Low doc loans

In June last year I announced we had begun to investigate whether people using low documentation loans were likely to have tax compliance issues. This early work suggested many people using these products had either understated their income or failed to lodge income tax returns. Our work since has confirmed our concerns.

In the first of our compliance initiatives, around 350 taxpayers were selected randomly from eight lenders to get a picture of the broader population using these products. This information was obtained using the access powers in the tax law. It identified failure to lodge tax returns as a primary concern.

Around 50 per cent of these people had not lodged returns - the average was three years outstanding.

We have already taken action to enforce lodgement from these individuals, including eight court convictions. Most of this group are now up to date and more than $1.3 million in tax has been raised. Prosecution action is continuing for those who have not yet lodged. We are also currently reviewing the accuracy of the returns that have been lodged.

In a second initiative we undertook a risk based approach that showed that, for certain low documentation loan users, concealment of income is a significant concern.

These high risk cases were identified using Tax Office and other information including complaints made against some mortgage brokers to offices of fair trading. This led us to focus more closely on the clients of certain mortgage brokers. A field of around 400 high risk clients were identified.

140 of these were selected for the first round of audit activity. These cases were chosen because the broker involved was also a tax agent who had been identified as high risk as part of our profiling of tax agents. The broker/tax agent was also subject to audit.

These audits raised over $23 million in tax and penalties.

Audits of the remaining high risk clients of selected brokers are now underway.

In the coming year we will systematically check the lodgement status of people obtaining finance through low documentation loans, and potentially other sources. We will work with the finance industry on the best way to achieve this. Because most low documentation loans are made subject to mortgage insurance we will explore the possibility of matching insurance company records against our data as a way to streamline this process.

We will also continue to refine our risk profiling process to identify cases for audit action.

Although our findings indicate concerning levels of non-compliance amongst the users of low documentation loans, many users of these products are fully meeting their tax responsibilities. Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.

Where income has been omitted most of it has been derived from cash economy business activities predominantly in the building and construction industry.

Our data matching exercises are carried out in accordance with the Federal Privacy Commissioner's guidelines. Consistent with these guidelines, records which show no evidence of failure to meet tax obligations are destroyed.