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Auditor-General Audit report for 2001-2002 No. 2-Examination of allegations relating to sales tax fraud: Australian Taxation Office


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A ustralian National

Audit Office

Exam ination of A llegations Relating to Sales Tax Fraud

Australian Taxation Office

T h e A u d i t o r - G e n e r a l

Audit Report No.2 2001-2002

Examination of Allegations Relating to Sales Tax Fraud

Australian Taxation Office

i c e A u s t r a l i a n N a t i o n a l A u d i t O f f

© Commonwealth of Australia 2001

ISSN 1036-7632

ISBN 0 642 44294 0

COPYRIGHT INFORMATION This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth, available from Auslnfo. Requests and inquiries concerning reproduction and rights should be addressed to: The Manager, Legislative Services, Auslnfo GPO Box 1920 Canberra ACT 2601 or by email: Cwealthcopyright@finance.gov.au

2 Examination of Allegations Relating to Sales Tax Fraud

A u stra lia n N atio n al

A udit Office

Canberra ACT 10 July 2001

Dear Madam President Dear Mr Speaker

The Australian National Audit Office has undertaken an Examination in the Australian Taxation Office in accordance with the authority contained in the Auditor-General Act 1997. I present this report of this Examination, and the accompanying

brochure, to the Parliament. The report is titled Examination of Allegations Relating to Sales Tax Fraud.

Following its tabling in Parliament, the report will be placed on the Australian National Audit Office’s Homepage— http://www.anao.gov.au

Yours sincerely

P. J. Barrett Auditor-General

The Honourable the President of the Senate The Honourable the Speaker of the House of Representatives Parliament House Canberra ACT

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AUDITING FOR AUSTRALIA

The Auditor-General is head of the Australian National Audit Office. The ANAO assists the Auditor-General to carry out his duties under the Auditor-

General Act 1997 to undertake performance audits and financial statement audits of Commonwealth public sector bodies and to provide independent reports and advice for the Parliament, the Government and the community. The aim is to improve Commonwealth public sector administration and accountability.

Auditor-General reports are available from Government Info Shops. Recent titles are shown at the back of this report.

For further information contact: The Publications Manager Australian National Audit Office GPO Box 707 Canberra ACT 2601

Telephone (02) 6203 7505 Fax (02) 6203 7519

Email webmaster@anao.gov.au

ANAO audit reports and information about the ANAO are available at our internet address:

http:/ / www.anao.gov.au

Audit Team Barbara Cass Alison Cerritelli Casandra Cameron

Peter White

4 Examination of Allegations Relating to Sales Tax Fraud

C ontents

Abbreviations/Glossary 7

Summary and Recommendations Summary 11

Background to examination 11

Examination objective and scope 13

Overall conclusion 14

Key Findings 16

Management of Sales Tax Fraud Cases— Chapter 2 16

Implications for the Goods and Services Tax (GST)— Chapter 3 19 Framework for Managing GST Fraud—Chapter 4 20

Recommendations 21

Audit Findings and Conclusions 1. Introduction 25

Background to examination 25

Collection of sales tax 26

Investigating fraud within the ATO 30

Examination objectives, scope and methodology 30

Structure of report 32

2. Management of Sales Tax Fraud Cases 33

Introduction 33

Coordination arrangements between ATO and Customs 35

ATO environment for managing fraud cases 36

Investigating sales tax fraud 38

Case management and reporting system 41

Guality assurance processes in the STPU and SBPIU 42

ANAO’s examination of sales tax fraud cases 44

Sales tax cases investigated by the ATO 45

Lessons to be learnt for future fraud investigations 53

Sales tax cases involving Customs 54

Specific cases provided to the Senate inquiry 56

3. Implications for the Goods and Services Tax 57

Introduction 57

Communication and education strategies for tax reform 57

Assessment of risks associated with the introduction of the GST 59 Process for collecting/deferring payments on imported goods 62 Processing of GST, WET and LCT collected by Customs 68

Processing of Business Activity Statements by the ATO 69

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A bbreviations/G lossary

ABN A ustralian Business N um ber

ACS A ustralian Custom s Service

ANAO A ustralian N ational A udit Office

ATO A ustralian Taxation Office

AWA A utom ated W orkflow A llocation

BAS Business A ctivity Statem ent

BLRG Business Line Reference G roup

CaMRA Case M anagem ent, Reporting A pplication system

CMIF Compliance M anagem ent Integration Forum

COMPILE Custom s O n-line M ethod of P roducing Invoices from Lodgable Entries

CTRP Customs Tax Reform Program

D eferred GST Scheme The D eferred GST Scheme allow s paym ent of GST on im ported goods to be d eferred u n til an en tity 's next

Business A ctivity Statem ent (BAS) is lodged provided the ATO has given approval to defer the GST.

GST Goods and Services Tax

GSTFC GST Fraud C ontrol System

HOTSA H ealth of the System A ssessm ent

HP H ighly Protected

IPS Instalm ent Processing System

LCT Luxury Car Tax

MoU M em orandum of U nderstanding

NCIP N ational Compliance Im provem ent Plan

RRE Risk Rating Engine

SBPIU Small Business Prosecution Investigation Unit

STPU Sales Tax Prosecution U nit

TRBEC Tax Reform Business E ducation and C om m unication

program

WET Wine Equalisation Tax

WHT W ithholding and Indirect Taxes Business Line

WST W holesale Sales Tax (sales tax)

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8 Examination of Allegations Relating to Sales Tax Fraud

Summary and Recommendations

10 Examination of Allegations Relating to Sales Tax Fraud

Summary

Background to examination 1. O n 24 June 1998, the Senate referred to the Senate Econom ics

References C om m ittee for in q u iry the m a tter of the o p eratio n of the A ustralian Taxation Office (ATO) w ith particular reference to:

• the equitable treatm ent of taxpayers;

• the perform ance of the Large Business and In tern atio n al D ivision, including, in particular, the H igh Wealth Individual Project;

• com pliance by the ATO w ith the Client Settlem ent Guidelines; and

• allegations of infiltration of the ATO by organised crime.1

2. The inquiry h a d its origins in the Sunday television p ro g ram

screened by the Nine netw ork in mid-1998. The Comm ittee published its re p o rt Inquiry into the Operation of the A ustralian Taxation Office in M arch 2000 concluding that, on the balance of evidence subm itted, it considered th a t the Sunday p ro g ram allegations w ere largely w ith o u t substance. In its report, the Com m ittee advised the Senate that it w as re q u e stin g th e A u d ito r-G e n e ra l to c o n sid e r in v e s tig a tin g a m a tte r involving possible fraud against the C om m onw ealth and reporting his findings to the Parliament.

3. A lleg atio n s w ere m a d e to the C o m m ittee th a t th e ATO an d

A ustralian Customs Service (Customs) had failed to pursue several cases of detected sales tax fraud, resulting in the loss of several m illion dollars of C om m onw ealth revenue. The C om m ittee believed that this alleged failure m ay have stem m ed from coordination problem s betw een the tw o

ag en cies. E v id en ce b efo re th e C o m m itte e also s u g g e s te d th a t th e introduction of the N ew Tax System could potentially increase, rather than dim inish, the risk of this type of fraud.

1 Report of the Senate Economics References Committee. Inquiry into the Operation of the Australian Taxation Office, March 2000, Parliament of the Commonwealth of Australia, p. 1.

4. The C h air of the C o m m ittee, S en ato r M u rphy, w ro te to the

A uditor-General about the Com m ittee's request on 23 March 2000. After m eeting w ith the Com m ittee and its Secretariat, review ing transcripts and b a ck g ro u n d m aterial an d in terv iew in g w itn e sses, the A u d ito r- General agreed, on 19 October 2000, to undertake an exam ination2 of the m atters requested by the Committee.

Collection of sales tax 5. U nder the sales tax legislation, the ATO had overall responsibility for collecting, m onitoring and rep o rtin g sales tax revenue. The ATO provided C ustom s w ith ap p ro p riate delegations, as w ell as legislative and procedural inform ation to adm inister the collection of sales tax at im portation.3 In 1999-2000, the ATO collected $15.5 billion in sales tax and Custom s collected $831 m illion.4

6. In February 1997, the ATO and Custom s established a N ational Liaison Com m ittee to ensure a m ore effective w orking relationship. To formalise this joint committee and establish a fram ew ork for im proving the relationship between the tw o agencies, the ATO and Customs entered into a M em orandum of U nderstanding (MoU) in June 1997.

7. Sales tax was replaced by the Goods and Services Tax (GST) on 1 July 2000. In addition to the GST, a Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) w ere also introduced to offset the abolition of sales tax on those items.

Investigating fraud within the ATO 8. The d e tectio n an d id e n tific a tio n of m a tte rs of serio u s n o n ­

compliance (including fraud) relating to sales tax w ere the responsibility of the form er W ithholding Tax (WHT) Business Line.5 M atters of sales tax fraud and serious non-compliance could also be referred to WHT for investigation by other business lines, external agencies or law enforcem ent bodies.

