What is tax fraud/tax evasion?
Tax evasion (also known as tax fraud) involves illegally reducing or eliminating tax liability. This may involve fraud by lying to the Australian Taxation Office (ATO), deliberately concealing material facts, or entering into sham transactions. Individuals or companies usually lie or provide fraudulent information to the ATO to reduce the amount they have to pay in tax or to manipulate the taxation system for financial gain.
How is tax evasion usually committed?
The most common forms of tax evasion include:
- Individuals deliberately failing to declare some or all of their business or personal income, or dishonestly over-stating their business or personal expenses.
- Individuals and businesses paying employees or other businesses in cash, or receiving cash payments, to avoid leaving an audit trail.
- The use of offshore “tax-havens” and money laundering has become a common form of tax evasion due to the publicised Panama Papers and Pandora Papers scandals.
Tax avoidance vs tax evasion
While tax evasion is illegal, tax avoidance involves entering into legal arrangements that exploit loopholes or unintended defects in tax law.
The government has enacted general and specific anti-avoidance provisions. The general anti-avoidance provisions in the income tax legislation are contained in part IVA of the Income Tax Assessment Act 1936 (Cth). General anti-avoidance provisions that are loosely modelled on part IVA are also contained in div 165 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) and section 67 of the Fringe Benefits Tax Assessment Act 1986 (Cth).
There are many specific anti-avoidance provisions included throughout the income tax legislation. To help the Commissioner deal with tax avoidance, the government also established a Tax Avoidance Taskforce in 2016.
Federal offences and tax evasion penalties
Criminal Code Act 1995
Taxation Administration Act 1953
The ATO will impose administrative penalties under the Taxation Administration Act for offences it believes are not serious enough for criminal prosecution. The penalties apply to a range of prohibited forms of conduct, including:
- Making false or misleading statements, adopting positions under the tax laws that are not reasonably arguable, and entering into certain tax avoidance schemes (div 284).
- Failing to lodge documents (e.g. tax returns) on time (div 286).
- Miscellaneous breaches, such as the failure to keep requisite records (div 288).
The penalties are fines that are calculated using a statutory formula and multiples of a penalty unit. Generally, the prohibited conduct carries a “base penalty amount” which tends to be a specified percentage of the “shortfall amount”. The penalties for prohibited conduct are contained in sub-divisions 284-B to 284-D of the Act.
NSW offences and tax evasion penalties
The NSW government can penalise individuals and companies for tax evasion offences through the Taxation Administration Act 1996 (NSW). Prohibited conduct under this act includes:
|55 Knowingly giving false or misleading information
|A person must not:
(a) make a statement, orally or in writing, to a tax officer, or
(b) give information, orally or in writing, to a tax officer,
knowing that it is false or misleading in a material particular.
|100 penalty units
|56 Deliberately omitting information
|A person must not omit from a statement made to a tax officer any matter or thing without which the statement is, to the person’s knowledge, false or misleading in a material particular.
|100 penalty units
|57 Failure to lodge documents
|A person must not fail or refuse to lodge a document, statement or return that is required to be lodged by a taxation law.
|100 penalty units
In NSW, one penalty unit is equal to $110. Therefore, 100 penalty units equals $11,000.
How does the ATO investigate tax evasion?
The Australian Taxation Office (ATO) takes fraud and tax evasion investigations seriously. When the ATO investigates a tax discrepancy, it seeks to determine whether fraud or tax evasion have occurred, or whether you have made an honest mistake.
The ATO will look at whether you:
- Knowingly made false or deceptive statements.
- Withheld information to influence a tax outcome.
- Failed to keep adequate records to support a tax audit.
- Intentionally omitted income from a tax return with no credible explanation.
To form an opinion that there has been fraud or tax evasion, the ATO must exercise sound judgement and fairness. In its Practice Statement, the ATO states that this opinion should be formed only by an executive or senior level officer, in accordance with ATO policies and practices.
The ATO also seeks specialist assistance including:
- Consulting with the relevant technical advisory division.
- If the level of risk warrants it, seeking formal assistance from the Tax Counsel Network.
- Obtaining advice from the National Fraud or Evasion Advisory Panel.
- Reporting instances of suspected fraud to the Australian Institute of Criminology.
- If appropriate, referring cases to a specialist division that deals with cases involving “aggressive tax planning”, defined as “the use of transactions or arrangements that have little or no economic substance and are created predominantly to obtain a tax benefit not intended by the law.”
What is the Serious Financial Crimes Taskforce?
The Serious Financial Crimes Taskforce is an ATO-led joint-agency taskforce established on July 1, 2015 to combat the most serious and complex forms of financial crime. The taskforce consists of multiple law enforcement and regulatory agencies including the AFP, ACIC, CDPP and AUSTRAC. The taskforce is currently focusing on:
- Cybercrime affecting the tax and superannuation systems.
- Offshore tax evasion.
- Illegal phoenix activity.
- Serious financial crime relating to the COVID-19 pandemic.
The Serious Financial Crimes Taskforce also supports Australia’s involvement as a member of the Joint Chiefs of Global Tax Enforcement (J5).
Possible defences for an allegation of tax evasion are:
- Lack of Intent – you did not intentionally or deliberately avoid or attempt to avoid paying tax. However, this is not a total defence as some offences can capture conduct where someone “recklessly” engages in tax evasion.
- Factual Dispute – This defence is if the individual disputes the facts alleged by the prosecution.
- Due care and diligence – this defence may be invoked if the individual was acting in their capacity as a director or officer of a corporation or business. The individual would argue that they have discharged their due care and acted with diligence.
- Duress – the individual may argue they were unlawfully coerced into evading tax by a third party.