Targeting tax crime: a whole-of-government approach - July 2009
Targeting tax crime: a whole-of-government approach - July 2009
Issue one July 2009
Take a closer look at the government's fight against tax crime in a new online magazine.
The first edition of Targeting tax crime: a whole-of-government approach (PDF, 2.26MB) is now available for download.
The magazine contains real-life case studies, interviews and stories about Australian and international tax crime - how we're trying to stop it and the serious consequences for those who offend.
Targeting tax crime: a whole-of-government approach is achieved in cooperative partnership between the Australian Tax Office, the Australian Crime Commission, the Australian Federal Police, the Australian Securities and Investments Commission, the Commonwealth Director of Public Prosecutions, the Australian Transaction Report and Analysis Centre and the Australian Government Solicitor.
Previous issues - Targeting tax crime magazine.
The tentacles of tax crime reach around the globe, as this new online magazine charts so thoroughly.
The OECD estimates up to $7 trillion in global assets are now held 'offshore' in tax havens, threatening government revenues and the integrity of the international financial system.
The Australian Government is committed to safeguarding the tax system for the benefit of all Australians and is determined to crack down on cheats.
I have just returned from the United States, where my official talks were dominated by the problem of tax abuse and the need for greater cooperation to fight it.
In the next few months, the world's key leaders will again convene at the G20 and the Prime Minister will continue the global push to crack down on tax abuse and tax havens.
Just as governments around the world need to cooperate, so too must the different areas of Australian Government administration.
We are providing significant funding for this whole-of-government approach against tax abuse.
The Government also recognises the talents and energy of those involved in this important mission.
This excellent magazine reflects the outstanding efforts of those who are targeting tax crime and my compliments go to the Australian Taxation Office and all involved in its publication.
Senator Nick Sherry
Tax crime is not victimless - it's an offence that costs the entire community money that could provide infrastructure, services and welfare support. If individuals and businesses don't pay their fair share of tax, this places an unfair burden on honest taxpayers and puts businesses under a competitive disadvantage.
During these tough economic times the Australian Taxation Office (ATO) is committed to supporting those who are doing their best to meet their obligations to the community. In fairness to these people, we also need to support them by ensuring that they are not victimised by those who wilfully seek to abuse the system.
Tax crime is not just a local issue and that is why a whole-of-government approach continues to be the most effective way to deter, detect and deal with it.
We're working with our partner agencies and departments at the local, national and international level to out-manoeuvre tax criminals and preserve the integrity of Australia's tax and superannuation systems.
These agencies and departments include the Australian Crime Commission, the Australian Federal Police, the Australian Government Solicitor, the Attorney-General's Department, the Australian Transaction Reports and Analysis Centre, the Australian Securities and Investments Commission and the Commonwealth Director of Public Prosecutions. We also work closely with overseas tax administrations.
This magazine is designed to inform tax professionals and others about whole-of-government initiatives to target tax and superannuation crime and the risks and consequences of serious non-compliance.
Our objective is simple - we want to maintain community trust and confidence by coming down hard on tax crime.
Commissioner of Taxation
Despite the efforts of governments around the world, a number of tax havens conceal artificial financial arrangements and the individuals or companies that use them. The burden of the revenue lost falls on honest taxpayers and the community as a whole.
Assistant Commissioner for International Relations at the ATO, Malcolm Allen said the Organisation for Economic Cooperation and Development (OECD) has championed a global effort to fight tax crime for a number of years.
The Internationally Agreed Tax Standard, developed by the OECD and endorsed by both the UN and G20 finance ministers in 2009, means countries must share tax information for administration and enforcement regardless of domestic tax laws or bank secrecy. It also provides for safeguards to protect the confidentiality of this information.
'Despite this, our tax system is still vulnerable to the use of tax havens. The ongoing Wickenby investigations, prosecutions and reports in the media of tax avoidance by customers of certain overseas banks, indicates there is still much to be done', he said.
The G20 meeting in March 2009 responded to sustained pressure from the international community and the financial crisis with stronger initiatives to combat tax crime. These included recommendations to make it more expensive to deal with 'uncooperative' nations as well as sanctions such as reducing the flow of aid money to them.
Following this meeting, the OECD published a report on the progress of implementing the Internationally Agreed Tax Standard. It also included a commitment to work with all relevant countries to bring about the swift and effective implementation of the Standard. The OECD report also highlights a 'grey list' of countries that have signed up to key standards of taxation and banking openness but have not yet fully implemented them.
Switzerland has committed to exchange information on suspected cases of tax evasion where requests are 'specific and justified'. Singapore, Hong Kong and China also endorsed OECD principles for transparency and the exchange of information and have agreed to implement new laws during 2009.
Meanwhile Costa Rica, Malaysia, Philippines and Uruguay have been reclassified as 'jurisdictions that have committed to the Standard, but have not yet substantially implemented it'.