2 Under Section 18 of the Auditor-General Act 1997 the Auditor-General may conduct a review or examination of a particular aspect of the operations of the whole or part of the Commonwealth public sector, being a review or examination that is not limited to the operations of only one Agency, body or person.

3 Under section 8 of the Taxation Administration Act 1953, the Commissioner of Taxation delegated certain responsibilities to Customs for collecting sales tax revenue.

4 Commissioner of Taxation Annual Report, 1999-2000, p. 4.

5 On 1 March 1999, the WHT Business Line ceased to exist and its responsibilities, including the administration of sales tax, were transferred to the Small Business (SB) Business Line. On 1 July 2000, GST replaced sales tax and responsibility for its administration was assumed by the newly created GST Business Line.

12 Examination of Allegations Relating to Sales Tax Fraud

Summary

9. A specialised Sales Tax Prosecution U nit (STPU) located in the H urstville office was established in 1989 to investigate and assist in the prosecution of cases of sales tax fraud identified by the WHT Eastern and S outhern regional offices. For cases of p o te n tia l sales tax fra u d identified in other regions, the Small Business Prosecution Investigation U nit (SBPIU) undertook the investigations.

10. In A ugust 2000, the SBPIU was integrated w ith the GST F raud Section to become the ATO F raud Section. The ATO Fraud Intelligence Section, w hich had been p art of the GST Fraud Section, was established as a separate section in Septem ber 2000. The com bined roles of the ATO Fraud Intelligence Section and the ATO Fraud Section are to m inim ise the risk of external fraud to the ATO through the prevention, detection and investigation of all p o te n tial frau d u le n t activities relatin g to all business taxes, including the GST.

Examination objective and scope

Examination objective 11. The objective of this ex am in atio n w as to investigate m a tters

relating to:

• allegations made to the Senate Economics References Comm ittee that the ATO and Customs failed to pursue several cases of detected sales tax fraud;

• the coordination arrangem ents betw een the ATO and Customs; and

• w hether any issues arising from these m atters had been addressed in im plem enting the GST.

Examination scope

12. Evidence before the Senate Comm ittee suggested that the ANA O 's exam ination should focus on cases handled by the ATO's New South Wales STPU, located at the ATO H urstville office. Following an internal ATO review, this unit was disbanded in Septem ber 1998 and ongoing cases w ere transferred to the H urstville SBPIU.

13. The ANAO exam ination focused on the following:

• the arrangem ents in place to coordinate activities betw een the ATO an d C u sto m s for sales tax an d the role C u sto m s p la y e d in the

investigation of the sales tax fraud cases,6 that is, w hether it w as a referring agency only or participated in the fraud investigation; and

6 Customs was required to refer any cases of suspected sales tax fraud to the ATO for investigation and prosecution.

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• the ATO's m anagem ent of the sales tax fraud cases being investigated by the STPU and the current status of those cases, including specific cases cited as examples during the Senate Inquiry to highlight concerns about sales tax fraud investigations.

14. To determ ine w hether issues arising from the sales tax m atters had been adequately addressed w hen im plem enting the GST, the ANAO also review ed:

• the coordination arrangem ents betw een the ATO and C ustom s and system s an d processes for c o lle c tin g /d e fe rrin g GST on im p o rted goods; and

• the fram ew ork w ithin the ATO for detecting and investigating GST fraud.

15. As the GST w as in tro d u c e d in July 2000 an d the ATO F raud

Section established in A ugust 2000, it was considered too early to fully assess the effectiveness of these new systems and processes as, in some instances, they are still being im plem ented and refined.

Overall conclusion 16. The A NA O found th a t the ATO d id not p u rs u e a n u m b er of

detected sales tax fraud cases in a timely manner. The investigations of sales tax fraud undertaken by the H urstville Sales Tax Prosecution Unit (STPU) and Small Business Prosecution Investigation Unit (SBPIU) were poorly m anaged. Analysis of the sales tax fraud cases also highlighted systemic case m anagem ent problem s w ithin both the STPU and SBPIU. The ANAO identified deficiencies in the m anagem ent of the sales tax fraud cases sim ilar to those identified by ATO internal reviews of the SBPIU. These deficiencies will need to be addressed by the ATO if fraud investigations are to be properly m anaged in the future.

17. The ATO Fraud Intelligence Section and the ATO Fraud Section are addressing a num ber of the issues raised in relation to the m anagem ent of the sales tax fraud cases exam ined by the ANAO. However, to ensure that alleged fraud cases are properly investigated and that the ATO Fraud Section has an effective case m anagem ent fram ew ork supported by a case m anagem ent system , as w ell as adequate train in g program s and

quality assurance review m echanism s, the initiatives currently u n d er developm ent w ithin the Section should be com pleted and im plem ented as soon as practicable.

14 Examination of Allegations Relating to Sales Tax Fraud

Summary

18. C u sto m s' role in the sales tax fra u d in v e stig a tio n s w as also

exam ined by the ANAO. No evidence w as found to support allegations that there w as a lack of coordination betw een the ATO and Custom s in these p articular cases. The ANAO did find, in one case, th a t C ustom s had m ade a refund paym ent using a m ethod of paym ent that w as contrary to applicable legislative requirem ents.

19. The establishm ent of a N ational Liaison Com m ittee su p p o rted by an MoU that clearly defined roles and responsibilities im proved the coordination arrangem ents betw een the ATO and Customs w ith regard to sales tax. This relationship has strengthened w ith the im plem entation of the N ew Tax System as b o th agencies recognised the im portance of establishing an effective, ongoing partnership that w ould allow a greater exchange of ideas, inform ation and access to the know ledge and resources of the other agency.

20. The ATO and Custom s have developed, and im plem ented, system s and processes for collecting, deferring and processing the GST, LCT and WET. H ow ever, as these system s are in the relatively early stages of im plem entation and changes continue to be m ade to GST processes, they are still being evaluated and refined by both agencies. It is likely to be some m onths before system s im plem entation is finalised, particu larly w ithin the ATO.

Recommendations 21. The ANAO has m ade two recom m endations aimed at im proving the ATO's m anagem ent of fraud investigations. The ATO has agreed w ith both recom m endations.

Planned audit coverage 22. The ANAO will review, as part of the 2000-01 financial statem ent au d it process, the system s and controls w ith in the ATO and C ustom s relating to the GST to the extent necessary to form an opinion on their financial statem ents. As p art of the p lan n ed perform ance A udit Work Program, the ANAO also intends to undertake, in 2001-02, a perform ance au d it of the im p lem entation of the GST th a t w ill focus p rim arily on A ustralian Business N um ber (ABN) registrations. In 2002-03, the ANAO plans to examine GST fraud prevention and control, focusing on external

GST fraud.

1 5

Key Findings

Management of Sales Tax Fraud Cases—Chapter 2

Coordination arrangements 23. M easu res w ere ta k e n b y the ATO an d C u sto m s to im p ro v e

coordination arrangem ents w ith regard to sales tax. Initiatives, such as the establishm ent of the N ational Liaison C om m ittee in February 1997 supported by a M oll th a t clearly defined the roles and responsibilities

of the tw o agencies, created a m ore effective w orking relationship.

Investigating sales tax fraud 24. A n ATO in tern al p a p e r d iscu ssin g an in te g ra te d resp o n se to

serious non-com pliance (including fraud) and an internal review of the SBPIU identified significant problem s w ith the w ay the SBPIU function was operating nationally. The review found that, as a consequence, cases were not being prom oted and investigated for prosecution and that there existed num erous im pedim ents to the referral of cases for investigation. The case m anagem ent system (CaMRA) w as considered to be resource­ in ten siv e an d u n reliab le for th e p ro d u c tio n of tim ely and acc u rate

inform ation. Some doubt w as also expressed as to w hether there w as a total com m itm ent by the SBPIU officers to using the CaMRA system.

25. The A NA O found th a t th ere w as no evidence to indicate th a t

quality assurance review s w ere conducted of STPU prosecution cases. Limited quality assurance review s of the SBPIU undertaken betw een 1995 and 2000 id en tified deficiencies in case m an ag em en t and m o n ito rin g practices.

ANAO’s examination of sales tax fraud cases 26. In addressing the allegations m ade to the Senate Committee, the ANAO sought to determ ine the num ber and verify the status of the sales tax fraud cases handled by the STPU. The ANAO review ed STPU case records from 1996, w hen the CaMRA system w as introduced, until the Unit disbanded in September 1998. SBPIU case records w ere also review ed for th o s e o n g o in g cases th a t w e re h a n d e d o v e r b y the STPU fo r

com pletion.

