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Text Media’s magazine The Eye might have closed but this is an excellent story journalist Stuart Washington prepared for the mag before it was closed last March.

There has been a little-reported underside to the Olympic city’s building boom. As the gleaming spires of new apartment blocks reach skyward and the $3.2 billion spent on construction of Olympic projects grinds to a halt, tax officials say they have identified $100 million in unpaid taxes during a two-and-a-half-year crackdown on the building industry.

And even that figure is likely to be a tip of the iceberg. Rough estimates of unpaid tax from the three most common types of frauds – the phoenix, cash payments and the bodgies – are at least $200 million in the Sydney region alone. Let alone the rip-offs from payroll tax and workers’ compensation. Says Sydney-based Australian Taxation Office regional director Terry Bates: “It (tax avoidance) was there anyway. As the industry has boomed, then obviously it’s much more profitable.”

Key among the culprits are large firms of sub-contractors – some employing more than 400 people – that have worked on some of the biggest projects throughout Sydney.

So the underside of the building industry has left its taint with Olympic projects at Homebush Bay – including Multiplex’s Stadium Australia – and the seemingly interminable production line of Harry Triguboff’s Meriton Apartments. Other major builders are not free of the taint. Mirvac has been named in court as employers of allegedly wayward, tax-avoiding sub contractors.

The Australian Taxation Office takes a dim view of the major building companies that hired major sub-contractors which now face the courts on fraud charges. This is particularly the case when the sub-contractors offer unrealistically low prices, says Bates.

“My view would be they must know. I think if you are a major construction company you must have a pretty good idea what prices are the right prices to get something done. I think it would be very naive to believe that they weren’t aware that something was going on. But it’s probably suited them to take the lower prices.”

The State secretary of the Construction Forestry Mining and Energy Union, Andrew Ferguson, underlines the point. “The more they (sub-contractors) don’t comply, the more the price is undercut, the more the principal contractor gains,” he says. “The builder receives the commercial gain in a lower price, with the money being forwarded from WorkCover, the ATO or (NSW’s) Office of State Revenue.” The ATO is also unhappy about some professionals who appear to have been instrumental in the schemes.

Bates again: “There seems to be certain accountants and liquidators that have been involved with a number of these and that’s something we’re following up at the moment.”

Sub-contractors stand accused of flagrant breaches of the tax laws. They are cash payments so blatant that they include allegations of “whiting out” details on cheque butts when a possible fraud is discovered.

A variation on straight-out avoidance is the phoenix scheme – new building companies arising from the ashes of the old, stripping their assets but leaving their tax debts. Courts have heard that one such scheme was allegedly masterminded by the wild-haired William “Bronco Billy” Walters. His bricklaying business worked almost exclusively for Meriton Apartments despite the bricklaying business changing companies on an almost annual basis over the past nine years. Walters is accused of distributing a wealth of largesse on personal expenses from his largely tax-free operations, including cosmetic surgery for family and friends, a shoe shop and a clothing boutique as he racked up an alleged tax bill of $7.3 million. Not to mention bestowing on himself a series of 17 cars that would make a car lover weep with envy.

The Eye has also found that an Olympic sub-contractor that worked on the stadium is before the courts on tax charges after court documents allege a police raid found more than $69,000 in cash at a director’s home: the weekly wages bill neatly divided into 231 envelopes. The allegation is that Mindgrove and its associated companies – which at their height employed 468 workers – simply deducted no tax from its workers’ wages as it amassed a tax bill of $3.5 million.

There are more revelations to come. The Eye can reveal for the first time that the ATO is actively pursuing 400 building companies throughout Sydney – large and small – for their participation in a tax minimisation scheme known as “the bodgie”.

Bates gives a clue to just how pervasive avoidance has become in the building industry when he relates how his officers uncovered a firm which would simply sell invoices to businesses, allowing them to write off expenses and avoid paying tax.

“It was a company that was supposed to be selling huge amounts of material to this guy. When we found this office, it was an office with a computer and a printer. There was only one guy who was fronting it. It was like a selection, you could select your invoices.”

O’Connor is among five Irish men facing court on charges relating to “the bodgie”. O’Connor, of the $11,000 taxable income, probably didn’t know he was under surveillance by the National Crime Authority as he zapped around Sydney in a red Mitsubishi Pajero four-wheel-drive.

If he had known he probably would not be facing allegations that NCA agents recovered cheques after O’Connor presented them at a Burwood bank branch, bearing the signature “Liam Kirkpatrick”.

O’Connor probably didn’t know his telephone calls were being intercepted either. So he would not be facing allegations that he estimated he had made about $500,000 from the scheme. Or allegations that he had been recorded planning to leave Australia and discussing with his sister the possibility of opening bank accounts in the Isle of Man with the intention of depositing money from Australia.