Tax Commissioners also focused on these issues at the May 2009 meeting of the OECD Forum on Tax Administration. Their communiqué highlighted their resolve to continue to work together to 'share information and expertise on measures to enable revenue bodies to prevent non-compliance using offshore arrangements, including voluntary compliance strategies.'
Malcolm Allen says the OECD and the G20 group are taking action to address secrecy, poor information sharing, tax havens and money laundering.
'They are closing the net on countries that continue to facilitate the abuse of tax systems.
'The progress achieved in the past six months is significant and will contribute greatly to minimising opportunities for Australians to engage in tax crime globally, which deprives other Australians of vital tax revenue', he said.
'The challenge, for those countries committed to improving transparency and information sharing, is to do so swiftly and effectively.
'Many will need to implement new laws or change existing ones and establish specific bilateral or multilateral agreements to enable information to be effectively exchanged.'
Mr Allen says the ATO is ready to help.
'Over the past four years we've signed tax information exchange agreements with six jurisdictions previously considered to be tax havens, namely Antigua and Barbuda, Bermuda, the British Virgin Islands, the Isle of Mann, the Netherland Antilles and Jersey.
'We anticipate that current negotiations will see further agreements finalised before the end of 2009.'
However he warns that coordinated international efforts will be needed to curtail the use of tax havens and reduce opportunities for tax crime.
For more information about tax havens read our story Federal budget targets tax havens.
Implementation of internationally agreed tax standard1
Progress at 13 July 2009
Jurisdictions that have substantially implemented the Internationally Agreed Tax Standard.
Isle of Man
United Arab Emirates
US Virgin Islands
Jurisdictions that have committed to the Internationally Agreed Tax Standards, but have not yet substantially implemented it - tax havens3.
Antigua and Barbuda
British Virginia Islands
St Kitts and Nevis
St Vincent and Grenadines
Turks and Caicos Islands
Jurisdictions that have committed to the International Agreed Tax Standards, but have not yet substantially implemented it - other financial centres.
Source: A progress report on the jurisdictions surveyed by the OECD Global Forum internationally agreed tax standards.
Fighting crime overseas
The dynamic nature of the global environment requires a range of responses to help fight tax crime overseas, according to the ATO's Assistant Commissioner for Serious Non-Compliance, Michael O'Neill.
'Factors such as expanded international trade, enhanced communications and increased travel have seen a substantial increase in the movement of money overseas in the past decade', he said.
'Much of this money is related to legitimate business and trade, or travel and tourism activities. But some of it is not legitimate, with sophisticated business models set up - often through organised criminal networks - to avoid the Australian tax system.'
A recent investigation found Australian taxpayers used Vanuatu-based schemes to avoid paying tax. The offenders applied false invoicing between a Vanuatu entity and an Australian entity that resulted in over-claiming of tax deductions.
Through the use of predictive analytics, the ATO and agency partners apply similar attributes to this system to a wide range of taxpayers and advisers. The aim is to identify similar activity for further investigation.
To date, some 90 audits have been conducted based on these investigations, which have recovered more than $100 million in deductions. Charges of tax fraud and money laundering have also been laid against several offenders, including taxpayers, scheme promoters and intermediaries.
Federal Budget targets tax havens
Australia's commitment to fighting tax crime has been bolstered by a $122 million budget allocation over three years to the ATO and partner agencies to continue to investigate and prosecute tax haven abuse through Project Wickenby.
By the end of May 2009, Wickenby had raised $352.72 million in tax liabilities, collected more than $110 million and restrained over $75 million from the proceeds of criminal activity. The ATO has also identified an additional $76 million in tax collected in subsequent years from people who have been subject to Wickenby action.
Project Wickenby will complement international developments, including the G20 initiatives on tax havens and non-cooperative jurisdictions, particularly in relation to the international exchange of tax information.
Across the Project Wickenby agencies, the $122 million will fund:
- additional audits and/or reviews
- additional criminal investigations by the Australian Federal Police, supported by mutual assistance requests
- increased strategic and financial intelligence from the Australian Crime Commission and the Australian Transaction Reports and Analysis Centre (AUSTRAC)
- increased civil investigations by the Australian Securities and Investments Commission, under the Proceeds of Crime Act 2002, and
- increased activity by the Commonwealth Director of Public Prosecutions.
The ATO will also expand its scrutiny of international transactions by all businesses and individuals, including the use of offshore bank accounts and international debt and credit cards.
Commissioner of Taxation, Michael D'Ascenzo said 'As Australia's economy recovers and companies seek to maximise competitive advantage via tax minimisation strategies, risks may start to emerge or magnify - particularly in the large and medium business market'.
'While we and our partner agencies recognise that some taxpayers will be experiencing financial distress, we're determined to keep them engaged with the tax system while addressing revenue risks that could emerge as Australia's economy recovers and returns to growth.' The ATO will be helping businesses remain viable in the global recession and promote a level playing field for small business.