27. The ATO did n o t h av e a co m p lete reco rd of sales tax fra u d

investigations. Following a search of the H urstville office, the ATO and A N A O in itia lly id e n tified a p o ssib le 124 sales tax fra u d cases. The A N A O 's reconciliation of the CaMRA system entries, case file records and ATO spreadsheets d o cum enting sales tax case files located in the

16 Examination of Allegations Relating to Sales Tax Fraud

Key Findings

H urstville office revealed 33 duplicate case records. Of the 91 sales tax fraud cases review ed by the ANAO, 90 cases w ere investigated by the ATO and one case related to a sales tax refund paym ent made by Customs.

Sales tax cases investigated by the ATO 28. The exam ination of the 90 ATO sales tax frau d cases revealed

that nine cases w ere u n d er investigation; 24 cases h ad been finalised through court action; and 48 cases were considered to w arrant no further action. The status of the rem aining nine cases could not be verified from CaMRA system entries, case file records or discussions w ith ATO case

officers.

29. Of the 24 cases finalised th ro u g h court action, 18 cases h a d a

successful prosecution outcom e. In 48 of the 90 sales tax frau d cases review ed by the ANAO, a decision to take no further action (NFA) had b een m a d e by e ith e r the ATO (37 cases) or th e D irecto r of P u b lic

Prosecution (DPP) (11 cases). For 19 of these cases, the reason given by the ATO w as that the cases w ere too old because they had apparently not been referred to the SBPIU w hen the STPU w as disbanded. At the time, the ATO did not conduct a case file census to determ ine an accurate

case status.

30. The ANAO identified 37 cases that had not been entered into the CaMRA system and their status could only be determ ined by review ing the case files or interview ing case officers. For nine of these cases, their status could not be verified. The ATO w as unable to explain the reasons

for these cases not being recorded in the CaMRA system.

31. The ATO w as u n ab le to locate th e case files for 20 cases. To

determ ine the status of these cases, the ANAO relied on discussions w ith ATO case officers and review ed CaMRA system records. The ANAO also fo u n d th a t som e of th e case files re v ie w e d h a d been 's tr ip p e d ' of

docum entation. The ATO advised that, p rio r to disbanding the STPU, files w ere stripped. Only basic file contents w ere retained and stored in the basem ent of the H urstville office. The ANAO w as inform ed it w as the practice of STPU to retu rn docum entation to the business line that

referred the case for investigation.

32. The ANAO analysed the sales tax cases to determ ine the tim e

ta k e n to co m p le te in v e s tig a tio n s . In fo rm a tio n re la tin g to th e

com m encem ent and finalisation of the investigations could only be found in 60 of the 90 ATO cases review ed. For 24 cases, it took longer than 36 m onths to complete the investigation. Of these 24 cases, three are still being investigated. Tw enty-one cases w ere considered to w arran t NFA

(20 by the ATO and one by the DPP). In one case, the in v estig atio n

continued for almost eight years before the ATO decided the case required NFA. These results suggest that, the longer an investigation continues, the less likely there will be a successful outcome.

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33. The ANAO found little evidence that, p rio r to com m encing an

investigation, any planning or assessm ent w as u n d ertak en by the ATO to determ ine the com plexity of a case or the priority it should be afforded. There w as also little evidence of ongoing participation of team leaders in m onitoring and m anaging the overall progress of STPU or SBPIU cases. The ANAO considers that the review s of case progress should have been more frequent to ensure that the investigating U nits' tim e and resources were being used effectively.

34. The re v e n u e re c o v e re d b y the ATO th ro u g h the su c c e ssfu l

prosecution of the sales tax cases w as only available from CaMRA system entries or case files for 14 out of the 18 successfully prosecuted cases. For these cases, approxim ately $43 100 w as recovered in rem itted sales tax, penalties and fines. Of the rem aining 72 cases review ed by the ANAO, revenue inform ation was only available for 16 cases. Based on the ATO estim ates p ro v id e d in the case files and CaM RA system en tries, the potential revenue involved in these cases is approxim ately $9.6 million, including six ongoing cases w ith an estim ated value of $7.6 million.

Sales tax cases involving Customs 35. C ustom s w as required to refer any cases of suspected sales tax

fraud to the ATO for investigation and prosecution. A lthough Custom s did not participate in the investigation of any of the sales tax cases, it was the referring agency in 11 cases. Of these, four have been finalised th ro u g h court action, four w ere considered by the DPP to req u ire no further action and the rem aining three are currently u n d er investigation by the ATO.

36. The ANAO also exam ined a refund paym ent of $460 027 ($113 002 in c u sto m s d u ty and $347 025 in sales tax) m a d e b y C u sto m s on

24 June 1997. Custom s officers m ade this refund paym ent using a m ethod of p ay m en t th a t w as co n tra ry to applicable leg islativ e requirem ents. A lthough the officers concerned acted on oral advice from their Regional F inance a n d L egal S ections, th is ad v ice w as c o n tra ry to a w ritte n

instruction issued by N ational Office. W hen it becam e apparent that the paym ent had been m ade in an inappropriate m anner, Customs initiated an internal inquiry and sought advice from the C ustom s Legal U nit (CLU). CLU recom m ended that a subm ission be m ade to the M inister for Finance seeking a w aiver of the am ount of custom s d u ty and (subject to the views of the ATO) of sales tax overpaid. Custom s advised that it did not seek a w aiver of the d u ty and sales tax because the validity of the refund itself was not in question, it w as the m ethod of paym ent that w as inappropriate. C ustom s did n o t seek an assurance from the ATO th a t there w ere no

18 Examination of Allegations Relating to Sales Tax Fraud

outstanding taxation debts to w hich the refund m ay have applied until S eptem ber 1998 and a response from the ATO w as not received u n til M ay 1999.

37. C ustom s acknow ledge that the action taken by their officers w as not in accordance w ith legislative requirem ents. In response to a request by th e A N A O , C u sto m s re c e n tly s o u g h t a s s u ra n c e a n d re c e iv e d

confirm ation from all Regional M anagers that no other refunds had been processed in this way.

38. Custom s advise that it is less likely entities w ill seek refunds from C ustom s for the GST p aid on im p o rts. U n d er the N ew Tax System , registered entities are able to claim in p u t tax credits on their Business Activity Statem ent for any GST they have paid at im portation. Details of

all refund paym ents are forw arded to the ATO to verify that the im porter has not claimed an input tax credit as well as a refund of GST from Customs.

Implications for the Goods and Services Tax (GST)—Chapter 3

Communication and education strategies for tax reform 39. The ATO's Tax Reform Business Education and C om m unication (TRBEC) Program team and the Customs Tax Reform Project (CTRP) team dev elo p ed , coordinated and deliv ered com m unication strateg ies and cam paigns for prom oting the N ew Tax System and educating in d u stry stakeholders and agency staff.

Coordination arrangements between ATO and Customs 40. The joint N ational Liaison Comm ittee established un d er the sales tax regim e continued w hen sales tax on im ported goods was replaced by the GST, LCT and WET on 1 July 2000. The N ational Liaison Com m ittee continues to operate u n d er the MoU entered into in June 1997. A new MoU form alising the current arrangem ents is currently being developed. The ATO an d C ustom s envisaged th at the new M oU and su p p o rtin g

schedules will be com pleted by mid-2001.

41. W ith the im plem entation of the N ew Tax System, the ATO and Custom s recognised the im portance of establishing an effective, ongoing partnership arrangem ent that w ould allow a greater exchange of ideas, in fo rm atio n and access to the k n ow ledge and resources of the other

agency. Both agencies consider that th e level of cooperation betw een them has increased and the w orking arrangem ents under the New Tax System are more effective than they w ere under the sales tax regime.

19

Process for collecting/deferring payments on imported goods 42. The ATO and Custom s are cognisant of their respective roles and responsibilities in relation to the GST, LCT and WET and have developed a fram ew ork for collecting, d eferring and processing these taxes. This fram ew ork includes the capability to exchange and validate data across agencies. It also incorporates a num ber of controls and integrity checks to e n s u re th a t the a p p ro p ria te taxes are c o lle c te d by C u sto m s on

im p o rta tio n o r re m itte d to th e ATO th ro u g h th e B usiness A ctiv ity Statement. D uring this early phase of im plem entation and, as processes re la tin g to th e GST c o n tin u e to ch an g e, th e ATO an d C u sto m s are

continually review ing these system s and processes and refining them as necessary.

Framework for Managing GST Fraud—Chapter 4 43. The F ra u d In tellig en ce S ection h as im p le m e n te d a sse ssm e n t

procedures and processes for selecting and p rio ritisin g all fraud cases p rio r to re g is te rin g th e case on the case m a n a g e m e n t sy stem a n d

fo rw arding it to the a p p ro p ria te ATO frau d region for investigation. C entral reg istra tio n of frau d cases should ad d ress the problem of all cases not being registered on the case m anagem ent system , as w as noted for a num ber of the sales tax fraud cases review ed by the ANAO.

