Big four partner accused of ‘significant’ tax misconduct worked at Ernst & Young

The consulting firm says it voluntarily applied to have its company named in legal proceedings for transparency reasons.

A former partner at Ernst & Young is before the courts for tax misconduct. Picture: Chris Pavlich

EY Oceania has revealed itself as the firm behind a former partner accused by the Australian Taxation Office of significant tax misconduct, the latest blow to an industry hit by a string of scandals.

The audit and consulting giant moved on Wednesday to have its name revealed, taking its case to the Federal Court amid a clamour by the parliament to expose names.

The ex-partner’s name and identifying information - including the clients he allegedly promoted a massive tax avoidance scheme to - cannot be revealed due to suppression orders.

The Senate has demanded the big four firms, PwC, EY, Deloitte, and KPMG, reveal if they were connected to the ATO’s case, with all firms bar EY denying their involvement in the case.

Court documents show the former partner was sacked in August 2022 by EY after he disclosed to the firm he had received more than $700,000 in allegedly “unauthorised” financial benefits from the tax scheme.

According to a redacted statement of claim released by the Federal Court, one aspect of the scheme involved minimising the tax payable on profits from a sale of units.

The alleged scheme involved establishing two trusts. The “beneficial interest” in a site was transferred at significantly less than its market value, and tax losses were applied against the distribution of income.

The partner allegedly drew his plans for the scheme on a whiteboard.

The ATO has accused the man of promoting tax schemes to different clients between November 2016 and April 2021. EY was first notified about the ATO’s investigation in June 2021.

EY managing partner and chief executive David Larocca said the ex-partner’s alleged conduct was “absolutely unacceptable”.

“EY is very clear that the behaviour alleged against the former partner are the isolated actions of a rogue operator, and are in no way reflective of the way we do business,” he said.

“We fell short in this instance and I regret that we didn’t identify and stop this behaviour earlier.

Mr Larocca said the EY was not finished with the case of the ex-partner, telling The Australian the firm was considering further legal action.

“We are considering a range of legal avenues,” he said.

David Larocca - EY Regional Managing Partner and CEO speaking at the Senate, Finance & Public Administration References Committee.

​The move by EY to name itself comes as rival firm PwC continues to face public scrutiny over the actions by its former head of international tax Peter Collins, who misused government tax briefings to create schemes to sell to clients.

Mr Larocca said EY had chosen to take action against its former partner before news of PwC’s breaches broke early this year.

EY has agreed to an enforceable undertaking with the ATO and has not made any legal professional privilege claims to stop attempts by the tax office accessing records.

Mr Larocca said EY had “wanted to speak about this much earlier” but the firm had been limited by tax secrecy laws and suppression orders.

He said EY’s reviews had shown the former partner allegedly acted alone “contrary to our policies and procedures”.

At a recent Senate appearance, Mr Larocca said the actions of “a group of partners and leaders of one firm have impacted the reputation of tens of thousands of professionals across Australia”.

However, the EY boss did not reveal the case hanging over the firm and its former partner.

After a brief hearing at the Federal Court in Melbourne on Wednesday, the ATO also released a limited statement on the proceeding, revealing it had lodged an application seeking to impose civil penalties on the former EY partner under promoter penalty legislation.

“The Commissioner will allege a former Ernst & Young (EY) tax partner promoted a tax exploitation scheme,” the ATO said.

“As the matter is before the courts and no findings have been made, the ATO is limited in making any further comments.”

It has previously been revealed the man is still a legal practitioner and registered tax agent.

The ATO also indicated it was working with the Tax Practitioners Board on the matter.

The TPB, which registers tax agents, has the power to ban the former EY partner..

In an earlier judgement released by Federal Court judge Geoffrey Kennett, the tax partner had previously argued his reputation would be damaged if his identity was revealed.

“(The respondent) relies on the damage to his reputation among clients and prospective clients (and consequent commercial damage) which he is concerned may arise from disclosure of the nature of the allegations against him,” the judgement read.

“The prospect of such damage is obvious. He is accused of significant misconduct as a tax practitioner.”

The case returns to court in February 2024.