'The Budget also provided funding for us to work with Australian financial institutions to determine what additional information they hold that could help us identify those relying on lack of transparency to avoid or evade their income tax obligations.
This information is expected to expand our existing intelligence sources, including AUSTRAC data.'
Commissioner of Taxation, Michael D'Ascenzo said the 2009-10 Budget provided some challenges, as well as some exciting opportunities.
Offshore voluntary disclosures
The ATO encourages taxpayers with unreported income and capital gains from offshore activities to come forward and disclose their activity.
Taxpayers with undisclosed income from offshore activities can contact the ATO to make a voluntary disclosure.
Full details about how to make a voluntary disclosure, including information on eligibility, can be found at www.ato.gov.au
There are few things that can shatter a personal or business reputation more than being embroiled in a high-profile tax investigation. Anyone contemplating, or already involved in, dodgy tax practices should consider the risk they're taking.
Businesses or individuals who abuse Australia's tax system by engaging in tax crime place an unfair burden on the majority of Australians who do the right thing. As a result, the penalties for people convicted of tax crime are severe.
Conspiring to obtain a financial advantage by deception and money laundering carries maximum penalties of 10 and 20 years imprisonment respectively. Penalties can also include heavy fines and, on top of that, courts generally order offenders to pay the taxes they owe.
The ATO also works closely with law enforcement agencies to make sure the Australian community is protected from the effects of tax crime. For example, the ATO works with the Australian Federal Police (AFP) and the Commonwealth Director of Public Prosecutions (CDPP) to restrain and confiscate the proceeds of tax crime, using the powers of the Proceeds of Crime Act 2002 (The POCA 2002). Similarly, law enforcement agencies work with their international counterparts to obtain evidence of tax crime by dodgy investment scheme promoters.
In the 2007-08 financial year, the Serious Non-compliance area of the ATO completed a total of 178 audits involving serious fraud or evasion. This resulted in more than $330 million in tax liabilities being raised. During the same period, a total of 77 tax crime cases were brought to court, with convictions achieved in every case. Of these convictions, 46 resulted in custodial sentences for the offenders. Penalties like these are in place for both promoters of dodgy tax schemes and the taxpayers who use them.
Tax crime may also lead to other serious offences, such as money laundering. For instance, when the proceeds of tax crimes are dealt with in ways designed to hide their source or to hide their true ownership, there is a serious risk that these ploys may amount to committing a money laundering offence. Such ploys include placing funds in complex offshore structures or arrangements based in tax havens.
It's understandable that the line between what's legal or illegal, ethical or unethical, can seem a little blurred at times. The difference between tax 'minimisation', 'avoidance' and 'evasion' - all the way through to 'crime' - can perhaps best be described, for some, as a continuum of increasingly unacceptable behaviour.
This is why the ATO provides rulings and other advice, including taxpayer alerts, to help taxpayers understand the law. Taxpayer alerts are an early warning to advisers and their clients of significant existing, new or emerging aggressive tax planning schemes being assessed for risk.
What is Tax Evasion?
For more information about the work of our cross-agency partners in fighting tax crime, visit:
Mr X, using a false name, lodges an activity statement claiming a false refund of $200,000. The refund is paid into a false-named bank account. A subsequent investigation by the ATO establishes that there are reasonable grounds to suspect that an offence of obtaining a financial advantage by deception has been committed.
The ATO and the AFP conduct a joint investigation gathering evidence to support the alleged fraud committed on the Commonwealth. At the same time, a proceeds of crime brief is referred to the CDPP for action under the POCA 2002, as the fraudulent refund is still in the bank account.
Proceeds of crime options
There are two types of civil restraining orders which the CDPP could obtain over the $200,000.
- Section 18 of the POCA 2002. An order restraining the $200,000 on the basis that it is property owned by or suspected to be under the effective control of a person (Mr X) suspected of having committed a serious offence. This is commonly referred to as a person-directed restraining order.
- Section 19 of the POCA 2002. An order restraining the $200,000 on the basis that the property (the $200,000) itself represents proceeds of an indictable offence. This is commonly referred to as an asset-directed restraining order.
Later, the CDPP can proceed to seek either civil forfeiture of the $200,000 (plus interest) or, if Mr X is subsequently charged and convicted, rely on his conviction as a basis for obtaining forfeiture orders.
Ms Y was married to a partner in a restaurant business which employed a number of staff. Ms Y was responsible for the business's bookkeeping. The takings of the business were a mix of cash sales and credit card transactions.
Information received by the ATO indicated that the business is paying cash wages that are not recorded in the pay books for the staff, as well as cash purchases being made from the till. There are also allegations of a second set of records for the business.
Initial compliance activity has identified that not all cash sales were recorded in the books of account.
Being suspicious that fraud offences might have been committed, the ATO sought the assistance of the AFP to execute search warrants to obtain evidence of the potential offences.