44. The ATO Fraud Section has developed and im plem ented a case m anagem ent fram ew ork that incorporates: the assessm ent and allocation of cases by the regional m anager or assessm ent panel; feedback to the referring area, officer or agency; and the p la n n in g and conducting of investigations in accordance w ith the ATO's Statem ent of Investigation S ta n d a rd s a n d P ro c e d u ra l G u id e lin e s c u rre n tly b e in g d e v e lo p e d . H ow ever, u n til these s ta n d a rd s an d g u id e lin e s are p u b lis h e d an d

im plem ented, and appropriate training provided, fraud investigators have only lim ited guidance on how to properly undertake and m anage fraud investigations. Consequently, u n til such action is taken, there could be an elem ent of inconsistency in the w ay investigations are conducted across ATO fraud regions. M easures to ensure that investigations are com pleted w ithin a reasonable timefram e, and the im plem entation of the proposed quality assurance review program , will also im prove case m anagem ent practices.

45. The case m anagem ent system used by the ATO Fraud Section has the potential to address the deficiencies identified w ith the CaMRA system w hen proposed system developm ents are com pleted and the system is fully operational.

20 Examination of Allegations Relating to Sales Tax Fraud

R ecom m endations

Set out below are the ANAO 's recommendations aimed at improving the ATO's management of fraud investigations. Report paragraph references and abbreviated ATO responses are also included. More detailed responses are shown in the body

of the report.

Recommendation

No.1 Para. 2.74

To ensure the effective use of investigation resources and in fairness to the taxpayers involved in fraud investigations, the ANAO recom m ends that the ATO Fraud Section finalise, as expeditiously as possible,

all ongoing sales tax fraud cases, w ith priority given to those cases that have b een u n d er investigation for m ore than two years.

ATO response: Agreed.

Recommendation No.2 Para. 4.75

To e n su re th a t cases of a lle g e d fra u d are b ein g

a d e q u a te ly in v e stig a te d a n d th a t th e in itia tiv e s im p le m e n te d by th e ATO F ra u d S ectio n are

facilitating the effective m anagem ent of these cases, the ANAO recom m ends that the ATO Fraud Section com plete a post-establishm ent review w ithin the next 12 m o n th s. This re v ie w s h o u ld fo cu s o n th e

follow ing areas:

• case m anagem ent fram ew ork;

• in v e s tig a tio n s ta n d a r d s an d p r o c e d u ra l

guidelines;

• the quality assurance review program ;

• training program ; and

• case m anagem ent system.

ATO response: Agreed.

21

22 Examination of Allegations Relating to Sales Tax Fraud

Audit Findings and Conclusions

24 Examination of Allegations Relating to Sales Tax Fraud

1. Introduction

This chapter outlines the background to the examination and provides an overview of sales tax and the New Tax System. It also sets out the objectives and scope of the examination and structure of this report.

Background to examination 1.1 O n 24 June 1998, the Senate referred to the Senate Econom ics

References C om m ittee for in q u iry the m atter of the o p eratio n of the A ustralian Taxation Office (ATO) w ith particular reference to:

• the equitable treatm ent of taxpayers;

• the perform ance of the L arge Business and International D ivision, including, in particular, the H igh Wealth Individual Project;

• com pliance by the ATO w ith the Client Settlem ent Guidelines; and

• allegations of infiltration of the ATO by organised crime.7

1.2 The inquiry h a d its origins in th e Sunday television p ro g ra m

screened by the Nine netw ork in mid-1998. The Com m ittee conducted n in e h e a rin g s w hich in c lu d e d a sig n ifican t p ro p o rtio n of in camera evidence,8 reflecting the sensitivity of the subject m atter of the inquiry.

1.3 Allegations h ad been m ade to the Com m ittee that the ATO and A ustralian Customs Service (Customs) had failed to pursue several cases of detected sales tax fraud, resulting in the loss of several m illion dollars of C om m onw ealth revenue. The C om m ittee believed that this alleged

failure m ay have stem m ed from coordination problem s betw een the two ag en c ies. E v id en ce b efo re th e C o m m ittee also su g g e s te d th a t the introduction of the N ew Tax System could potentially increase, rath er than dim inish, the risk of this type of fraud.

7 Report of the Senate Economics References Committee, Inquiry into the Operation of the Australian Taxation Office, March 2000, Parliament of the Commonwealth of Australia, p. 1.

8 Most Committees are empowered to hear evidence in public or in private. By hearing evidence in private and agreeing to orders forbidding publication of the evidence, a Committee may inform itself fully on an issue and, at the same time, minimise any risk arising from the publication of evidence. Of the 21 separate witnesses who gave evidence to the Committee, 11 gave their evidence in camera. A proportion of the ATO’s evidence was also taken in camera.

25

1.4 The Com m ittee published its report Inquiry into the Operation of the Australian Taxation Office in M arch 2000 concluding that, on the balance of evidence subm itted, it considered that the Sunday program allegations w ere largely w ith o u t substance. In its rep o rt, the C om m ittee advised the S enate th a t it w as re q u e s tin g the A u d ito r-G e n e ra l to c o n sid e r

in v e s tig a tin g a m a tte r in v o lv in g p o s s ib le fra u d a g a in s t th e

Com m onw ealth and reporting his findings to the Parliament. The Chair of the Com m ittee, Senator M urphy, w rote to the A uditor-G eneral about the C om m ittee's request on 23 M arch 2000.

1.5 The Committee considered it appropriate that the ANAO examine the substance of the allegations and report back to the Parliam ent. The A NA O h ad id e n tified c o o rd in a tio n p ro b lem s b etw ee n the ATO and C ustom s in ANAO A u d it R eport No. 20 1997-98 Sales Tax— Australian Taxation Office. After m eeting w ith the C om m ittee an d its S ecretariat, re v ie w in g tra n s c rip ts a n d b a c k g ro u n d m a te ria l an d in te rv ie w in g witnesses, the A uditor-G eneral agreed, on 19 October 2000, to undertake an exam ination of the m atters requested by the Committee.

1.6 The In q u iry w itn e sse s re q u e s te d th a t th e ir id e n titie s n o t be

disclosed and the ANAO w as asked to strictly lim it circulation of the evidence provided by the w itnesses to the Com m ittee. This evidence is protected by Parliam entary Privilege.9 The ANAO agreed to take every precaution to safeguard inform ation provided by the w itnesses in camera and the confidentiality of the w itnesses appearing before the Inquiry.

Collection of sales tax 1.7 U nder the sales tax legislation, the ATO had overall responsibility for collecting, m o nitoring an d rep o rtin g sales tax revenue. The ATO provided C ustom s w ith ap p ro p ria te delegations, as w ell as legislative and p rocedural inform ation to adm inister the collection of sales tax at im portation.10 In 1999-2000, the ATO collected $15.5 billion in sales tax and Custom s collected $831 m illion.11

9 Under the Parliamentary Privileges Act 1987, the giving of evidence and the production of documents by a witness has the same legal status as a Senator’s participation in Senate proceedings, and therefore attracts the very wide protection which is given to proceedings in Parliament against prosecution, suit, examination or question before any court or tribunal. The action of a witness in giving evidence and producing documents and the evidence given therefore cannot be used against the witness in any sense in subsequent proceedings before a court or tribunal.

10 Under section 8 of the Taxation Administration Act 1953, the Commissioner of Taxation delegated certain responsibilities to Customs for collecting sales tax revenue.

11 Commissioner of Taxation Annual Report 1999-2000, Commonwealth of Australia, p. 4.

26 Examination of Allegations Relating to Sales Tax Fraud

Introduction

1.8 In February 1997, the ATO and C ustom s established a N ational Liaison Com m ittee to ensure a m ore effective w orking relationship. To formalise this joint Com m ittee and establish a fram ew ork for im proving the relationship betw een the tw o agencies, the ATO and Custom s entered into a M em orandum of U nderstanding (MoU) in June 1997.

1.9 The ATO is structured around clients grouped into Business and Service Lines. The adm inistration of sales tax w as the responsibility of the W ithholding Tax (WHT) Business Line. From 1 M arch 1999, the WHT Business Line was abolished and many of its responsibilities, including the adm inistration of sales tax, w ere transferred to the Small Business

(SB) Business Line. W hen sales tax was replaced by the Goods and Services Tax (GST) on 1 July 2000, responsibility for sales tax m atters w as assum ed by the new ly created GST Business Line.

Overview of Wholesale Sales Tax 1.10 S ales tax, a lso k n o w n as w h o le s a le s a le s tax (W ST), w as

in tro d u ced into A u stralia in 1930.12 It w as a tax on goods th a t w ere m anufactured in, or im ported into, A ustralia. G oods that w ere for use in m in in g , p rim a ry p ro d u c tio n or m a n u fa c tu re -re la te d activ ities w ere generally exem pt as w ere some other goods (e.g. building m aterials, m ost

food and clothing, printed m atter and goods for use by sales tax exem pt bodies).

