Last Friday I revealed to Crikey readers that there are 775 illegal brothels, nude massage parlours and home prostitution businesses trading freely in NSW. The list has also been sent to Peter Dutton, the Assistant Treasurer, with a request that he demand the ATO audit the illegal industry to make it a level tax playing field for the legal industry.

The number is an embarrassment to Michael D’Ascenzo and the Australian Taxation Office because they have attacked the legal brothel industry in NSW like a hungry mongrel dog going for a bone. In other words, they’ve concentrated their efforts on the already (in the main) tax-compliant legal industry while an enormous illegal trade has been allowed to go unchecked and untaxed by Mr D’Ascenzo.

I know this to be true because Mr Dutton, in a reply to Parliamentary Question 4893, said the ATO has either completed or is presently conducting 91 audits of businesses in the NSW adult services industry. As the majority of those audits are from the legal industry, there are at present over 700 illegal operators making untaxed profits in NSW under Mr D’Ascenzo’s radar.

The ATO is in denial about the size of the illegal trade. Just look at what Mark Jackson, Deputy Commissioner of Small Business and responsible for GST in the Commonwealth, said last month at a Senate estimates hearing starting at page 56.

Mr Jackson — There is an article in today’s Sydney Morning Herald where some claims are made about numbers of brothels, I think, in New South Wales. We view those sorts of numbers with some scepticism — ’scepticism’ might be an overstatement — reservation and conservatism.

Here you have a senior ATO officer admitting they have no idea about the illegal trade in NSW. It is a damning admission that they have stuffed up! This man has responsibility for GST in the Commonwealth and he misleads Parliament on how bad the illegal brothel situation is in NSW and the potential loss to revenue of untaxed profits.

On top of this, one of Australia’s leading academics specialising in the regulation of the s-x industry, University of Technology Sydney Law Lecturer Penny Crofts, has said her research indicates that home brothels make up almost 40 per cent of NSW’s s-x industry.

Mr Dutton has also said in reply to a question on notice that ATO records currently indicate that there are 554 ABN registrations identified by descriptions that could be associated with the adult service industry. This is well short of the 10,000 s-x workers identified by the ATO as service providers operating businesses within brothel and escort agency operations and not fully compliant with their tax obligations.

Up to the 2006 financial year, they have raised only $19 million in GST and income tax nationally. Strewth, Liberal Party donor Robert Gerard had $75 million wiped off his tax bill with one stroke of former Commissioner Michael Carmody’s pen! So, let’s put the results of this project in perspective. 554 ABN registrations and $19million  in tax is all the ATO have to show for nearly two years’ work.

I have twice written to Mr D’Ascenzo about the problems with the project but he hasn’t bothered to reply, even though he says he wants feedback from people about their compliance program.

I spent 23 years in the tax office and rose to the rank of senior audit manager specialising in project-based audit work. In my view, the Adult Industry Project is a big flop. It has been poorly researched, poorly administered and is being run by a pack of nongs.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey