Question

Instruction: Read the following scenario study and respond as per the following requirements: Benjamin, the owner of a small consultancy in Victoria, thought he could boost his income by creating false companies and submitting fraudulent activity statements to the ATO. Thinking that the sheer volume of activity statements the ATO processes would allow him to slip under the radar undetected, he created 17 bogus companies and submitted fraudulent activity statements for each of them. However, instead of the hefty GST refund he expected, Graham received a rather sever lesson in the ATO’s ability to detect fraud and evasion by working with other government agencies, on this occasion, the Australia Federal Police. The ATO quickly identified his claims as suspect. Before GST refunds are issued, all claims are automatically checked against a set of criteria to detect incorrect or fraudulent statements. In this case, the GST Identity Fraud Model picked up some very clear fraud characteristics in the series of activity statements lodged. Once detected, the ATO undertook a detailed investigation where it became evident that a serious offence had occurred. His home and business premises were raided and documents and his laptop computer seized. Computer forensics easily detected the fraudulent driver’s licences, passports and birth certificates used to register the bogus companies and create bank accounts for the GST refunds. Benjamin was charged with obtaining and attempting to obtain a financial benefit by deception. He was sentenced to five years imprisonment and had to pay $312,075 reparation. The judge said that fraud on the Commonwealth revenue was a serious offence which must be dealt with by way of custodial sentence. He pointed out that it was not just fraud on the ATO but fraud on the community as a whole.

Requirements: i) What review techniques ATO may have applied to analyse evidence of non-compliance to diagnose origin of fraudulent and dishonest business operations of Benjamin?

ii) What are the evidences of non-compliance which prompted ATO to conduct an investigation and develop a resolution?

Answer 1

I) Benjamin in this case was expecting a refund of GST which he claimed by creating bogus companies and submitting false activity statements.

GST refund is the result of higher input tax as compared to output tax. Now, what he must have done is that he created bogus input bills and bogus output bill.

Review techniques ATO may have applied to analyze evidence of non-compliance to diagnose origin of fraudulent and dishonest business operations of Benjamin:

1. Business Activity Statements also record amounts of tax other than the GST that may be due to be paid by the relevant entity to the Tax Office. These other amounts of tax include wine equalization tax, luxury car tax, quarterly income tax installments, Pay As You Go withholding tax, and fringe benefits tax installments. Therefore, where an entity is entitled to a refund of GST based in its activities during a particular reporting period, it will only receive an actual refund from the Tax Office if the amount of that refund is more than any other tax debts that might be recorded on the same BAS.
2. The Tax Office states that it applies risk management methodologies to its administration of the tax system. This involves identifying risks and analyzing their likelihood and potential consequences. The Tax Office states that it works in an environment where it is not practical to materially treat all risks, so its approach is to identify and take steps to properly manage the highest risks and to monitor lesser risks to prevent them from increasing.
3. The Tax Office principally mitigates the above risks by intercepting GST refunds prior to their payment through the use of a control known as the risk rating engine (RRE).

II) The evidences of non-compliance which prompted ATO to conduct an investigation and develop a resolution

1. There must be a system in place to check that input tax that the purchaser is showing have been deposited to the government by the seller. So, if Benjamin has entered bogus bills in the return then the system must have checked whether the same have been earlier deposited in the government treasury. And this must have showed that input bills are fake.
2. At the same time, there might be review technique to check if the majority output bills are in cash. Benjamin must have had major sales in cash, as this would help him in doing this economic offence as cash transactions are difficult to track.
3. Also, it might be case that Benjamin showed the inputs at higher rate and output at lower rate, which arose the case of refund of GST. So, there must be check in place to see whether the rates mentioned against the items purchase are correct to ensure the overall correctness and accuracy.