• Identifying and treating non-compliance

    We continue to explore and implement ways to balance self-service and self-review options with a suitable approach to dealing with non-compliance. For those who are not transparent or willing to do the right thing, we focus our efforts on areas where non-compliant behaviour is more prevalent, such as:

    • incorrect reporting of GST
    • incorrect and fraudulent claiming of refunds
    • property transactions
    • financial transactions
    • the cash economy
    • serious evasion of GST obligations

    We understand that businesses can report incorrect amounts of GST (often without realising it) when their systems for capturing and recording GST information fail. To reduce the risk of incorrect reporting we encourage both new and established businesses to review their business systems, processes and controls regularly.

    For a number of years the incorrect reporting compliance strategy has focused on certain industries – mining, construction, financial services, retail and wholesale trade. Our audit activities are targeted using revenue analysis and intelligence scans to inform us in case selection. This approach led us to expand our focus to include the accommodation, information and media, energy, gas and water industries.

    We continue to improve our risk models using analytical techniques to detect incorrect and fraudulent refund claims and improve the timely release of low risk claims. This approach is supported by electronic validation checks at the time of lodgment to reduce common errors and shared intelligence from other law enforcement agencies and intermediaries. This has allowed us to reduce the number of refunds that we review and focus our effort on those claims identified as potentially fraudulent, while protecting the system from fraudulent and incorrect refund claims.

    We continue to expand our strategies to minimise unnecessary intrusions on our clients including using digital channels such as SMS, email, social media, newsrooms and YouTube to highlight common BAS errors and reinforce messages around how businesses can protect themselves from identity crime.

    During the year, we applied behavioural insights when contacting around 12,000 taxpayers whose refund claims had attracted our attention and asked them to self-review. This approach has resulted in $10 million to date in self-revisions by clients.

    To assist with the timely release of refunds we introduced a new review process that is less intrusive and time consuming than an audit. This targeted approach has led to a significant reduction in the number of audits we completed in 2014–15.

    Over the year, we raised $693.7 million in GST liabilities from over 14,700 refund audit cases and, on average, we adjusted one out of every two claims compared to one in every four claims in 2013–14.

    We finalised over 83% of GST refund claims stopped for review within 14 days in 2014–15.

    CASE STUDIES: Fraudulent refunds

    Using intelligence to combat fraud

    We received intelligence from law enforcement agencies about potential GST fraud being committed against the ATO. Through our risk detection systems, intelligence activities and use of external data and evidence, we identified a network of entities linked to this activity.

    The network would engage the services of different tax agents to lodge false BAS for various companies. Refunds would issue to the tax agent or legal firm’s trust account for disbursement. Comprehensive documents and detailed explanations were provided to these tax agents to support their network’s business activities and claims. Contact with these tax agents was also generally limited to emails.

    The network frequently changed tax agents, shifting across both large and small firms to avoid suspicion. In order to hide their identities, the network also appointed different individuals, some of whom resided overseas, as directors of these companies. The focus of their activity-involved exploitation of hire purchase provisions for claiming input tax credits.

    During the year, fabricated invoice amounts totalling approximately $6.4 million (with over $600,000 in refunds) were lodged across various companies.

    Risk models identify high risk refund

    In 2014–15, we conducted an audit to examine a high-risk refund identified by our risk models. During the audit it became apparent that there were significant issues with the BAS preparer, who was suspected of committing fraud against both the ATO and their clients.

    A number of people potential impacted by identity crime were identified, and four more cases were referred for further investigation. Through these audits fraud was confirmed in all five cases.

    Concurrently, the Tax Practitioner Board contacted the ATO to advise they had received complaints from clients of the BAS preparer. The BAS preparer has subsequently been deregistered and referred for further action.

    End of example

    In the property sector, we recognise that the behaviour of a small number can undermine the system, and we therefore continue to invest in detection and risk mitigation strategies to address this risk. We also continue to work with partner agencies and third parties to detect such behaviour, deter others and deal with those who seek an unfair competitive advantage over compliant participants in the GST system.

    This year we undertook 7,500 property assurance and engagement activities and, of those leading to adjustments, we raised around $291 million in liabilities.

    As part of addressing ‘phoenix’-type behaviour by property developers (those who deliberately disengage at the point of sale by the use of cyclical insolvency to avoid meeting their GST obligations), we completed 992 cases, collecting around $37.9 million in GST. These included reviewing the activities of 131 individuals controlling the operations of the property development entities.

    In April 2015, the ATO provided a submission to the Senate Economic References Committee Inquiry into insolvency in the Australian construction industryExternal Link. The submission also covered our approach for dealing with compliance risks in this industry including fraudulent ‘phoenix’ operators and facilitators, ‘disengaged’ property developers, and small business compliance issues including lodgment, payment and the cash economy from a GST perspective.

