Australian Taxation Office auditors are having a great time visiting brothels, strip clubs, adult novelty shops and esc*rt services around Australia for their latest little money spinner known as the Adult Industry Project (AIP).

Last year they raised $9.5 million from this project which is part of a wider ATO audit blitz into Australia’s black economy. John Garnaut in the SMH yesterday reported that the ATO has vowed to “stay involved” with brothels and er*tic dance clubs after its unannounced investigators sampled 50 venues and uncovered rampant tax evasion.

There is no doubt that the ATO is on a public relations winner with this – just look at the cheap shots hurled at the industry by senior officers at a parliamentary committee recently. However beneath the surface of this grandiloquence, controversy is brewing, with many in the adult industry complaining of below-the-belt tactics by the ATO.

They allege various breaches of the taxpayers’ charter, a serious breach of the ATO’s Code of Settlement Practice as well as stand-over and intimidation tactics being used by the Cash Economy Task Force. The most serious allegation is threatening to extend a two-year audit period to four years with all issues examined and penalties likely to apply if the business doesn’t accept the ATO assessment covering a two-year audit period. This is a clear breach of their code of settlement practice.

To deal with the ATO’s overzealousness, various professional industry groups have sprung up in Victoria, Queensland and now NSW representing legal brothels and esc*rt agencies. Out of these groups grew a peak national body called Legal Adult S*x Industry (LASI).

As well as this, a Queensland based group known as EWC Results Pty Ltd are holding expensive seminars around Australia to advise those in the adult industry on what to do when the ATO calls. They boast There’s a whole bunch of sticky questions they’ll be asking you… and you’d better have the right answers, and have them backed up with the right records.

By the time the ATO calls, the brothels say they have been following model four of their guidelines. It works like this: A client visits a brothel and makes two separate payments; one to the establishment for room hire and the other to the s*x worker for s*x. By transacting like this, the brothel only pays GST on the room hire but not on the payment to the s*x worker. To accommodate these new arrangements, brothels have placed padlocked letter boxes in the girls’ waiting room where the girls place the cash they receive from their clients. At no stage can the brothel “hold” the money for the worker as that would attract GST.

By doing this, the brothels avoid the big bills and the ATO are back to square one; chasing the girls for unpaid tax. What a tax administration! What a shemozzle!