1.11 The broad aim of th e sales tax le g islatio n w as to tax the last

'w holesale' sale of goods (usually the sale from the w holesaler to the retailer). A lthough the m ost com m on taxing point w as a w holesale sale, sales tax law also applied in other circum stances. For example, sales tax could also be payable if the m a n u fa c tu re r so ld the goods by retail;

arranged to lease the goods; or used the goods instead of selling them. A system of credits dealt w ith (am ong other things) situations w here sales tax became payable m ore than once on the same goods. The law provided a 'q u o tin g '13 system designed to avoid tax being payable on earlier sales.

12 The legislation was rewritten and reorganised in 1992 to reduce its volume, replace obscure provisions and produce a more logical legislative framework expressed in plain English. The new legislation was known as the Streamlined Sales Tax (SST) legislation and consists of the following core Acts: Sales Tax Assessment Act 1992; Sales Tax (Exemptions and Classifications) Act

1992; and Sales Tax Amendment (Transitional) Act 1992. Acts which formally impose sales tax (and are separate Acts for constitutional reasons) are Sales Tax Imposition (Customs) Act 1992, Sales Tax (Excise) Act 1992 and Sales Tax Imposition (General) Act 1992.

13 A person who ‘quotes’ their sales tax number (or an exemption declaration) did not pay sales tax on the goods they were acquiring. The law contained a precise set of rules detailing when exemption could be claimed by quoting.

27

The New Tax System 1.12 From 1 July 2000, sales tax was replaced by the GST. In addition to the GST, a Luxury Car Tax (LCT) and W ine Equalisation Tax (WET) were also introduced to offset the abolition of sales tax on those items. For the ATO, this has m eant im plem enting a com prehensive program of reform w ith the associated requirem ents of developing new system s and operational processes, changes to organisational structures, and alliances w ith o th er agencies. The ATO is cu rre n tly o p e ra tin g in a co n stan tly c h a n g in g e n v iro n m e n t as p ro c e s s e s a n d s y ste m s re la tin g to th e

introduction of the GST are refined.

Goods and Services Tax 1.13 A key elem ent to the G overnm ent's indirect tax reform strategy was to introduce the GST, w hich is a broad-based indirect tax, to replace WST and a num ber of State in d irect taxes. The GST14 taxes the private consum ption of most goods, services and the provision of inform ation. GST is payable on most goods im ported into A ustralia by both businesses and p riv ate in d iv id u als, reg ard less of w h eth er they are registered for GST. Fiowever, if an en tity is registered and im ports goods for use in the enterprise for a creditable purpose, it is able to claim an in p u t tax credit for any GST p a id on th e im p o rtatio n . R egistering for the GST effectively requires applying for an ABN.15 The GST does not apply to co n su m p tio n outside A u stra lia , an d consequently, does not a p p ly to exports.16 A ppendix 1 outlines an exam ple of how the GST operates.

1.14 The ATO is responsible for m anaging the legislation, policy and adm inistration concerning taxable supplies and C ustom s is responsible for calculating and collecting GST on im ported goods, and adm inistering all m atters concerning taxable im portations. The GST is 10 per cent of

14 A New Tax System (Goods and Services Tax) Act 1999 provides for the GST to be levied upon the taxable supply of goods and sen/ices, and the taxable importations of goods.

15 The ABN is the new single identifier for business and a key element of the new tax system framework. To be entitled to an ABN, businesses must be a company registered under corporations law in Australia, a government agency or department, or an entity carrying on an enterprise in Australia.

16 Tax Reform not a new tax a new tax system, The Howard Government’s Plan for a New Tax System August 1998, AGPS, p. 80.

28 Examination of Allegations Relating to Sales Tax Fraud

Introduction

the value17 of a taxable im portation.18 GST will norm ally be payable to Customs at the time im ported goods are entered for home consum ption, that is, w hen Customs releases them for use in A ustralia. Subject to certain eligibility criteria and approval by the ATO, im porters who are registered for GST m ay defer the paym ent of GST on im ported goods through the Deferred GST Scheme. It is estim ated that $10.5 billion, of a total GST liability of $12.5 billion on im ported goods, will be deferred in 2000-01. Exported goods are GST-free.

Luxury Car Tax 1.15 LCT w as in tro d u ced on 1 July 2000 to replace the 45 p er cent

sales tax previously levied on luxury cars and is in addition to any GST payable. Cars with a GST-inclusive value above the LCT threshold19 are subject to LCT. The LCT rate is 25 per cent and no input tax credit is available for LCT. The LCT is rem itted to the ATO, or collected by Custom s on im portation, unless im porters 'quote' their ABN to defer paym ent of the LCT until the luxury car is sold.20 The estim ated revenue from LCT is $180 m illion per annum in the first year (2000-01) and $200 m illion in subsequent years.

Wine Equalisation Tax 1.16 WET replaced the 41 per cent sales tax on wine. WET is a value- based tax of 29 per cent on all sales, im p o rta tio n s and certain other

dealings w ith wine m ade on or after 1 July 2000. The ATO adm inisters and collects WET for the A u stra lia n d om estic m ark et an d C ustom s adm inisters and collects WET on im ports. WET on im portations m ay be deferred if im porters 'qu o te' their ABN21 as WET is paid on the value of the goods at the last w holesale sale, or an equivalent value w hen there is no w holesale sale. Exports of w ine are not subject to WET. The estim ated

revenue from WET is $530 m illion per annum .

17 The value of a taxable importation is the sum of: the customs value of the goods; any customs duty payable; the amount paid or payable to transport the goods to the port or airport of final destination in Australia; the insurance cost for that transport; and any wine equalisation tax payable.

18 A taxable importation is made if goods are imported and entered for home consumption (within the meaning of the Customs Act 1901).

19 The LCT threshold for 2000-01 is $55 134.

20 The circumstances in which a person can quote their ABN for a supply or importation of a luxury car and not pay the LCT are set out in Division 9 of the Luxury Car Tax Act 1999.

21 Section 13-5 of the Wine Equalisation Tax Act 1999 outlines the grounds for quoting an ABN to defer payment.

29

Investigating fraud within the ATO

Sales tax fraud 1.17 The d e te c tio n an d id e n tific a tio n of m a tte rs of s e rio u s n o n ­

com pliance (including fraud) relating to sales tax w ere the responsibility of the form er W ithholding Tax (WHT) Business Line.22 M atters of sales tax fraud and serious non-com pliance could also be referred to WHT for investigation by other business lines, external agencies or law enforcem ent bodies.

1.18 A specialised Sales Tax Prosecution U nit (STPU) located in the H urstville office was established in 1989 to investigate and assist in the prosecution of cases of sales tax fraud id en tified by the WHT Eastern and S o u th ern regional offices. For cases of p o te n tia l sales tax fra u d identified in other regions, the Small Business Prosecution Investigation Unit (SBPIU) undertook the investigations.

GST fraud

1.19 In A u g u st 2000, the SBPIU was in teg rated w ith the GST F raud Section to becom e the ATO F rau d Section. The ATO Fraud Intelligence Section, w hich had been p a rt of the GST F raud Section, was established as a separate section in Septem ber 2000. The com bined roles of the ATO Fraud Intelligence Section and the ATO F raud Section are to m inim ise the risk of external fraud to the ATO through the prevention, detection and in v e stig atio n of all p o te n tia l fra u d u le n t activ ities rela tin g to all business taxes, including the GST.

Examination objective, scope and methodology

Examination objective

1.20 The objective of th is e x a m in a tio n w as to in v e stig ate m a tte rs

relating to:

• allegations m ade to the Senate Economics References Comm ittee that the ATO and Customs failed to pursue several cases of detected sales tax fraud;

• the coordination arrangem ents betw een the ATO and Customs; and

• w hether any issues arising from these m atters h ad been addressed in im plem enting the GST.

22 On 1 March 1999, the WHT Business Line ceased to exist and its responsibilities, including the administration of sales tax, were transferred to the Small Business (SB) Business Line. On 1 July 2000, GST replaced sales tax and responsibility for its administration was assumed by the newly created GST Business Line.

30 Examination of Allegations Relating to Sales Tax Fraud

Introduction

Examination scope 1.21 E vidence b efo re th e C o m m ittee su g g e ste d th a t th e A N A O 's examination should focus on cases handled by the ATO's New South Wales STPU, located at the ATO H urstville office. Follow ing an internal ATO review, this Unit w as disbanded in Septem ber 1998 and ongoing cases were transferred to the H urstville SBPIU.

1.22 The ANAO exam ination focused on the following:

• the arrangem ents in place to coordinate activities betw een the ATO an d C u sto m s for sales tax an d th e ro le C u sto m s p la y e d in the

investigation of the sales tax fraud cases,23 th a t is, w hether it w as a referring agency only, or participated in the fraud investigation; and

• the ATO's m anagem ent of the sales tax fraud cases being investigated by the STPU and the current status of those cases, including specific cases cited as exam ples during the Senate Inquiry to highlight concerns about sales tax fraud investigations.

