Tax evasion in Australia

Tax evasion occurs when a taxpayer commits a blameworthy act or omission to avoid paying their tax obligations. Tax fraud, on the other hand, is more serious. It involves a taxpayer knowingly making a false statement to the Australian Taxation Office (ATO) about their tax affairs or showing reckless disregard for whether their statements are true or false.

Examples of tax fraud or evasion include:

• Recklessly claiming deductions the taxpayer is not entitled to;
• Failing to provide required information to the ATO or neglecting to keep accurate records;
• Submitting false, backdated, or altered documents;
• Paying wages in cash and not reporting them to the ATO;
• Failing to remit GST, pay-as-you-go withholdings (PAYGW), or superannuation guarantee contributions;
• Making false statements in tax returns; or
• Disguising personal expenses as business expenses.

A criminal investigation may happen for knowingly or recklessly acting with dishonesty to obtain a lower payment or refund from the ATO.

How the ATO uncovers tax evasion

The ATO has sophisticated mechanisms to identify tax evasion. 

This includes:

1. Data matching: Property transactions, share registers, payment platforms, banks and other registers (e.g. boat registrations) are notified to the ATO.
2.  Cross-agency collaboration: The ATO works with other government agencies like the Australian Federal Police (AFP) and state revenue offices.
3.  AI and machine learning: AI can be used to detect income mismatches from known sources, unexplained changes in activity, and deductions disproportionate to income.
4.  Audits and reviews: Wealthy family groups undergo routine and ongoing reviews.
5.  Public tip-offs: The ATO operates a Tax Integrity Centre that provides anonymity for reported tax evasion. 
6. Industry focus: The ATO has a higher focus on some industries like construction and cryptocurrency traders.
7.  International agreements: The ATO can access international information through the Common Reporting Standard (CRS) for offshore accounts, Automatic Exchange of Information (AEOI) agreements, and double taxation agreements.
8.  Unexplained wealth: The ATO investigates taxpayers with unexplained wealth and purchase activity, including purchasing luxury cars or boats.

A recent prominent case was Project Wikenby. A Swiss tax advisor had their laptop seized at the airport and client information was retrieved from the laptop. The Australian government was informed by whistleblowers, Australian Transaction Reports and Analysis Centre, and potentially information from Switzerland. 

The options to declare income

Where a taxpayer has engaged in fraud or evasion, they and the ATO have an unlimited time frame to amend tax returns and declare income.

If a taxpayer has not engaged in fraud or evasion, they may amend tax returns for up to 4 years from the date of lodgement. 

The conditions for voluntary disclosure of tax evasion

The circumstances vary depending on the amount of tax underpaid.

If a tax review has not yet started, the best approach is to contact the ATO and notify them of the potential shortfall amount, the misleading nature of the statement, and the anticipated time frame within which the taxpayer will make the complete disclosure.

Advising the ATO of the evasion quickly is important to pre-empt a review.

The voluntary disclosure, be it through an amended tax return, a formal letter advising of the adjustment, or a late return lodged, is best communicated through a tax agent or directly to the ATO through its secure portal. 

In rare instances where the undisclosed liability is significant, an approach can be made to the ATO on an anonymous basis to negotiate the tax impact of the fraud and the effect of voluntary disclosure. When multiple tax return years are outstanding, and it is challenging to prepare returns for previous decades, a negotiation can happen for a set number of years to be lodged without further request. 

Voluntary disclosure before a tax review starts

If a voluntary disclosure occurs before a tax review starts, the taxpayer is in a much stronger position with the following benefits:

1. Significantly lower likelihood of criminal prosecution;
2.  Reduction of tax penalties by up to 80%;
3.  Possible remission of the ATO interest charged;
4.  Improved working relationship with the ATO; and
5.  Greater chance of a payment arrangement for the ultimate tax assessed.

Voluntary disclosure during a tax review

If a voluntary disclosure happens during a tax review, it is still better for the taxpayer to disclose than if the matter is identified by the ATO resulting from the review. 

The following factors are at play:

1. If the disclosure happens earlier during a review, it is considered more favourably.
2.  If the disclosure is not related to the item in review, it is considered more favourably.
3.  If the disclosure is full and clear, and the taxpayer works with the ATO to provide information, it is also treated more favourably. 

The ATO has a form to complete for voluntary disclosure during a tax review. The benefits of voluntary disclosure before a review are still relevant, but they are fewer than if the disclosure is made before the review or investigation starts.

When voluntary disclosure is no longer possible

Voluntary disclosure is not possible if the disclosure is not voluntary.

Anecdotally, we have assisted clients in difficult positions and presented information as a voluntary disclosure (even when the disclosure was not that voluntary), which, surprisingly, has assisted in future negotiations.

It is rare for a client to be forced to present information. Ordinarily, a functional relationship is encouraged between the client and the ATO to facilitate a short review. Sometimes, information is withheld from the ATO, but it is rare. 

The main areas where voluntary disclosure plays a major role

Typically, taxpayers who have committed tax evasion have an aggressive view of their affairs. The desire to make a voluntary disclosure has arisen from a life event or a gradual change in risk profile.

In our experience, the voluntary disclosure of tax evasion occurs when another person takes control of the taxpayer's affairs, such as the executor of an estate who is uncomfortable managing the tax risk of the estate, or passing tax due diligence for a sale. 

Often overlooked by foreigners but considered tax evasion by the ATO

The primary area where we encounter tax fraud or evasion as a practice is tax residency. A taxpayer can have significant worldwide assets, while wishing to live in Australia and generate wealth from Australia and not be subject to the Australian tax system.

Intentionally disregarding the Australian tax system and assuming that tax residency is offshore is tax evasion. 

Recommendations to clients who have committed tax evasion

The ATO is surprisingly cooperative with taxpayers who come forward and want to pay their share of Australian tax. The ATO's primary emphasis is encouraging a corporative approach, and significant progress has been made in engaging with taxpayers. 

Being upfront and honest about the past is essential.

If a taxpayer is combative, fraudulent, and evasive in their dealings, the approach is significantly different, costly and criminal prosecutions can happen. The same principles apply to Australia’s state revenue offices. 

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Ross Forrester is a director of Westcourt, a leading tax advice practice in Australia.  He is the Regional Chair Asia-Pacific for the GGI International Taxation Practice Group (ITPG) and is also the State Chair for The Tax Institute of Australia.