Bittersweet is the way tax lawyer turned whistleblower Tony Watson describes the Australian Tax Office's decision to smack global construction giant Lendlease with an initial $112 million tax bill after his tip-off a few years ago.
He says his sense of vindication, when the ATO's audit was made public on May 13 this year, was tainted by his sacking and the need to sell the family home, which will be listed for sale on May 22. This is just one of the many costs of blowing the whistle, including a mental breakdown and the loss of his job.
"All because I called those bastards out for doing the wrong thing," he says.
The situation Watson finds himself in makes a mockery of the corporate whistleblower protections that were introduced in July 2019 and inspired him to take legal action three years later.
Arguably, his whistleblowing helped boost Australian tax revenue by $112 million and by the time the ATO is finished with Lendlease, it could be in excess of $300 million.
He says a small tweak in the current laws would solve his situation. To that end, he has reached out to several politicians, including driving to Canberra last October to meet the assistant treasurer and minister for financial services Stephen Jones, who never got back to him.
Seven months on, nothing has changed.
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Lendlease's big battle
It comes as Lendlease — whose developments include Barangaroo in Sydney, Docklands in Melbourne, Adelaide Oval in Adelaide and RNA Showgrounds in Brisbane — is embroiled in a big battle with some major investors, with a showdown expected at an investor day meeting later this month.
One of the company's major shareholders recently sent a letter to the board describing its culture as bureaucratic and without enough accountability as it called for radical strategic reform, including downsizing its global operations. Some others are also critical as the company's profits and value on the share market have tanked in recent years.
Watson says the description of Lendlease's culture is apt. "Lendlease has lost the capacity to see itself as others see it."
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He should know. Watson was Lendlease's primary tax adviser for 30 years, working with senior executives and directors. At one stage, he was invited to sit on the board of one of its biggest subsidiaries, as well as due diligence committees and most things the board did that had a tax aspect to it, including acquisitions and capital raisings.
As part of his job, he gave tax advice to Lendlease, including running a high-profile case against the ATO in the Federal Court, which he won.
But when it came to the way Lendlease was treating tax on its $1.7 billion retirement village acquisitions, which he claims was "double dipping", he advised them they couldn't do it.
He first started raising his concerns in 2012. He briefed company officials, Lendlease's external auditor, the board and his law firm, where he held the position of partner. When all else failed, he informed the ATO in a series of protected disclosures between 2018 and 2022.
"They were stealing from Australian taxpayers and I couldn't stay silent," he says.
The role of auditors
Watson estimates the tax scheme boosted Lendlease's profits by at least $260 million, based on $1 billion of tax deductions.
KPMG, which has been Lendlease's external auditor for more than 66 years, approved the accounts.
It's the job of auditors to be independent and give a "true and fair" view of the organisation's financial position and affairs. Auditors play a big role in the integrity of the financial system. Banks, investors, and superannuation funds rely on an auditor's independent assessment of financial accounts to make decisions.
Some governance experts say companies should rotate audit firms every 10 years to ensure independence. Some countries, including the European Union, have made it mandatory for listed companies to rotate audit firms every decade.
Until last year, corporate regulator ASIC conducted annual audit quality report cards on the six biggest auditors — including Deloitte, KPMG, PwC and EY — and found deficiencies in a third of the biggest firms. Separate reviews found negative findings in 48 per cent of KPMG's audit cases.
In 2023, ASIC decided to scrap its annual report card and replace it with "integrated financial reporting and audit surveillance", which received heavy criticism.
Labor's Senator Deborah O'Neill, who led a parliamentary inquiry into the auditing industry in 2019 and again more recently, says she remains concerned at the way the oversight of the quality of auditing is at odds with best practice in other jurisdictions.
"PWC, KPMG, Deloitte and EY have a critical role in reporting on the integrity of the companies in which so much of our superannuation retirement savings are invested. If the quality of audit continues to decline, every citizen stands to lose — a lot," she says.
"The evidence we received during that 2019/20 inquiry, and through the work of the Parliamentary Joint Committee in the years since, is that regular, randomised and intensive reviews of audit quality are the most effective way to drive standards and accountability in the sector.
"When auditors don't know when the regulator could arrive to check on their work, that has an impact on raising audit quality and professional accountability."
