Scammers, fraudsters and the tax office’s missing $50 billion | Four Corners Documentary

Key Concepts

• GST Fraud (Goods and Services Tax)
• ABN (Australian Business Number)
• ATO (Australian Taxation Office)
• Operation Progo
• Collectable Debt
• Tax Gap
• Confidential Settlements
• Secrecy Jurisdictions (e.g., Isle of Man)
• Risk Assessment Tools
• Tax Avoidance vs. Tax Evasion

GST Fraud and the Mildura Scam

• The Scam: Individuals create fake businesses, register for an ABN and GST, and then claim fictitious GST refunds on expenses they never incurred. The process is entirely automated, requiring no invoices or receipts initially.
• How it Works:
  1. Create a fictional business (e.g., restaurant, hairdresser).
  2. Link the business to an ABN.
  3. Register the ABN for GST via the MyGov site.
  4. Claim GST refunds by entering fabricated sales, GST collected, and GST owed by the ATO.
• Scale: The scam went viral in mid-2021, with approximately 57,000 people participating.
• Mildura's Role: Mildura, a town in northwest Victoria, became an unlikely hotspot for the scam.
  • One example cited is that of Lyndon Phillips, who claimed $13,158 in GST refunds shortly after being released from jail and then filed 46 backdated BAS statements for $821,000.
  • Mildura police discovered the scam by chance during an unrelated drug matter, leading to the identification of 60 other offenders in the area.
  • While not the epicenter of the fraud, Mildura became an epicenter for prosecutions.
• Operation Progo: Launched by the ATO around the time of Phillips' arrest in April 2022.
• Recovery Rate: Of the $2 billion stolen, only about 8% ($160 million) has been recovered.
• Vulnerability: The system was designed in a way that made it highly susceptible to fraud, with "big money fast."
• Example: Sarah, a single mother, received almost $35,000 in GST refunds after claiming to be a hairdresser, despite having no prior experience or established salon.
• Consequences: Sarah was arrested, pleaded guilty, and received a 2-year good behavior bond. Her debt, including interest and penalties, is now $45,000 and growing.
• Criminal Involvement: Many participants were on Centrelink benefits and some were unaware of what GST was.
• ATO's Response: The ATO claims to have identified the scam using sophisticated risk models, AI, and tip-offs from major banks. However, evidence suggests that the discovery was accidental.
• Current Status: While the ATO claims to have tightened its systems, no verification is required to get a GST refund.

Warnings Ignored and Downgraded Risk

• Inspector-General's Warning: Ali Naruzi, former Inspector-General of Taxation, warned the ATO that its fraud detection systems were inadequate.
  • He stated that the automated risk assessment tools were only marginally better than random selection.
  • "That is a huge statement that their fraud detection processes were really no better than random selection."
• Risk Downgrade: Just two months before the GST scam blew up, the ATO downgraded the fraud risk from "severe" to "low," claiming the likelihood had gone from "almost certain" to "rare."
• ATO's Defense: The ATO claims to have strengthened controls and now requires evidence of a business before issuing an ABN.

Corporate GST Scams

• Scale: Sophisticated corporate scams cost taxpayers $1.4 billion annually.
• Example: Nahi Gazal, a Sydney property developer, used fake invoices to claim over $21 million in GST refunds for non-existent or already completed building projects.
• Gazal's Modus Operandi:
  • Set up new companies with the help of relative strangers (e.g., taxi drivers, mechanics).
  • Used fake directors to control the money.
  • Claimed to be developing buildings without any actual construction activity.
• ATO's Failure: The ATO failed to conduct basic checks, such as verifying the addresses of the buildings or requesting land title documents.
• Recovery Rate: The ATO is unlikely to recover much of the stolen money, as it was spent on luxury items and travel.
• Liquidator's Perspective: Steven Hathaway, a liquidator funded by the ATO, describes Gazal's operation as "whack-a-mole," where he continues to perpetrate fraud through new companies.

Impact of Budget Cuts

• Staff Reductions: The Abbott government's public service cuts resulted in the loss of 1,000 staff (half the division) responsible for GST within the ATO.
• Consequences: The ATO may not have recovered from this "drain of knowledge and drain of skill sets."

Uncollected Tax Debt

• Scale: Uncollected tax debt has grown to $53 billion.
• ATO's Explanation: The ATO blames COVID-19, but the increase began two years before the pandemic.
• Inspector-General's Concerns: Karen Payne, Inspector-General of Taxation, flagged collectable debt as a major problem, noting that a large percentage of the debt was owed by a small number of taxpayers.
• Recovery Rate: Once a debt is 12 months or older, only 2% of the outstanding amount is typically collected.
• ATO's Discretion: The ATO has the power to discount or waive debts, making 301 confidential settlements last year, writing off $880 million.

Paul Keating Settlement

• Background: In 2012, the ATO discovered that a company controlled by former Prime Minister Paul Keating had not paid $446,000 in tax from the sale of Lake Technology shares in 2004.
• Dispute: The ATO demanded penalties and interest, bringing the total debt to $953,000.
• Settlement: After three years of negotiations, the ATO wiped the entire debt in a four-line email.
• ATO's Justification: The ATO stated that overlooking payment was generally not grounds for cancelling interest and penalties, but it depended on individual circumstances.
• Transparency Concerns: Senator Barbara PCO raised concerns about the fairness and lack of transparency in confidential settlements.

Chris Jordan's Tenure as Tax Commissioner

• Background: Chris Jordan, former chairman of KPMG, was appointed as Tax Commissioner in 2013.
• Focus: Jordan focused on making the tax system more user-friendly and embracing the digital revolution.
• Criticism: This push for ease of use may have opened the door wider to fraud.
• Conflict of Interest Allegations: An anonymous letter alleged that Jordan had links to an offshore company in the Isle of Man a decade before becoming Tax Commissioner.
  • The letter claimed that $3.3 million was transferred to the Isle of Man company and then to companies in Australia.
  • Jordan stated that the potential conflict issues were "not real" and declined to answer if he was a beneficiary of the company.

Tax Gap as a Performance Metric

• Definition: The tax gap is the difference between what the ATO expects to collect and the amount that would have been collected if every taxpayer was fully compliant.
• ATO's Rating: The ATO rates itself above 90% in key areas of tax collection based on the tax gap.
• Criticism: The Australian National Audit Office questioned the accuracy of the tax gap as a performance measure.
• Independent Board Proposal: Some have called for the Commissioner to be accountable to an independent board, similar to ASIC, to improve transparency and accountability.

Conclusion

The Australian Taxation Office faces significant challenges in preventing fraud, collecting debt, and maintaining public trust. Systemic flaws, inadequate risk assessment, budget cuts, and a lack of transparency have contributed to billions of dollars in losses. While the ATO has taken some steps to address these issues, further reforms are needed to ensure the integrity of the tax system and protect taxpayer funds. The need for independent oversight and a more critical evaluation of the ATO's performance are crucial for restoring confidence in this vital institution.