    We also focused on contemporary communication and education methods, and law clarification, to help taxpayers apply the right GST treatment for their transactions. We understand that GST obligations for property transactions can be a concern and we want to try to make it easier for people to get it right. So, this year we engaged with property developers and their advisers through the ‘Let’s talkExternal Link’ live chats which allowed them to ask questions of our technical experts.

    Enhanced data matching to third party data from State and Territory revenue offices, land title offices, and planning and development agencies, combined with intelligence from other sources, continues to be integral to our approach. We also used third party data to identify future large residential development sales to engage early with the client to ensure that GST is correctly reported. Using this data in conjunction with behavioural economics approaches, we wrote to 1,600 taxpayers who had made a property sale but had not reported the transaction in their BAS. These taxpayers were asked to check and self-amend their BAS. This resulted in a 6% self-revision rate.

    CASE STUDY: GST treatment of leasing transactions

    Following the High Court’s unanimous decision in the Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 matter, various public guidance products relating to the GST treatment of property transactions were required to be updated to reflect the judicial guidance from the High Court.

    To expedite the publication process, we consulted a number of key property industry stakeholders on the proposed changes. Where appropriate, the external feedback was incorporated into the draft addenda, ensuring the products reflect the commercial reality of how the industry operates.

    This targeted consultation in the initial drafting, followed by wider industry distribution for feedback, resulted in guidance products that are more practical for the industry, and provides certainty on the GST treatment of transactions, helping to reduce the cost of compliance.

    We also released GST tax ruling GSTR 2015/2 Goods and services tax: development lease arrangements with government agencies.

    External stakeholders were complimentary of the way we worked with them to develop practical examples and transitional relief provisions.

    Feedback included this comment from the Property Council of Australia following publication of the final ruling on 3 June 2015:

    “….already received quite positive feedback from members on how the ruling provides much needed clarity on these types of arrangements, so thank you to you and your team for consulting with us throughout the process”.

    End of example

    Reporting of financial transactions can be complex because of the need to apportion GST on costs between the mix of input taxed and non-input taxed supplies. To identify and resolve areas of uncertainty in the financial services industry, we continue to build effective and mutually beneficial relationships with key stakeholders.

    Consistent with previous years, apportionment of acquisitions (which are used partly for the purposes of making input taxed financial supplies and partly to make other non-input tax supplies) continues to be the focus of our efforts. To support this, we developed an early engagement approach that enables us to work with the major players in the industry prior to new apportionment methods being implemented.

    During the year, we increased the frequency of engagement with taxpayers and industry bodies to understand more fully the practical application of early-proposed ATO views. In response to taxpayers’ feedback, we are working with the Australian Bankers’ Association to consider opportunities to develop a GST apportionment assurance method.

    Our approach to protecting honest businesses from those operating in the cash economy to gain an unfair advantage has strongly resonated across the community, and with industry and media outlets.

    This year we focused our attention on a number of industries, including hair and beauty, restaurant, café and takeaway, and building and construction. In particular, we have seen a significant improvement in on time lodgment in the hair and beauty industry compared to the broader small business population; along with a greater willingness for honest businesses to come to us with information on practices that harm them. The use of location-based strategies in Haymarket (Sydney), Newcastle and Adelaide that supports broader industry strategies, has achieved both significant buy in from stakeholders and strong support from the community.

    We take a more targeted approach in our use of third party data sets to identify businesses not competing fairly. During the year we conducted a pilot where we contacted 1,070 online businesses who had in excess of $100,000 in trading activity in the 2012–13 year, yet their accounts could not be matched to records held in ATO systems. Approximately 300 (representing 28%) of these cases have been escalated for compliance action for issues including understatement or non-reporting of the trading activity, significant periods of disengagement through non-lodgment, or businesses trading outside the tax system (where the trader was subsequently identified).

    We continue to promote small business benchmarks as a business performance tool that can be used to improve a business’ bottom line. For example the recent inclusion of the Business Performance tool on our ATO app. The tool allows clients to compare their performance against similar businesses in their industry and measure their business performance over time.

    Longitudinal studies of businesses in benchmarked industries show a clear movement by businesses formerly outside of the industry norm ranges to report costs of sales and income that are within the benchmarks for their industry.

    To assist the community to engage with us, we upgraded the ATO smart phone app to provide an easier channel for the community to raise concerns. We will be following up on the community information in partnership with other regulatory agencies.

    We have also clarified the GST treatment of new business practices in the sharing economy, for example, ride-sourcing industries.

    CASE STUDY: Cash economy

    We recently conducted a cash economy audit on a Sydney CBD business identified as demonstrating high-risk characteristics and dealing in ‘cash only’.

    The business had been operating for three years, was not registered for GST, and had been reporting income tax losses claimed against salary and wage income of the business owner, a qualified accountant.

