• Crime doesn't pay

    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.

    References

    What is Tax Evasion?

    Tax Crime

    For more information about the work of our cross-agency partners in fighting tax crime, visit:

    Scenario

    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.

    1. 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.
    2. 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.

    Final orders

    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.

    Case study

    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

      Last modified: 28 Jan 2010QC 28245