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Federal

May 11, 2011

Taxation: cops target phoenixing and refund fraud

Tradesmen, building workers, elite athletes, cleaners and dodgy businessmen who collapse companies are on the tax office budget hit list over the next four years, writes Chris Seage, a tax consultant and former ATO audit manager.

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Tradesmen, building workers, elite athletes, cleaners and dodgy businessmen who collapse companies are on the tax office budget hit list over the next four years.

The government will strengthen the law to counter fraudulent phoenix activity that has been a problem for many years.  In a nutshell, a phoenix company, according to the ATO, is when individuals use limited liability companies to accumulate debts (usually to the Tax Office), liquidate the companies concerned and then carry on their business via a newly formed company. The cycle is later repeated; the phoenix rises again.

I alerted Crikey readers to the rise of phoenix companies in 2008 and I have campaigned hard since to have the law changed.  Many people suffered at the hands of these shonks, including unpaid creditors and employees who saw their superannuation guarantee go unpaid. My own 21-year-old daughter recently suffered this humiliation when her employer went belly-up without paying nearly $7000 into her super fund.  She will never see those funds again.

With effect from July 1,  the ATO will make directors of a failed company personally liable for their company’s failure to pay employee superannuation. A great move in my opinion.  The move is expected to increase government coffers by $245 million.

Refund fraudsters are also in the tax microscope.  The government will provide $56.4 million over four years to the ATO to address fraudulent tax-refund claims.  This area has also been a problem to the tax cops in recent years to the extent that organised crime has infiltrated the scene.

The latest intelligence captured by the ATO highlights a trend towards a business-like and highly organised approach to commit refund fraud. These groups are attempting refund fraud — stealing, manipulating or falsifying identities in the process, which can result in large monetary sums at risk.

The ATO’s deputy commissioner of serious non-compliance Michael Cranston recently said: “Leaders may reside internationally while lower level syndicate members may only visit Australia temporarily. These network members typically carry out tasks such as opening bank accounts and harvesting identity information. While attacks have tended to focus on income tax, evidence also supports some movement into GST refund fraud. An attack was thwarted in June 2010 when several hundred ABNs were seemingly being stockpiled in preparation for fraudulent lodgement.”

This new crackdown is expected to raise $225.6 million over four years.

A major increase in audits for building and construction workers will reap the government $513 million for an outlay of $46.4 million, which will allow the ATO to undertake data matching, reviews of contractors’ tax liabilities and targeted audits.  Certain businesses will have to report annually on payments made to contractors in the building and construction industry with effect from July 1, 2012.

Tax cheats in the cleaning industry better get their stuff together quickly as the government will also consult publicly on options to introduce a similar reporting regime for payments to contractors in the commercial cleaning industry.

Elite athletes better recheck their tax returns as the government will provide $43.3 million over four years to the ATO to allow it to monitor the accurate accounting of government grants and payments.

This increased funding will enable the ATO to collect payment information from government agencies across all three levels of government, and will provide for sophisticated data‑matching techniques to examine compliance by the recipients of such payments.  Athlete grants come under the grey area of tax law of whether they are carrying on a business.  Watch this space.

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