The execution of the search warrants identified a second set of records prepared by another person for a four-week period in one financial year. These records indicated sales in excess of those recorded in the books of account that Ms Y provided to the tax agent to prepare the income tax returns.
An audit and an investigation were carried out concurrently.
The audit identified that for the period covered by the second set of records, the percentage of cash sales is significantly higher than for the balance of the financial year. Ms Y maintained that the cash not banked was used to meet expenses that had not been claimed as deductions.
A review of the business records indicated that there were, indeed, cash expenses but they were significantly less than the additional income that was not recorded in the books of account provided to the tax agent.
Amended assessments were issued based on estimating the percentage of cash sales compared with credit card transactions from the second set of records for the full financial year. Allowance was also made for additional cash expenses based on the gross profit margin that applied to the second set of records. A review of prior-year returns also showed that the percentage of cash sales was lower than the percentage in the second set of records. Amendments were also made for the previous years for which records were available.
The behaviour of the taxpayer was considered to be an intentional disregard of the tax laws and a base penalty amount of 75% of the tax shortfall was imposed. In addition, a general interest charge was applied for the relevant period.
A brief of evidence was prepared and referred to the CDPP. Charges under the former section s29D of the Crimes Act 1914 were laid alleging that Ms Y had defrauded the Commonwealth of more than $300,000, and a criminal prosecution began.
At trial, Ms Y was found guilty of fraud offences. Ms Y was sentenced to three years' jail, with a minimum of 12 months to be served.
Making a voluntary disclosure
The ATO encourages taxpayers who have made a mistake in relation to their tax affairs to make a voluntary disclosure. This can lead to reductions in shortfall penalties and interest, particularly if the voluntary disclosure is made before the notification of an audit.
Voluntary disclosures can be made in writing, electronically, by phone, or via other methods available in specific circumstances.
Full details about how to make a voluntary disclosure can be found at www.ato.gov.au
Business failure, and the fallout for creditors and equity holders, is a fact of life. For most of us it poses a largely unavoidable but low-level risk that we accept in return for the benefits of an entrepreneurial economy.
In most cases, where failure is just the consequence of getting it wrong, stakeholders dust themselves off and move on.
But some business operators try to use liquidation as a means of avoiding their financial obligations, without risking their assets and with the full intention of resuming business operations through a new entity.
Like the mythical bird, the phoenix, these businesses rise from the ashes and are 're-born' as new entities which essentially continue running the same business.
The net effect of these activities is that competitors, debtors and employees are left in the lurch.
ATO Deputy Commissioner, Mark Konza, said this behaviour is a deliberate attempt to avoid financial obligations.
'Liabilities are 'parked' in the liquidated business and the underlying business activity is resumed free of liabilities', he said.
The cost to the Australian economy of phoenix and related practices has been estimated at between $1 billion and $2.4 billion a year.
This cost includes competitors being unfairly priced out of business, trade creditors being left unpaid and employees missing out on vital superannuation payments.
The Australian community also bears a significant part of this cost through reduced tax revenue.
'This type of tax evasion is the deliberate, systematic and sometimes cyclical liquidation of related corporate trading entities and has the potential to severely erode the revenue base and undermine business and community confidence', Mr Konza said.
And the risk is growing.
Phoenix-related tax evasion takes place mainly through the failure to pay (to the ATO) tax that has been correctly withheld from payments to employees and others or, in the case of GST, payments by customers.
Phoenix operators also may claim tax credits for tax that is due but not paid. The entity in question may have outstanding superannuation guarantee obligations to the ATO on behalf of its employees.
In reality, income tax withheld from employees wages and GST collected from customers do not belong to the business but are owed to the community through the ATO.
Phoenix operators may also be trying to avoid paying wages due to employees and supplier accounts.
This activity is concentrated in business groups with turnovers up to $15 million and in sectors where labour costs are high relative to assets used, such as building and construction, security services and labour hire.
They are generally privately-held companies.
The arrangements will often involve a group in which each main business function is operated through a separate entity, one of which will supply workers to the entire group. This labour supply entity will withhold taxes from workers, the proceeds of which will be siphoned off and the entity declared insolvent and wound up without paying the withheld amounts to the ATO - and without affecting the assets held elsewhere in the group.
A new labour supply entity is then created, the workers are transferred to it and the process is repeated.
These companies are easy to liquidate or wind up, as they normally hold few, if any, assets.
'We take an early intervention approach to phoenix activity', Mr Konza said.
'We don't just react when entities have already been wound up with outstanding tax liabilities, we seek to identify and deter potential phoenix activity before it occurs. An audit is rarely the response of first choice.'
For small to medium enterprises generally, the economic group is a focus of compliance monitoring and verification across the board.
When an entity goes into liquidation with outstanding tax debts, and there are related entities that are going concerns, we closely examine their tax affairs, including their directors.
The bottom line is, a business that is liquidating for the purposes of addressing tax debt but intending to continue business operations through another entity, can expect attention from the ATO.