“Liam Kirkpatrick”, an Irish national, receives frequent mentions in the NCA’s investigations into the company Pro Line Plant Hire. In some ways the part played by “Kirkpatrick” is reminiscent of the line of poetry: I met a man who wasn’t there.

According to NCA documents before the court Kirkpatrick and his tax file number were used to register the company Pro Line Plant Hire on June 23, 1998. And his name was used to open a Westpac account on July 3. But the Crown case alleges Kirkpatrick left the country about six months before the company and the bank account were established. In the end, the NCA alleges, Pro Line Plant Hire was solely operated by Patrick O’Connor.

In the case mounted by the Director of Public Prosecutions, the company and a series of bank accounts built the foundations for “the bodgie” (see panel) – essentially a cheque-cashing business that took a commission for laundering the money.

In any case O’Connor experienced a rapid reversal of fortune from his previous low-income days in 1997. Documents allege he has claimed to own two 20 tonne excavators and three 12 tonne excavators, emblazoned with O’Connor Excavations on their sides.

Proline has never lodged a tax return. O’Connor faces fresh assessments of his income when he has his day in court later this year: $89,680.71 in 1998 and $121,778.49 in 1999. He also faces three counts of defrauding the Commonwealth and one count of committing an organised fraud. The NCA investigation was conducted under its national Swordfish task force, targeting money laundering and tax evasion, which is designed to raise $80 million in forfeited assets and unpaid taxes over a three-year period.

Bates outlines the difficulties in tracking down “bodgie” frauds, which operate mainly in the labour hire and equipment hire areas. “It’s a money washing operation. The difficulty that we had at first was that they had documentation showing … we get (labour) from this labour hire company, here’s our invoices, here’s our receipt. “When we eventually went to find the labour hire companies we couldn’t find them, so it started to unravel.”

He adds: “Once we found out how they did it, then it was pretty easy going to the next one and the next one.”

William Walters appears to have liked variety in his companies as much as he liked variety in his luxury cars. Walters was a favourite sub-contractor for Meriton Apartments. As noted by Director of Public Prosecutions barrister Peter Renehan in a March hearing: “He worked almost exclusively for Meriton, the group that builds apartments, mainly apartments, with astonishing regularity throughout the city.”

In 10 years it is alleged Walter’s operations churned through a bewildering series of companies as they progressively collapsed and subsequent companies took over their operations – but not their debts. Companies Lymkom, Kindby, Frego, Taureema, Conogo, Budscan, Milcoy, Camotray, Convoy, Aloprom, TAJ Constructions and AJ Australia were all involved in Walters’ bricklaying business between 1989 and 1998. In the Crown’s case most of the companies were wound up owing substantial tax debts, a total of $7.3 million between June of 1989 to May of 1998.

Walters faces 10 charges of defrauding the Commonwealth in relation to 10 of the companies. And a further charge of committing an organised fraud. At the March hearing District Court judge xx Ireland gave a clear description of the practices of Phoenix companies: “One company rising as it were from the ashes of a preceding company, taking over the operation of the firm then in time, after a period of time, winding up and passing on the business to a subsequent company.”

Walters’ bricklaying business employed between 150 and 200 employees. Renehan alleges that Walters made extravagant payments that were clearly personal in nature. Walters’ alleged payments include establishing a shoe shop, a clothing boutique, overseas travel, residential electricity accounts and plastic surgery for acquaintances and family members – including daughter Brenda Walters and xxx Rebecca Walters.

“Were it not for these private payments each company would have been able to pay its group tax debt,” Renehan told the court. Court documents also allege that over the nine years Walters had a rolling collection of 19 high-priced boats and cars, including a Honda Integra, two Harley Davidsons and a Cadillac Stretch Limousine that he paid for with cash cheques.

Other vehicles in his colourful car purchasing history include a Lamborghini Diablo, a Lamborgini Countache, a Ferrari Testarossa, a Ferrari Boxer, two Porsches and two cruisers.

Walters has pleaded not guilty (check). He faces court later this year. The Eye has learned that Walters’ companies were not the only ones that had appeared in various incarnations with a long association with Meriton Apartments. The Eye has learned that a series of companies associated with banned company directors Mario Dilario and Eric Dilario -have been used frequently as formworkers on Meriton Apartment projects in recent years. Many of the companies associated with Mario Dilario and Enrico Dilario have folded, leaving behind substantial debts.

The director of bricklayer Fugen Holdings Pty Ltd, Dan Murphy, explains the predicament that the widespread acceptance of underhand tactics places on businesses meeting their tax obligations.

“Someone pricing the same job as me, instead of allowing $1 million for labour, they can do it for $800,000, $770,000.

“So then the builder will look at my price compared to their price and just think we are complete rip-offs, whereas they know deep down that the other subbie is taking shortcuts.

