whether or not a tax benefit is allowed. Similarly it is clear that the disclosure of a tax arrangement has no effect on the tax position of any person who uses the tax arrangement [para 176]
We would add one qualification, however that the reporting of the arrangement should, in the event that the arrangement is held to be ineffective (either under general provisions or an anti-avoidance rule such as Part IVA or Div 815) trigger an automatic reduction in any penalty by enlivening s. 284-225 Taxation Administration Act 1953. Clearly the taxpayer has voluntarily disclosed their position to the ATO and should be entitled to a reduction in any penalty for that reason.