1.23 To determ ine w hether issues arising from the sales tax m atters had been adequately addressed w hen im plem enting the GST, the ANAO also review ed:

• the coordination arrangem ents betw een the ATO and C ustom s and system s and processes for c o lle c tin g /d e fe rrin g GST on im p o rte d goods; and

• the fram ew ork w ith in the ATO for detecting and investigating GST fraud.

1.24 As the GST w as in tro d u c e d in July 2000 and the ATO F rau d

Section established in A ugust 2000, it w as considered too early to fully assess the effectiveness of these new system s and processes as, in some instances, they are still being im plem ented and refined.

Examination methodology 1.25 The m ethodology adopted was a com bination of quantitative and qualitative analysis, file /d o c u m e n ta tio n review s and interview s w ith agency officers. To determ ine the ongoing sales tax cases transferred by the STPU, the ANAO accessed the STPU com ponent of the ATO case m anagem ent system (CaMRA). Com ponents of the CaMRA system used by the tw o SBPIU team s w ere also exam ined to ascertain the cu rren t

status of these ongoing cases. Available case files w ere reviewed to verify the CaMRA database records. The ANAO exam ination did not extend to an assessm ent of the potential fraudulent activity subject to investigation.

23 Customs was required to refer any cases of suspected sales tax fraud to the ATO for investigation and prosecution.

31

1.26 The exam ination w as conducted in accordance w ith the ANAO A uditing Standards at a total cost of $285 412.

1.27 The ANAO w ould like to express its appreciation to the ATO and C ustom s m anagem ent and staff for their valuable assistance w ith the conduct of this examination.

Structure of report 1.28 The rep o rt has been s tru c tu re d to ad d ress the objective of the

exam ination. C hapter 2 outlines the coordination arrangem ents betw een the ATO and Custom s for sales tax and contains analyses of the sales tax frau d cases in v estig ated b y the STPU and tra n s fe rre d to the SBPIU. C hapter 3 exam ines the system s and processes for collecting/deferring the GST on im portations. C h ap ter 4 review s the ATO's fram ew ork for detecting and investigating GST fraud.

32 Examination of Allegations Relating to Sales Tax Fraud

2. M anagem ent of S ales Tax Fraud C ases

This chapter discusses the arrangements between the ATO and Customs for collecting and refunding sales tax and the ATO's management of the sales tax fraud cases investigated by the Sales Tax Prosecution Unit and the Small Business Prosecution Investigation Unit. It also outlines the lessons to be learnt for future fraud investigations.

Introduction 2.1 A llegations w ere m ade to the Senate Inquiry that the ATO and

Custom s had failed to pursue several cases of detected sales tax fraud, resulting in the loss of several m illion dollars of Com m onw ealth revenue. The Com m ittee believed that this alleged failure m ay have stem m ed from coordination problem s betw een the two agencies.

2.2 The ANAO exam ined the arrangem ents betw een the ATO and Custom s w ith regard to sales tax and the m easures in place w ithin the ATO for m anaging sales tax fraud cases.

2.3 To determ ine the status of the sales tax fraud cases, the ANAO

review ed the cases handled by the STPU from 199624 until the U nit was disbanded in September 1998 and the ongoing cases that were transferred to the tw o SBPIU teams. The ANAO also identified those cases Custom s had referred to the ATO for investigation and sought to determ ine the role, if any, Customs had played in the subsequent investigation of those cases.

Background to Sales Tax

Sales tax process in ATO 2.4 U nder the sales tax legislation, the ATO had overall responsibility for collecting, m onitoring and reporting sales tax revenue. To determ ine

their liability for sales tax, taxpayers follow ed a basic self-assessm ent process and paid the ATO accordingly.25

24 Cases investigated prior to 1996 were reviewed by the ANAO, however, a number of these were not entered into the CaMRA case management system as the CaMRA system was introduced to the Hurstville STPU in 1996.

25 The self-assessment process for sales tax involved determining whether the acquired goods were subject to tax, whether a taxable transaction was involved in acquiring the goods, and then calculating the resulting tax liability. Most sales tax was paid by taxpayers on a monthly basis, or on a quarterly basis if their sales tax liability for the previous financial year was less than a statutory amount.

33

2.5 The legislation provided a 'quoting' system that w as designed to avoid sales tax becom ing payable on sales earlier than the last wholesale sale of the g o o d s. An o p tio n a l re g is tra tio n sy stem en ab led p erso n s engaged in certain businesses (e.g. m anufacturers, w holesalers, indirect m arketers) to apply for registration. If a business w as registered, it could quote its re g is tra tio n n u m b e r to p u rch ase m o st goo d s for use in its

business free of sales tax.26 To claim sales tax credits, taxpayers lodged an application w ith the ATO and claim ed the credits as a refund or had the credits deducted from their tax liability w hen lodging their tax return.

Sales tax process in Customs

2.6 The ATO d ele g a te d re s p o n s ib ility for c o llectin g sales tax on

im ported goods and, in certain cases, exported goods to Custom s.27 The ATO assisted C ustom s to adm inister the collection of sales tax through a num ber of su p p o rt m echanism s that included:

• p r o v id in g a d e q u a te tr a in in g fo r C u sto m s o ffic e rs in v o lv e d in

adm inistering and collecting sales tax;

• p ro v id in g in fo rm atio n tech n o lo g y s u p p o rt for C u sto m s' sales tax systems; and

• m aintaining links betw een the ATO and Custom s via liaison officers.

2.7 A ccording to the sales tax legislation, im ported goods subject to sales tax w ere to be correctly entered and the am o u n t of revenue due (customs duty and sales tax) either paid, or w here appropriate, deferred. The appropriate sales tax rate28 w as applied to the taxable value (customs value plus custom s duty) and the Custom s COMPILE system calculated the taxable value and applied the m ethod of acquittal ie., paym ent on entry, quotation of a Sales Tax R egistration N um ber (STRN), or claim for exem ption.

2.8 C ustom s u n d erto o k its resp o n sib ilities for collecting sales tax w ithin a self-assessm ent environm ent. This m eant that assurance in respect of the m ajority of the im p o rt/e x p o rt population w as gained through p o st­ transaction com pliance activity. To satisfy its responsibilities and reduce s a le s tax c o m p lia n c e ris k , C u s to m s d e v e lo p e d a n u m b e r of ris k

m anagem ent param eters w ithin w hich it carried out its functions. Customs functions relating to sales tax are outlined in A ppendix 2.

26 Australian Taxation Office, 1999, Taxation Statistics 1997-98 pp. 100-103; CCH Australia Ltd 1998, Australian Master Tax Guide 1998 pp. 1426-1430.

27 The responsibilities delegated by the ATO to Customs involved powers and functions in relation to the Sales Tax Assessment Act 1992, including the administration of sales tax related penalties.

28 The sales tax rates ranged from 12-45 per cent, depending on the goods.

34 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Coordination arrangements between ATO and Customs 2.9 The ANAO exam ined the coordination arrangem ents betw een the ATO and C ustom s in relatio n to sales tax in the au d it of Sales Tax— Australian Taxation Office undertaken in 1997. This audit found that there w as significant scope for im provem ent in the coordination betw een the tw o agencies.

National Liaison Committee 2.10 The ATO and C u sto m s e sta b lish e d a jo in t N atio n a l L iaison

C o m m itte e in F e b ru a ry 1997 to e n s u re a m o re effectiv e w o rk in g

re la tio n s h ip b etw ee n th e tw o agencies. The C o m m itte e 's te rm s of reference w ere to:

• focus on strategic aspects of the ATO / Customs relationship and m onitor overall progress on issues of m utual interest;

• o v ersee th e p ro g ress of th e A T O /C ustom s w o rk in g g ro u p s 29 and a d d re s s issu e s a ris in g fro m th e se g ro u p s re q u irin g h ig h le v e l

resolution; and

• p repare a brief annual rep o rt on progress, achievem ents, m ilestones and outstanding issues.

Memorandum of Understanding 2.11 To formalise the A TO /C ustom s Liaison Comm ittee and establish a fram ew ork for im proving the relationship betw een the tw o agencies, the ATO and Customs entered into a MoU in June 1997. In addition to

d e fin in g th e re s p o n s ib ilitie s of each ag en cy in a d m in is te rin g an d

collecting sales tax on im ported goods, the MoU set out an agreem ent for regular liaison and m utual cooperation on sharing inform ation and coordinating compliance activities.

2.12 A n A T O /C u sto m s lia is o n n e tw o rk w as also e s ta b lis h e d to

coordinate and m anage liaison at the regional operational level and, in Ju n e 1998, th e N a tio n a l L iaiso n C o m m ittee e n d o rs e d a Roles an d R esponsibilities Paper that o u tlin ed the agencies' agreed ap proach to

adm inistering sales tax on im ports and exports.