    The audit found record keeping was very poor and relatives were working in the business on a part time basis.

    The taxpayer purchased two investment properties during the period of audit based on equity held in their principal place of residence. Both properties were negatively geared.

    The audit covered the 2012 to 2014 financial years. It was determined the taxpayer should have been registered from commencement of business in 2012.

    Total adjustments and penalties raised against the business were $194,109. This included a GST shortfall amount of $44,298.

    End of example

    We continue to maintain the strong focus on taxpayers who deliberately evade their GST obligations.

    This year we identified deliberate and organised evasion of GST obligations within the gold bullion refining and processing industry.

    In particular, a scheme whereby established networks acquire gold bullion and ‘alter its form’ (by melting or defacing) and re-supply the altered precious metal. In order to obtain a financial benefit in the form of input tax credits or understated GST liabilities, participants in the schemes seek to exploit the special rules in the GST Act relating to precious metals.

    To address this emerging risk, we focused our audit and monitoring activities on refiners, gold dealers and buyers who are engaged in business activities that form part of supply chains that deal in precious metal. These primarily involve gold in the form of bars and wafers (bullion), scrap gold (e.g. second-hand jewellery), and coins.

    Our activities to mitigate this risk and deliver a fair and level playing field within this industry have so far raised around $73 million in GST liabilities.

    We have also seen an increase in the number of private binding ruling applications, which we reasonably believe is attributable to our compliance efforts in this industry.

    In 2014–15 we received applications seeking to clarify the following issues under the GST Act:

    • GST-free supplies of precious metals under section 38-385
    • input taxed supplies of precious metals under section 40-100
    • input tax credit entitlements for acquisition of scrap gold (e.g. second-hand jewellery) from unregistered entities under Division 66 and whether gold in a particular form meets the precious metal definition in section 195-1.

    CASE STUDIES: Serious evasion of GST

    Organised groups

    By matching Australian Transaction Reports and Analysis Centre (AUSTRAC) data with amounts declared on a BAS, we identified a taxpayer whose behaviour suggested potential hidden income.

    During evaluation of the taxpayer, a geographical analysis was also incorporated due to previous intelligence held surrounding the industry type, location and business environment of the taxpayer. The geographical analysis identified a number of potentially associated entities, who were displaying similar behaviours (e.g. reporting inconsistencies and discrepancies, disengaging from dealing with the ATO, and levels of poor compliance history associated with the entities).

    Compliance activity against these entities resulted in over $2.79 million in GST liabilities being raised.

    Tax agent of concern

    During an audit, we identified that a tax agent was inflating his clients’ reported lodgment amounts in order to obtain refunds directly through his trust account without the knowledge of his clients.

    Working across the ATO a strategy was developed that resulted in adjustments to the tax agent’s clients’ accounts and debt recovery action. Because of evidence obtained during the investigation, a default assessment was subsequently raised on the tax agent’s personal income tax account.

    Given the need to protect the clients, we denied the tax agent further access to the ATO Tax Agent Portal.

    So far, we have prevented around $5 million in false refunds being paid to the tax agent.

    End of example

    We investigate and prosecute fraudulent and criminal behaviour. This year, we completed 98 GST-related fraud investigations of which we:

    • referred 38 new GST-related briefs of evidence for breaches of the Crimes Act 1914 to the Commonwealth Director of Public Prosecutions (CDPP)
    • referred two briefs of evidence for the prosecution of offences under the Taxation Administration Act 1953 (TAA).

    During the year, there were 22 GST-related fraud matters where successful prosecution action was taken by the CDPP. Sentences ranged from good behaviour bonds to an imprisonment sentence of seven years with a non-parole period of more than three years. Reparation orders of $3.87 million were also obtained.

    Matters referred to the CDPP cover a similar range of GST risks as last year, including refund integrity issues such as lodgment of suspected fraudulent BAS, disengaged property developers, real property and ‘phoenix’ activity.

    We also prosecute internally on a range of matters such as not complying with statement lodgment requirements, making false and misleading statements on our forms, keeping false records and not attending our offices to answer questions when required to do so.

    In 2014–15, we successfully prosecuted 579 matters for administration offences under the TAA that resulted in $4.92 million being levied in costs and fines.

    Relevant tax crime prosecution results are now published on ato.gov.au

    PROSECUTION CASES

    Two SA men in the IT industry jointly used other people’s identities without their knowledge to obtain fraudulent GST refunds of $209,433 from the ATO by the submission of false BAS. On 1 September 2014, one man was sentenced to five years and six months’ imprisonment with two years and six months to serve. The other man was sentenced to six years and five months’ imprisonment with three years and four months to serve. On 4 December 2014, an appeal lodged by one of the men was dismissed.