'Where we see this behaviour emerging, we write to people highlighting the range of potential sanctions that can be applied and point out the very serious consequences.
We effectively take these cases out of the self-assessment regime and actively investigate. Serial offenders are closely monitored to ensure tax payments are made on time.'
Cases are managed by a dedicated phoenix risk management team with around 36 staff, which carries out phoenix-specific reviews and audits. Increased resources for this work were provided in the 2009 Federal Budget.
Some $694 million in taxes and penalties have been raised through 1,420 phoenix audits since 1998, when the ATO began a specific focus on phoenix arrangements.
During the 2008-09 financial year the ATO had finalised 73 audits and raised $83.3 million in tax and penalties in relation to phoenix arrangements.
The most serious cases are referred to the Australian Federal Police and Commonwealth Director of Public Prosecutions for prosecution.
Like other forms of tax crime, fraudulent phoenix behaviour often involves criminal activity outside the tax jurisdiction. The ATO has been working closely with the Australian Securities and Investments Commission on strategies to combat phoenix behaviour.
'We share information and work together to take action against company directors suspected of breaching the corporations and tax law', Mr Konza said.
Given its potential to undermine business confidence by giving criminally motivated operators an unfair advantage, the ATO receives strong cooperation from industry stakeholders and the insolvency profession in its efforts to tackle fraudulent phoenix activity.
AUSTRAC CEO Neil Jensen retires
The Australian Transaction Reports and Analysis Centre (AUSTRAC) protects the integrity and security of Australia's financial system by countering money laundering and terrorism financing. Recently retired Chief Executive Officer, Neil Jensen, talks about how AUSTRAC is targeting tax crime.
How does AUSTRAC help to identify and combat tax crime?
Our role is a dual one - a combination of regulator and financial intelligence unit. We have a wide range of organisations reporting to us on certain financial transactions, mainly across the financial services and gambling sectors. Then we apply our tools and expertise to analyse the collected data to identify suspicious transactions and share that intelligence with agencies like the ATO.
Who does AUSTRAC work with to achieve its objectives?
AUSTRAC relies on a partnership between reporting entities (such as financial institutions), revenue partners (like the ATO), and law enforcement agencies (such as the Australian Federal Police).
We also work with peer organisations in 53 countries through bilateral agreements.
And we're members of the Egmont Group, which brings 107 countries together to share information and undertake programs to counter money laundering and terrorism financing.
For the ATO, we track items such as fund flows in and out of Australia, including identifying whether funds are being transmitted between Australia and a tax haven.
How does AUSTRAC identify and investigate suspect transactions?
Before 2006, we had working relationships with just under 4,000 reporting entities, which probably sounds like a lot. However, with the introduction of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (the Act), we've increased the number of these relationships to more than 15,000.
Each of these entities has to report certain transactions, and when we combine those reports with data that's sourced from overseas jurisdictions, and apply our analytical tools, we can identify patterns and suspicious transactions.
In 2007-08 the volume of suspect transactions increased by nearly 20 per cent. Why?
Once the Act was introduced, we were able to significantly expand our education program to encourage people to report transactions. That said, I don't think there has been a 20 percent increase in criminality - we've just enhanced awareness of the need to report criminal activity.
We hope the increased reporting rate deters would-be offenders, as it shows that we're monitoring data more closely than ever before and working with partners to deter criminal behaviour.
By way of example, our intelligence contributed to ATO assessments of more than $76.7 million during 2007-08. It also helped to identify $36 million in previously undisclosed income as part of the ATO's Offshore Voluntary Disclosure Initiative.
What has been the impact of the global financial crisis on AUSTRAC's operations?
Times of economic volatility tend to give rise to opportunistic scams and dodgy schemes, with unscrupulous individuals trying to make money out of other people's difficulties.
We've also witnessed the collapse of long-standing dubious schemes because the financial crisis means they can no longer continue to operate. The Ponzi Scheme of Bernard Maddoff in the United States - which was estimated to have lost investors more than $50 billion - is one example. In this case, the funds of new investors were paid to long-standing investors in order to induce even newer investors.
The scheme apparently generated minimal profits from business activities, with any new money invested going towards paying returns to other investors and therefore requiring a constant stream of new investments in order to survive.
So the global financial crisis has focused the operations of AUSTRAC to identify these sorts of schemes more readily and work with our partners to put a stop to them.
Which of AUSTRAC's achievements are you most proud of from your time as CEO?
I'm really proud of helping to put Australia on the map as a global leader in financial intelligence. The technology platforms developed by AUSTRAC to detect criminal activity in Australia's financial system are considered among the best in the world. It's really satisfying to know that Australia is considered by other developed and developing countries as a benchmark for quality and effectiveness.
We've also built successful partnerships with the private sector and government agencies worldwide to better identify criminal activity. And we've helped law enforcement agencies convict offenders who damage the security of Australia's financial system. I'm proud that AUSTRAC is a key player in protecting that system for the benefit of the Australian community as a whole.