29 Joint working groups were established for specific projects and to address operational and other issues and were required to report back to the Committee on their findings and recommendations.

35

2.13 As the S enate Econom ic References C om m ittee req u ested the ANAO to exam ine the arrangem ents betw een the ATO and Customs for handling sales tax cases, the ANAO exam ined the role played by Custom s in the sales tax cases. As all cases of su sp e c te d sales tax fra u d are

investigated by the ATO, the exam ination by the ANAO focused on the ATO's m anagem ent of fraud. O ne m atter relating to a sales tax refund paym ent m ade by Customs is discussed later in this chapter.

ATO environment for managing fraud cases

ATO Compliance Model and prosecution function 2.14 The Com pliance M odel is the ATO's fram ew ork for a structured approach to im proving taxpayer com pliance and dealing w ith taxpayer n o n -c o m p lia n c e . The ATO e n d e a v o u rs , th ro u g h its c o rp o ra te a n d business-planning processes, to m anage taxpayer/client relations w ithin the param eters established by the Com pliance M odel. The Compliance M odel seeks to e n su re th a t ta x p a y e rs are tre a te d c o n siste n tly and

appropriately.30

2.15 The Com pliance M odel, illustrated in Figure 1, acknow ledges that the m ajority of taxpayers com plies voluntarily w ithout the need for ATO intervention. Some will not com ply in the first instance b u t will, eventually, if given further prom pting. A small proportion w ill not com ply and may need enforcem ent action through such m easures as investigation and, in some instances, prosecution.

30 Australian Taxation Office, October 1999, Command Regulation: The Prosecution Investigation Function, p. 26.

36 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Figure 1 ATO Compliance Model

Disengagement Command Regulation

(Non-discretionary)

'rosecutiont

Resistance Command Regulation

> (Discretionary) Audit with / without penalty

Enforced Self-Regulation Capture Real Time Business \ Examinations / Record Keeping Reviews

Managerial Accomodation

Self Regulation

Education/ \

/ Record Keeping / Service Delivery \ (convenience, access, choice control)'

ENFORCEMENT STRATEGIES REGULATORY STRATEGIES

MOTIVATIONAL POSTURES

Source: Australian Taxation Office 1998, Cash Economy Task Force Report, p. 25

2.16 The ATO p ro s e c u tio n p ro c e ss in c lu d e s th e fo llo w in g th re e

elem ents:

(i) the detection and identification of possible offences;

(ii) the investigation of the offences; and

(iii) the preparation for court and advocacy.

Relationship between serious non-compliance and fraud 2.17 The 1994 F raud C ontrol Policy of the C om m onw ealth defines frau d as inducing a course of action by deceit or other dishonest conduct, involving acts or omissions or the making of false statements, orally or in writing, with the object of obtaining money or other benefit from, or of evading a liability

to, the Commonwealth,31

31 Commonwealth Law Enforcement Board, Best Practice for Fraud Control—Fraud Control Policy of the Commonwealth, AGPS, Canberra p. 3. This definition includes monetary gain and any benefit that could be gained from the Government, including intangibles, such as ‘rights’ of entry to the country, documentation conferring identity, and information. The Commonwealth Fraud

Control Policy and Guidelines— Consultation Draft No. 2, April 2001 defines fraud against the Commonwealth as: Dishonestly obtaining a benefit by deception or other means. This definition includes: theft; obtaining property, a financial advantage or any other benefit by deception; causing a loss, or avoiding or creating a liability by deception; providing false or misleading information, or failing to provide information where there is an obligation to do so; making, using or possessing forged or falsified documents; bribery, corruption or abuse of office; unlawful use of Commonwealth computers, vehicles, telephones and other property or services; bankruptcy offences; and any offences of a like nature to those listed above. The benefits referred to can be either tangible or

intangible.

37

2.18 The ΑΤΟ uses serious non-com pliance as an over-arching and flexible term to encom pass the w ide variety of activities that constitute serious non-com pliance by taxpayers th at are reflected in the Compliance Model. The ATO considers fraud is an activity that can fall w ithin the classification of serious non-com pliance. However, it can also fall outside of it.32 In this regard, external fraud is covered by the Crimes Act 1914, w hereas serious non-com pliance relates to a failure to com ply w ith the Taxation Acts. Essentially, fraud encom passes m atters that are dealt w ith by in v e stig atio n an d p ro secu tio n action; m a tte rs th a t are dealt w ith

through audit activity or other civil or adm inistrative rem edy are issues of (serious) non-com pliance. T hroughout this report, the cases referred to relate to external fraud.

Investigating sales tax fraud 2.19 The d e te c tio n an d id e n tific a tio n of m a tte rs of serio u s n o n ­

compliance (including fraud) relating to sales tax w ere the responsibility of the form er WHT Business Line. M atters of sales tax fraud and serious non-com pliance could also be referred to WHT by other business lines, external agencies or law enforcem ent bodies.

2.20 The STPU w as established in 1989 and located in the H urstville office to investigate and assist in the prosecution of cases of sales tax fraud identified by the WHT Eastern and Southern regional offices. Cases of potential sales tax fraud identified in other regions w ere undertaken by the SBPIU.

2.21 W ith the exception of the sales tax m atters referred to STPU, the SBPIU conducted the investigation of offences id en tified by the WHT B usiness Line. In a d d itio n to in v e stig a tiv e w o rk , SBPIU staff also conducted a range of other activities including the preparation of briefs of evidence for prosecution cases. SBPIU officers o p erated in team s of varying sizes and w ere located at a num ber of ATO regional offices.

Sales Tax Prosecution Unit 2.22 The STPU investigated non-com pliance w ith sales tax law and related sections of the Taxation A dm inistration Act, the Crimes Act, and several other Acts. The investigation process included preparing briefs of evidence to support prosecution action undertaken by ATO in-house p ro secu to rs and the DPP; liaisin g w ith the AFP, C u sto m s and o th e r ex tern al agencies; an d p ro v id in g technical ex p ertise on p ro secu tio n related m atters to staff in the WHT Business Line.

32 Serious non-compliance by a taxpayer or group of taxpayers could be dealt with by a number of options such as industry education, arbitrary administrative penalty, audit and administrative penalty, or referral to the DPP for prosecution action.

38 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

2.23 In M ay 1998, a review w as conducted of the STPU to determ ine the potential benefits and draw backs of closing the unit and transferring its responsibilities to the H urstville SBPIU teams. According to the review, there w ere some com pelling argum ents for continuation of the STPU as a separate prosecution team .33 The review also identified a num ber of risks associated with transferring the sales tax w orkload to SBPIU, each of w hich had contributed to an overall concern that the SBPIU m ight not be capable of coping w ith the added w orkload.34

2.24 D espite these concerns, the review recom m ended that the STPU be d isb a n d e d and its resp o n sib ilities for sales tax pro secu tio n cases transferred to the H urstville SBPIU. The m ain reasons for this decision

in c lu d e d : e s ta b lish m e n t of a sin g le lin e of co n tro l over the A TO 's

p ro se c u tio n function; re d u c tio n in case m an ag em en t problem s; and greater consistency in decision-m aking, procedures, training and quality assurance. The STPU w as disbanded in Septem ber 1998 and the sales tax

prosecution cases that the U nit had been investigating were transferred to the tw o H urstville SBPIU teams.

Small Business Prosecution Investigation Unit (SBPIU) 2.25 SBPIU was set up in the late 1980s to investigate acts of serious non-com pliance under the provisions of the Taxation Administration Act 1953 and the Income Tax Assessment Act 1936. In 1999 and 2000, two internal reviews exam ined, am ong other issues, the perform ance of the SBPIU in m anaging investigations relating to m atters of potential fraud and serious non-com pliance.

Contestability Review of SBPIU 2.26 F rom M arch to O c to b e r 1999, a te a m of fo u r ATO o fficers

u n d erto o k a C ontestability Review of the SBPIU. The review covered five major ATO offices, including H urstville, and focused on case selection and investigation processes, other issues necessary to support a crim inal investigation, the provision of client services and the continuing capacity of the U nit to perform efficiently and effectively.

33 For example, due to its visibility within the Hurstville office, the STPU generated more frequent referrals about possible offences. Also, the review noted a preference among some WHT officers for dealing with STPU staff over SBPIU staff and the easy accessibility of STPU officers for dealing with urgent matters.

34 These risks included complaints by WFiT staff concerning past difficulties in having cases actioned by SBPIU staff. This issue had been a major factor in previous decisions to retain the STPU and staff reductions in the SBPIU.

