On Friday last, November 6, the Australian Taxation Office had a serious legal bomb blow up in its face. It’s so serious that the full bench of the Federal Court has put a 10–day embargo on the publication of the judgment that went against the ATO. We can only guess why. However, the case, the facts and the implications are known.
In essence, about four years ago the ATO destroyed the Australian private–sector gold refining industry. It did this after international criminals ripped off up to a billion dollars in GST through trading gold. The gold refiners were unwitting conduits in the massive scam. Instead of chasing the criminals, the ATO attacked the refiners, most of whom were small businesses, effectively bankrupting many in the sector.
The scandal for the ATO strikes at the core of its competency or rather its incompetency. The criminal scam was possible because of a known loophole in the GST legislation. In the early 2000s, international criminals had pulled off the same scam in the UK and other jurisdictions. Those countries amended their VAT (GST) laws around 2004 thereby closing the loophole.
The ATO knew about the VAT (GST) scam and how to stop it. If it didn’t, it was stupid. It did nothing. In 2012 the criminals moved into Australia. ISIS operatives are believed to have been involved. The scam was slick in its simplicity.
The criminals sold impure gold to the Australian refiners. The refiners processed the gold to a purity suitable for bullion. The refiners paid GST on their purchases as is normal. The criminals didn’t forward the GST to the ATO and disappeared. This went on for four years until April 2017 when the ATO finally moved to have the legal loophole closed.
It’s a reasonable assumption that some refiners acted in collusion with the criminals. But it is clear from internal ATO documents that they pursued a deliberate strategy not to target the GST thieves but instead to pursue what it called its “refiner retention strategy” to hamstring the refining industry.
The ATO took a blanket ‘kill the industry’ approach. It can only be speculated as to the ATO’s motivation. Perhaps the ATO was seeking to cover up its gross incompetence by not stopping the scam before it started and then allowing it to continue for four years before acting.
The ATO instigated standover tactics against the refiners and refused to refund GST credits. This quickly sent refiners to the wall. The ATO followed up by issuing fines and penalties. Significantly the ATO did not move against the only government–owned refiner, the Perth Mint. Why?
But a feisty liquidator stood up to the ATO. The ATO issued a debt against the company for around $200 million. The case went to the Administrative Appeals Tribunal with the ATO winning. The liquidator appealed to the Full Bench of the Federal Court. That’s the decision announced on Friday. The ATO lost 3-0 after spending (on some estimates) $40 million in legal fees.
We don’t yet know the details of the Court’s ruling, but we do know the argument mounted by the ATO.
The ATO admitted in evidence that the targeted company was not involved in the criminal activity. But to justify its stance the ATO ran what to this layperson is an eye-wateringly technical and bizarre argument.
The ATO asserted that the refiners were not ‘refining’ the gold they had purchased from the criminals. The ATO used an ‘expert’ to run this argument. Then it conducted an ‘independent’ review. The ATO’s expert headed the review which found that his assessment was correct. Pardon me but, surprise, surprise!
The ATO has now lost in the Federal Court. The immediate implications seem to be that the Federal government now arguably owes the states around $1 billion in GST. Further, that the refiners are owed the (withheld) GST refunds which presumably run into the hundreds of millions of dollars. And refiners attacked by the ATO should be entitled to large scale compensation.
This case goes to the core of the ATO’s approach to auditing and enforcement. In this gold-refining case, the ATO ‘stuffed up’ on a massive scale. It failed to move against a known criminal scam with years of notice. It failed to close the scam down during its four years of operation.
In response to its huge failure, the ATO sought scapegoats. It targeted innocent refiners who were unwitting tools in the criminal scam. It used its unrestrained powers to bludgeon businesses, regardless of the facts. We see this constantly, particularly with small businesses who either collapse or give in to the ATO because they don’t have the resources to fight back.
This time, after some six years, a liquidator with the resources has proven the ATO wrong.
Lessons must be heeded. The ATO enforcement division is out of control. It’s a wrecking ball in the economy whenever it targets individual businesses or sectors. It wrecked the research and development policies of the government through the same sort of incompetence and vindictiveness demonstrated in the gold refining case.
The ATO has proven that it cannot reform itself. Reform must be imposed by legislation. A template for such reforms is available based on successful reforms in the USA to its tax authority. Coincidentally I discussed this in an article last week.
Australia cannot afford an ATO that continues to operate as it currently does.
Ken Phillips is Executive Director of Self Employed Australia
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