    A QLD accountant continued operating after being de-registered and lodged false BAS for entities that had stopped trading. The fraudulent refunds totalled $250,483 with an attempt to obtain a further $156,367 (which ATO compliance activities prevented). On 22 August 2014, the accountant was sentenced to four years six months’ imprisonment with eight months to serve. Reparation orders to a total value of $279,739 were made.

    A VIC process worker (who was an accountant prior to committing the fraud) pleaded guilty to submitting 36 false BAS for nine non-operating entities. He was convicted and sentenced to a gaol term of four years and six months with two years and six months to serve. The judge noted that if he had not pleaded guilty, the sentence imposed would have been six years with four years to serve. A reparation order for $555,622.27 was also made.

    A floor covering business owner, who had previously been convicted and fined, failed to lodge 110 GST returns and 12 income tax returns. In handing down its decision, the Court took into account the business owner’s previous offences and the need for general deterrence as well as the loss to the community. He was convicted and fined $150,000 for failing to lodge GST returns and a further $40,000 for failing to lodge income tax returns on time. The owner has now lodged all outstanding returns.

    A NSW accountant was involved in the lodgment of activity statements claiming input tax credits relating to the alleged purchase of medical equipment. He received $203,072 in refunds that he was not entitled to, and attempted a further claim of $259,624. The ATO determined that a sale had not occurred as the title had not changed and no consideration was made.

    On 2 April 2015, he was found guilty and sentenced to four years’ imprisonment with two years and six months to serve. A reparation order for $200,000 was also made.

    End of example

     

    A QLD male with three business entities under his control submitted false BAS between 2008 and 2010 with purchases claimed totalling nearly $1.2 million. During the lodgment and audit process, he provided false information to the ATO in order to substantiate his fraudulent claims to the effect that money was being spent on property development activities. As a result, $1,156,000 was paid into the entities’ bank accounts. He pleaded guilty and was sentenced to seven years’ imprisonment, with two years and six months to serve, and a reparation order was made for $1,104,565.

    A SA IT consultant and director of three companies lodged 27 false BAS between 2009 and 2010, in order to gain $130,143 in tax benefits, and a further attempt to gain $15,811. He was sentenced to two years and eight months’ imprisonment, with 15 months to serve, then to be released on good behaviour for a further two years. A reparation order was made for $130,143.

    A QLD sole director and shareholder of an agricultural company lodged a false BAS for September 2010 in an attempt to claim input tax credits of $48,351. In addition, she provided false documents to the ATO to verify the purchase of capital assets and sales figures quoted in the BAS. She pleaded guilty and was sentenced to two years’ imprisonment fully suspended and released on $2,000 bond to be of good behaviour for two years, with a reparation order of $48,351 was made.

    A QLD youth worker obtained $43,634 and attempted to gain a further $14,291 in GST refunds, which was prevented. She was charged with three counts of obtaining a financial advantage by deception and one count of attempting to obtain a financial advantage by deception in claiming GST refunds while not carrying on an enterprise using an ABN registration from a previous business enterprise. She pleaded guilty and was sentenced to one year and six months’ imprisonment with three months to serve. She was then released on a $500 order to be of good behaviour for three years. As she had become bankrupt, no reparation order was made.

    A QLD truck driver who operated a road transport business made false statements in five BAS between 2008 and 2010, resulting in refunds totalling $31,294. He also attempted to obtain a further $16,680. He pleaded guilty and was sentenced to 18 months’ imprisonment (fully suspended) and released to be of good behaviour for three years with reparation orders made for $31,294.

    A VIC unemployed male lodged 22 BAS containing false information for associated companies that resulted in $99,211 refunds that he was not entitled to receive. After pleading guilty, he was sentenced to two years’ imprisonment with 10 months to serve and a reparation order was made for $92,803.

    A NSW labourer lodged false BAS between 2006 and 2007, obtaining $322,600 in refunds he was not entitled to. He was found guilty by a jury and was sentenced to six years’ imprisonment with four years to serve, then to be released on good behaviour bond of $500 until 24 February 2021. A reparation order was also made for $322,600.

    A bankrupt QLD pensioner engaged other people to become directors of 10 companies. BAS were then lodged for these companies claiming GST refunds for purported property developments on the Gold Coast. An ATO investigation found that the refund claims were not supported by valid tax invoices. The company directors had no knowledge of the claims. The pensioner was found guilty and sentenced to three years, six months’ imprisonment with 14 months to serve, then released on a $5,000 recognisance to be of good behaviour for four years.

    A NSW customer service officer, and her labourer/minister husband, lodged several BAS on behalf of a charity between 2011 and 2012. She changed the charity’s nominated financial institution details for BAS refunds to her own bank account. The couple received $143,070 in their personal account and attempted to obtain $9,879,000. Both pleaded guilty and were sentenced to three years’ imprisonment with one year to serve.

    End of example
      Last modified: 14 Dec 2015QC 47462