“A lot of jobs … it’s a waste of time even trying to price it because you know you might be competing against three people doing it the right way and three people doing it the wrong way …

“All the builder will do is try to get us in and say, we’ve got a bloke here whose price here is $100,000 under you, you have got to drop your price $100,000.”

He finishes off: “The builders know when they are taking on shonky or rough subbies.”

Wednesdays were a busy day for the directors of formwork, concrete and steelwork sub-contractor Mindgrove. This was the day they divvied up thousands of dollars in cash for their workers. Mindgrove has completed work on the Olympic site, appearing in published reports as a subcontractor at the Sydney Showgrounds. Directors Tom Cappadona and Vincent Milazzo appear in construction records as workers at Stadium Australia.

The allegation – yet to be tested in the District Court – is that Cappadona, his wife Dorothy and Milazzo simply did not pay any taxes on their employees’ wages bill.

And the bill was substantial. Court documents show that at its peak, in 1998, their businesses employed 468 workers and paid a total wages bill of $2.8 million.

Between 1994 and 1999 the Crown alleges a total tax fraud of $3.6 million, largely by paying workers and sub-contractors with cash cheques or deposits directly into their accounts.

In a statement of facts tendered to court this month, the cash was usually withdrawn on Wednesdays in cash cheques, signed by Tom or Dorothy Cappadona and Vincent Milazzo.

The statement reveals that raid on the home of Vincent Milazzo by Australian Federal Police in February last year revealed a bag containing 231 envelopes, each marked Mindgrove NSW and a different workers’ name. The total amount of cash in the envelopes was $69,394. The facts allege the content on envelopes had been prepared the night before by Tom and and Dorothy. A busy night if it happened every week, one would imagine. The alleged “system” depended on none of the employees or the subcontractors declaring their income to the ATO.

ATO investigations were met by primitive subterfuges. The words cash cheque were removed from bank statements; details on the cheque butts had details whited out and sometimes new details added and (false) invoices were supplied to support explanations that the withdrawals were made for payments to suppliers.

The document before the court states the Cappadonas and Vincent Milazzo have agreed to a total tax debt of $3.2 million, secured by mortgages over their houses and the company’s office.

They will pay it off in monthly instalments, the last on June 2003.

Ferguson is vehement about the dangers cash payments pose to workers in the industry. This is because the ATO insists the responsibility lies with workers to repay tax from their cash payments, not the companies that did not deduct their taxes. In some cases the CFMEU has demanded and won payments from sub-contractors and principal contractors to offset workers’ liabilities. In others workers have been left with tax bills of up to $40,000.

The ATO’s investigation of the building industry started in November 1997. At its peak in New South Wales there were 100 tax officers poring over records. Numbers have fallen to 40, partly because the job has been done, largely because the ATO is turning its energies to the GST. But it is continuing to chase the thread from its investigations. The CFMEU’s Ferguson wants to see laws changed so that principal contractors can be held to account for the mis-deeds of their sub-contractors, although he concedes this has not been warmly embraced when he has propositioned state or federal governments.

“They should have the obligation to make sure people comply with the law. That they don’t make progress payments unless they check for compliance,” he says.

In the meantime the ATO has a good handlehold on many of the clues of tax avoidance. Including Bates’ description of one of the first warning signs. “The main thing that crops up is … when you ask to see his records and he brings out his shoebox,” says Bates.

“You realise there are problems there.”

Breakout story: For the first time, how to do a Bodgie

A person registers a company with the Australian Securities and Industry Commission using a false identity and a false name.

The company details and the false identity are then used to open bank accounts in the company name.

These companies are generally registered with the ATO as labour and plant hire companies.

The promoter of the scheme then receives cheques from legitimate companies which are deposited into the bank accounts. The funds, once cleared, are then withdrawn from the account by way of cash cheques.

These cheques are always under $10,000 so there is no report submitted by the bank under the provisions of the financial transactions reporting laws.

The promoter of the scheme then takes a commission of 7 per cent of the cheques and returns the balance of the cash to the payer.

The payer then uses the cash themseleves. At the time the cash or cheque was exchanged, a blank or partially completed invoice was provided by the promoter to the payer.

The invoice can then be used to make it appear it was for services provided, such as labor or plant hire, when those services had not in fact been provided.

The invoices are used by the payer to claim deductions from the ATO as a legitimate business expense incurred, regardless of the final destination of the cash, effectively reducing the payers’ tax liability.

By then providing cash wages to the employees, the payers were able to evade the payment of group tax which should have been deducted from any wages paid. They also avoid any payments of superannuation and workers compensation payments.

These schemes are known within the building industry as “the bodgie”. They operate effectively as cheque-cashing businesses.

Source: National Crime Authority documents tendered to court.

Peter Fray

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