She says the powerful US Public Company Accounting Oversight Board (PCAOB) uses randomised audit quality checking to avoid the gaming of the audit inspection system.
In response to a series of questions, Lendlease said its board resolved in 2022 to conduct an audit tender process, with a view to changing the auditor. In May 2023, it said it paused that process. It said it fundamentally rejected Watson's position.
"We're confident our tax treatment is consistent with the law and with the ATO's 2002 tax ruling on the retirement living industry. We disclosed that the ATO was conducting an audit of the retirement living transaction in both our Lendlease 2021 Tax Report and our Lendlease 2022 Tax Report," Lendlease told the ABC in a statement.
It said the ATO adjustments did not relate to deductions claimed by Lendlease and that it intends to request remission of the interest in full.
Lendlease's $112 million tax bill includes a $24.5 million interest payment, which Lendlease says it will contest. It told shareholders in a statement to the ASX on May 13 that if the ATO applied the same treatment to other partial sales of the retirement village business it could result in an additional tax bill of $50 million, excluding interest.
However, if the ATO decides to charge interest and penalties, it will be a lot more than the $50 million Lendlease is estimating.
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Whistleblower protections are flawed
It's a win for the ATO but it has come at a huge cost to Watson.
Public sector whistleblower protections have already been shown to be deeply flawed in the cases of two public sector whistleblowers. David McBride was jailed for almost six years earlier this month, and ATO whistleblower Richard Boyle is set to stand trial in September.
Corporate whistleblower protections are also flawed.
In April 2022, Watson decided to take legal action in the Federal Court against Lendlease and his old tax firm Greenwoods & Freehills (now owned by PwC) under the Taxation Administration Act's whistleblower protections.
He alleges he was dumped from the Lendlease account in 2014, which resulted in depression. In 2017, while he was on unpaid sick leave, he alleges he was terminated by his law firm.
Watson says when he recovered he was determined to continue his quest to call out the wrongdoing. He organised a series of meetings with senior Lendlease officials — and wrote to PwC — alerting them to the questionable tax scheme.
He also made a series of protected disclosures to the ATO between 2018 and 2022, many of them well after the new whistleblower laws came into effect.
Watson then lodged his legal action, believing he was covered under the new 2019 whistleblower protections, which he said were a vast improvement on the old laws.
"The new law provides that a court cannot make a cost order against a whistleblower seeking compensation, to ensure whistleblowers are not deterred from bringing proceedings by potential adverse costs orders," he says.
"Secondly, the burden of proof is reversed once the whistleblower has adduced evidence that suggests the wrongdoer has engaged in conduct causing detriment to the whistleblower."
However, Lendlease and PwC applied to the court to strike out his use of the current whistleblower laws on the basis they should apply to the date the detrimental conduct was inflicted, not just when the protected disclosure was made.
In Watson's case, the detrimental conduct was unleashed in 2017, when he was terminated. His protected disclosures took place after the new laws were introduced in July 2019.
In August 2023, the Federal Court ruled in Lendlease and PwC's favour.
It means Watson's case will be conducted under the old laws, which leaves him exposed to costs if he loses and means he doesn't benefit from the reversal of the onus of proof.
He says if the government tweaked the legislation to say the application of the current 2019 whistleblower protections are based on the timing of the disclosure, not the timing of detrimental conduct, his risks would be reduced.
"If this is not fixed, the politicians will be helping PwC and a tax avoider which has just received an amended assessment for $112 million, proving what I said all along is right," he says.
In the US, the Internal Revenue Service (IRS) offers a bounty to individuals who disclose information about tax frauds that are successfully collected. Watson says the discloser need not have suffered any victimisation. The only requirement is that they make the disclosure.
He says politicians talk about how important whistleblowers are and how they want to protect them. "Well here's their chance to protect the person of conscience, or help the tax avoider and PwC."
Assistant Treasurer Stephen Jones was sent a series of questions, including whether he believed there was a problem with the application of the laws for corporate whistleblowers in light of Watson's plight.
In a statement, a spokesperson said it would not be appropriate to comment on individual matters before the courts.
"The government is committed to strong whistleblower protections and will be conducting a statutory review of tax and corporate whistleblower laws from late 2024."