We'd like to record our thanks to Neil Jensen for this interview, and acknowledge the major contribution he made during his time at AUSTRAC. We wish him well for his retirement.
For more information about AUSTRAC, visit www.austrac.gov.au
The ATO has teamed with other government agencies to ensure it has the information it needs to identify people who are trying to avoid paying tax. This often involves data matching - bringing together data from different sources and comparing it.
Each year the ATO receives details of payments made by employers, banks and other financial institutions as well as Centrelink and the Department of Veterans' Affairs. This information is used by the ATO to identify people who are receiving benefits they're not entitled to and to ensure they pay the right amount of tax.
The ATO runs an extensive data matching program using a range of third-party sources to verify information reported in income tax returns and activity statements. The program also uses overseas data sourced by other government partners through international treaties. Data, including an increasing range of financial transactions, is automatically exchanged with more than 40 foreign tax administrations.
The ATO's data matching program also covers a wide range of professions, trades and industries, as well as tax issues and risks. Data sources come from professional associations, corporations and government agencies.
In the past few years, projects have included the furniture removal and fishing industries, as well as auction houses, taxis, mining, security, clubs and pubs, motor vehicles, luxury boats, antiques and art, and financial planning.
For individuals and businesses, the data matching program includes projects designed to address specific tax issues such as the scrutiny of property sales to detect property development and capital gains tax risks. Projects also analyse indicators of lifestyle and wealth such as the ownership of luxury vehicles, marine vessels and aircraft.
In 2007-08, the ATO received about 408 million records. Of these, 78 million were used in individual income matching.
The program operates within strict privacy guidelines, including the secrecy provisions and other legislation that regulates the exchange of data among agencies and the use of tax file numbers when comparing personal information held by the ATO with data held by other agencies.
'Data matching has been a successful part of our strategy for identifying and dealing with non-compliance for a long time', said the ATO's Deputy Commissioner for Serious Non-Compliance, Michael Cranston.
'By comparing data from other sources with the taxpayer records, we can detect people who are failing to lodge returns or disclose income', he said.
Sources far and wide
Sources of information for the ATO's data matching programs include:
- employers, labour hire firms, building contractors and WorkCover authorities
- industry registrations, professional associations and various licensing bodies
- land, real estate and property-related sources, including titles offices, planning authorities and tenancy agreements
- government agencies, including the Australian Securities and Investments Commission, and
- banks and other financial institutions, the Australian Securities Exchange, share registers and managed investment funds.
Case study: Centrelink
Centrelink is one of the key agencies that works with the ATO on its data matching strategy.
Centrelink provides the ATO with information about clients who have outstanding welfare debts. The ATO is then able to intercept income tax refunds otherwise due to these taxpayers, and deducts the amount of the debts.
At the same time, the ATO supports Centrelink by providing income and/or employment details of welfare recipients.
Data is provided via regular file downloads to Centrelink under the Data Matching Program Assistance and Tax Act 1990.
Data matching has provided significant outcomes for Centrelink, as shown in this table*.
Financial year 2008
Financial year 2009
(at 31 March)
Compliance (number of compliance events)*
(number of fraud events detected)
* Compliance events occur when Centrelink information is matched with data from other sources such as the ATO, the Department of Immigration and Customs, births, deaths and marriage registries, corrective services and information reported by members of the public.
The Australian Securities and Investments Commission (ASIC) - the consumer protection regulator for financial services - has a 'FIDO' website that provides warnings about known dubious investments and advice on how to identify them. ASIC has four key tips for tax professionals about investment schemes.
Tips for tax professionals
ASIC recommends you take these steps to determine whether a scheme is operating legally.
- Search ASIC's FIDO database to find out whether the company managing the scheme investment has an Australian Financial Services license.
- Search the FIDO database to see if the scheme is registered with ASIC.
- Check FIDO's list of illegal investments.
- Ask the seller for their product disclosure statement, which all schemes are required to have.
You can find more information at www.fido.gov.au
The current global financial crisis will lead to more people experiencing financial pressure, which will increase people's motivation to access their superannuation early - before they are eligible.
This activity is illegal.
Promoters of 'illegal early release schemes', as they're called, try to encourage people to roll over their superannuation money from a large superannuation fund into a self-managed super fund (SMSF), and then withdraw the money before they're entitled to it.
Promoters of these schemes - and any participants - need to be aware that civil and criminal penalties, including significant fines and prison terms, may be imposed in connection with these activities. Also, any superannuation benefit accessed illegally will form part of taxpayers' assessable income and, as a result, they're likely to face higher taxes.
A typical scheme starts with a persuasive promoter preying on people who have a limited understanding of the superannuation system and who may be in financial difficulty. The promoter tells them they can gain immediate access to their superannuation contributions for personal or investment purposes.
The promoter recruits participants, registers one or more self-managed super funds, and sets up bank accounts. Participants are told how to roll over their superannuation savings to a bank account, the promoter deducts a fee - anything from 15% to 30% - and the participant takes the rest.
Promoters rely on word-of-mouth to gain credibility and build trust. Participants may be targeted in a particular workplace, in a cultural or family group, or in the same geographic area.
A new variation on these schemes is when a promoter offers to establish an SMSF that will provide better returns than a large super fund. The scammers make their money by deceiving super funds into paying out these benefits directly to the adviser in cash.
They may ask victims to agree to a story to secure the early release of their money. The promoter controls the SMSF bank account and, when the victim's super benefits are rolled over, it's quite simple for the organiser to withdraw all the funds, leaving the participant high and dry.
The ATO is monitoring this type of activity. As a result, in 2008-09 more than 430 SMSFs were suspended from receiving rollovers and 14 bank accounts were frozen.
Neil Olesen, the ATO's Deputy Commissioner for Superannuation, said Australian laws regulate when superannuation funds can be accessed.
'These laws are designed to make sure superannuation is properly invested for retirement purposes, rather than for current-day benefits to individuals.'
Neil explained that access to superannuation before retirement is only allowed in very limited circumstances, such as when the individual is considered to be in severe financial hardship or when there are strong compassionate grounds for allowing release.
'Individuals don't need to pay a scheme organiser to access their superannuation benefits on these grounds', he said.
'They should instead contact their superannuation fund direct, or the Australian Prudential Regulation Authority (APRA), to discuss whether they can access benefits before retirement.'
The ATO has issued Taxpayer Alert 2009/1 Superannuation Illegal Early Release Arrangements to warn people about illegal early release.
The ATO has evidence that some SMSF trustees are using their funds to prop up their businesses by illegally accessing their retirement savings. In one recent case, a trustee used his fund as a virtual bank account and made dozens of illegal withdrawals. A few people have even withdrawn money from super funds to buy racing cars or drugs.
'We'll take firm action against anyone who tries to make unauthorised withdrawals from their superannuation savings,' Mr Olesen said, 'whether they try to illegally access funds through sham SMSF schemes or by operating their own fund outside the super laws.'
Super scams are costly
Two men involved in the promotion and operation of an illegal early release scheme are due to be sentenced in the Supreme Court of New South Wales, following a successful prosecution by the Australian Securities and Investments Commission (ASIC), assisted by the ATO.
The scheme involved 192 people rolling over $4 million from 26 APRA-regulated funds into the bank accounts of a sham SMSF set up by one of the offenders. The bulk of the money was released to the participants but the operator of the scheme kept more than $600,000 for himself. A third of this money was sent overseas.
A number of intermediaries were involved in introducing participants to the operator of the scheme, and commissions of up to 40% were charged by these people. The second offender received more than $340,000 in commissions.
Tips to avoid super scams
- You see an advertisement promoting early access to your superannuation.
- The scheme promises you a quick and easy way to access or 'unlock' your super.
- The promoter of the scheme claims to be a financial adviser.
- Use your common sense: the offer may be a scam.
- Don't let anyone pressure you into making decisions about money or investments: always get independent financial advice.
- Don't agree to offers or deals straight away: tell the person that you're not interested or that you want to get some independent advice before making a decision.
- Before you agree to roll over your super to another fund, talk with your current super provider who will be able to explain the requirements.
- As well as following these specific tips, find out how to protect yourself from all sorts of other scams.
Do your homework
- If you're under the age of 55, watch out for offers to quickly and easily arrange for your preserved superannuation benefits to be paid out in cash.
- The first thing to do if you receive one of these offers is contact your superannuation fund and ASIC or the ATO and report that you've been approached by an early release scheme.
- Take a look at the superannuation section on ASIC's FIDO website. It includes a list of people that ASIC has taken legal action against for promoting these scams.
- If you want independent advice about your superannuation, speak to a financial planner. Remember to make sure they are licensed by ASIC. You could also seek advice and information from other sources, such as your lawyer, employer or union representative.
Make an informed decision
- If you're experiencing severe financial hardship or believe you should have access to your super early for another reason, ask your own superannuation fund for some information. Don't rely on the promoter of the early release scheme.
- Remember that in the past, dodgy financial advisers have taken a large proportion of people's super funds, and that if you illegally access your super early, you may face financial penalties under the tax law.
Before you invest...
If you're thinking of investing funds in a self-managed super fund, make sure that you understand your role and responsibility as a trustee of an SMSF (you can check these on the ATO website). You should also seriously consider obtaining independent professional advice.
If you have any concerns about superannuation security, contact:
- your super fund
- APRA on 1300 131 060
- the ATO's Superannuation Line on 13 10 20, or
- Crime Stoppers on 1800 333 000 or www.crimestoppers.com.au (for anonymous reporting of criminal activity).
Living in the information age puts all of us at risk of becoming victims of identity crime at some time. Increasingly, our financial dealings are electronic, whether we are using an ATM here or overseas, purchasing goods or services, or doing our banking online.
Identity crime has become one of the fastest growing crimes in the world, in part due to new technologies and, in particular, the internet. An increase in globalisation has also facilitated cross-border identity crime.
The ATO is a partner agency in a whole-of-government approach to reducing the incidence of identity crime. More than 30 agencies participate in the national Identity Security Strategy, supported by the Attorney-General's Department, to combat the misuse of stolen or assumed identities in the provision of government services.
The Australian Bureau of Statistics estimates that identity crime costs the Australian economy almost $1 billion a year.
Identity crime includes the use of someone else's tax file number (TFN), or obtaining a passport in another person's name. Criminals who are involved in this type of activity will exploit any opportunities in systems or processes to access the personal details they need.
Investigations have revealed that false and stolen identities are used in an ever-expanding range of criminal activities. The ATO has identified people who use stolen TFNs to illegally obtain tax refunds.
Attacks like this can undermine the integrity of regulatory systems, including the tax system.
'Systematic methods in reviewing income tax lodgments to identify refund fraud have been a successful part of our strategy in detecting and stopping refunds from issuing. Where we identify such attempts, we will employ a number of responses including a criminal prosecution which may result in a custodial sentence', said the ATO's Deputy Commissioner for Serious Non-Compliance, Michael Cranston.
The ATO continues to undertake information campaigns to educate the community on TFN security and possible threats posed by identity crime. Tax professionals also have an important role to play in preventing identity-related crime.
Identity crime occurs when a person uses an identity that is not their own to do something illegal.
Identity fraud is when a person uses someone else's personal information, without his or her knowledge, to fraudulently obtain credit, goods or other services.
Identity creation is when an identity is invented, using fictitious client details, and there is nothing to back it up.
Identity theft/takeover is when a person's details are stolen or assumed. This is considered a more sophisticated form of identity crime because it involves stealing the identities of real people, such as people who have died.
Source: Australian Bureau of Statistics (ABS), ABS Report 4528.0. Personal Fraud (2007), page 7.
How tax professionals can help
- Develop and implement strict recruitment practices, including rigorous background checks for any new staff.
- Allow access to information on a need-to-know basis only, as it is likely that some of your employees will not need access to your clients' personal details.
- Make sure that staff leaving your practice do not take sensitive or confidential information with them.
- Know who your clients are by carefully checking their details.
- Secure your premises, particularly if you share accommodation with other businesses.
- Change passwords and other access codes as a safeguard when staff leave your practice.
- Use data encryption and store data securely.
- Use digital certificates when accessing the Tax Agent Portal.
- Make sure your computers are protected from threats such as viruses and hackers.
For more information about identity crime and how to prevent it, visit www.ato.gov.au/identitycrime
Crime & Money
Help us break the link. Stop dirty money in its tracks. See the anti-money laundering and counter terrorism financing laws on the Crime & Money pages on the Attorney-General's Department's website at www.ag.gov.au.
The 'Financial tips and safety checks' page on the website for the Australian Securities and Investments Commission offers money tips, advice about financial products, and information about scams and warnings. Go to www.asic.gov.au/fido
SCAMwatch, at www.scamwatch.gov.au is a website designed to help individuals and small businesses protect themselves from scams. It is administered by the Australian Competition and Consumer Commission. It tells you how to protect yourself from scams, report a scam, and gives you access to the Little black book of scams.
The Australian Crime Commission works with a number of other agencies to unite in the fight against nationally significant crime. Read about one of these key initiatives at frequently asked media questions, Project Wickenby
Protect your financial identity
The 'Protect your Financial Identity' website was developed by the Australian Bankers' Association, the Australian High Tech Crime Centre and the Australian Securities and Investments Commission. The website provides information for the public about how to protect financial identity in everyday life and minimise the damage if a problem occurs. Go to www.protectfinancialid.org.au
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1 The Internationally Agreed Tax Standard, which was developed by the OECD in cooperation with non-OECD countries and which was endorsed by G20 Finance Ministers in Berlin in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters in October 2008, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law, without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.
2 Excluding the Special Administrative Regions, which have committed to implementing the Internationally Agreed Tax Standard.
3 These jurisdictions were identified in 2000 as meeting the tax haven criteria as described in the 1998 OECD report.
4 The Cayman Islands has enacted legislation that allows it to exchange information unilaterally. It has also identified 12 countries with which it is prepared to do so. This approach is being reviewed by the OECD.
5 Austria, Belgium and Switzerland withdrew their reservation to Article 26 of the OECD Model Tax Convention. Belgium has already written to more than 80 countries to propose the conclusion of protocols to update Article 26 of their existing treaties. Austria and Switzerland announced that they have started to write their treaty partners to indicate that they are now willing to enter into renegotiation of their treaties to include the new Article 26.
Last Modified: Thursday, 28 January 2010