39

2.27 The review team's overall findings indicated th at there were some significant problem s with the w ay that SBPIU was operating nationally. E vidence in d ic a te d th a t th e U n it w as flo u n d e rin g u n d e r reso u rce constraints, poor coordination an d com m unication betw een separate te am s, in a d e q u a te in fo rm a tio n sy stem s an d an u n c o o rd in a te d ,

in co n sisten t n atio n al ap p ro ac h to the selection an d m an ag em en t of prosecution cases. Consequently, it was found that there were cases not being prom oted and investigated for prosecution and that there existed num erous im pedim ents to referral of cases for investigation.35

2.28 The review 's recom m endations addressed m atters considered to be key im pedim ents to the efficiency and effectiveness of the SBPIU function and included:

• lack of an effective quality assurance program ;

• lack of consistent case planning and docum entation of files;

• in c o n siste n t p ra c tic e s s u rro u n d in g case s e le c tio n an d se c u rity

classification of files;

• inadequate com pletion of referral forms; and

• inefficient practices co n trib u tin g to high n u m b ers of 'N o F u rth er Action' (NFA) cases.

ATO’s integrated response to serious non-compliance 2.29 An internal ATO paper,36 produced in A pril 2000, identified options for achieving a m ore integrated approach to dealing w ith serious non­ com pliance m atters. The paper also discussed problem s relating to the ATO's m anagem ent of serious non-com pliance (including fraud). This paper noted that the more significant im pedim ents to the prevention of,

and reaction to, serious acts of non-compliance included:

• lack of m eaningful outcomes and m easures to focus activities;

• no n a tio n ally co n sisten t m e asu re s to id e n tify ATO effectiveness, quantify risk and analyse overall trends in serious non-compliance;

• no national system for budgeting and recording such factors as the num ber of serious non-com pliance cases on hand, num ber actioned, cycle times, total ATO resources deployed, unit costs, etc.;

• serious non-compliance being dealt with on an ad hoc, discretionary, reactive and fragm ented basis;

35 Australian Taxation Office, Command Regulation: The Prosecution Investigation Function, op. cit., pp. 20-22.

36 Australian Taxation Office, Towards an Integrated Response to Serious Non-Compliance, April 2000, p. 1.

40 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

• no progression m odel in place to specifically deal with processes of detection, audit, litigation, debt collection, prosecution, and ancillary ATO activities in relation to serious non-compliance;

• lack of clear and consistent policies and guidelines on how ATO officers are to deal with m atters of serious non-compliance; and

• no national system in place for identifying and registering serious non-com pliance m atters to ensure th a t lim ited resources are being devoted to the m ost im p o rtan t cases and to developing increased reporting a n d /o r m onitoring requirem ents for identified serious non-

compliers.

2.30 The p ap er reco m m en d ed th a t all ATO u n its resp o n sib le for

in v e stig a tin g and p ro se c u tin g cases of serio u s n on-com pliance be am algam ated into one unit. The integration of these units into the ATO Fraud Section in A ugust 2000 is discussed in detail in Chapter 4.

Case management and reporting system 2.31 The Case M anagem ent and R eporting A pplication, know n as CaMRA, was used by the WHT Business Line (including the STPU), and later by the SBPIU, as a tool for recording and monitoring the progress

of defined w ork activities, including prosecution cases.

2.32 CaMRA was designed to provide a range of search and report generating functions for case m onitoring and w orkflow m anagem ent purposes. For security purposes, access to the inform ation contained in CaMRA relating to cases investigated by the STPU and two SBPIU teams was restricted by the following measures:

• each prosecution team was able to view only the cases its team members were currently w orking on; and

• access to cases for recording and m anagem ent purposes was provided according to user access levels, w hich reflected the w ork needs of each officer who used the system.37

2.33 System problem s experienced by users w ere noted in internal bulletins and CaMRA technical updates. These problem s included linking difficulties, errors and delays w hen updating information, slow response w hen being used by several officers at a time and inconsistencies and

inaccuracies w hen attem pting to generate costing, statistical and other case sum m ary reports.

37 Australian Taxation Office 1998, CaMRA Administrators Manual, p. 4.

41

2.34 At the tim e of CaMRA's im plem entation in Septem ber 1997, a po st­ im plem entation review w as p lan n ed for approxim ately one year after the database had been functioning across all of the WHT Business Line.38 The ANAO w as advised that no review was undertaken.

2.35 The C ontestability R eview re p o rt also n o ted th a t the CaMRA system w as resource-intensive and unreliable for the production of timely and accurate inform ation. There w as also some doubt as to w hether there w as a total com m itm ent to using CaMRA by the SBPIU officers.39 The rep o rt recom m ended that the SBPIU consider d ev elo p in g a new case m anagem ent system based on the system developed for the then GST Fraud Section.

2.36 D u rin g th e p re se n t A N A O ex am in atio n , SBPIU case officers advised th a t they w ere still experiencing d ifficulties w hen using the CaM RA sy stem , in c lu d in g in a c c u ra te and u n re lia b le d ata, lim ite d reporting capabilities, incorrect and inconsistent rep o rtin g results and long delays in u p d atin g inform ation on the system.

Quality assurance processes in the STPU and SBPIU 2.37 Q uality assurance (QA) review s of frau d prosecution cases are designed to identify, assist and sup p o rt the developm ent of best practice and prom ote an ap p ro p riate and consistent level of case m anagem ent perform ance across ATO prosecution units. The reviews should indicate w h e th e r an a d e q u a te s ta n d a rd has been achieved an d m ay su g g est im provem ents in term s of training, changes to procedures, investigation m anagem ent or investigation policies.

Sales Tax Prosecution Unit 2.38 The A N A O in te rv ie w e d s e v e ra l fo rm e r STPU officers an d

review ed available inform ation reg ard in g case m anagem ent processes and business objectives for the Unit. However, there w as no evidence to indicate that QA reviews w ere conducted on the STPU prosecution cases.

38 Australian Taxation Office 1997, CaMRA Implementation—Staff Implementation Document, p. 7.

39 Australian Taxation Office Command Regulation: The Prosecution Investigation Function, op. cit., p. 39.

42 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Small Business Prosecution Investigation Unit 2.39 The SBPIU Q uality A ssurance Review G uidelines were developed in 1997, based on the Com m onw ealth Law Enforcement Board's (CLEB) Quality Assurance Review Guidelines'10 and the Service Agreements4 0 41 betw een the business line referring the case and the SBPIU.

2.40 According to ATO policy, QA reviews were to be conducted every six m onths for large SBPIUs, annually for m edium SBPIUs, and on a b i­ annual basis for small SBPIUs. The process involved taking a stratified random sam ple of cases listed in the CaMRA database; each case w as to be review ed by two officers and rated as either above standard, satisfies standard, or below standard. Individual case assessm ent reports were to be p ro v id ed to the case officer and a w ritten rep o rt of the results of the

overall QA review p rovided to the team le ad er/reg io n al m anager and SBPIU executive m anagem ent.

2.41 The ANAO exam ined six QA reviews undertaken in various SBPIU offices betw een 1995 and 2000. No QA review s w ere conducted in 1996. As well, there were no w ritten reports available for reviews conducted in 1998 or 2000. A lthough individual investigations had not been rated by the review teams, the following deficiencies in case m anagem ent and

m onitoring procedures were identified in the ATO QA reports exam ined by the ANAO:

• inefficient case planning;

• lack of evidence matrices, w hich can result in crucial evidence being ignored;

• case officers not recording all com m unications and actions on the case files;

• lack of case reviews being undertaken;

• no prioritisation procedures governing case selection processes; and

• resourcing problem s affecting the quality of o u tp u t from the unit.

40 The Commonwealth Law Enforcement Board’s (CLEB) Quality Assurance Review Guidelines form part of the Board’s larger publication Fraud Control Policy of the Commonwealth. These guidelines, published in March 1997, set the minimum standard for QA of prosecution cases in all Commonwealth agencies. They are based on best practice standards and model procedures for handling fraud cases that were developed in March 1995 by the Commonwealth Investigation Technical Standards Committee.

41 Service Agreements outlined the responsibilities of the SBPIU and referring Business Line for the purpose of conducting and managing prosecution investigations and the QA reviews of those investigations. The Agreements varied according to the specific needs of the business line with which the Agreement was made and covered such issues as likely case referrals; quality assurance processes; liaison with the DPP and AFP; conduct of project work; and publicity of prosecution cases.

43

ANAO’s examination of sales tax fraud cases

Search methodology 2.42 The ATO d id not h av e a co m p lete reco rd of sales tax fra u d

investigations. To address the allegations m ade to the Senate Committee and to determ ine the num ber and verify the status of the sales tax cases handled by the STPU, the ANAO adopted the follow ing methodology:

• d o w n lo a d e d all e n trie s in th e c o m p o n e n t of th e CaM RA case

m anagem ent system used by the STPU from 1996, w hen the system was introduced, until the U nit disbanded in Septem ber 1998;

• exam ined tw o ATO sp re a d sh e e ts d o cu m en tin g sales tax case files located in the H urstville office;

• reviewed the cases included on a hand-over list provided to the SBPIU Regional M anager when the STPU was disbanded;

• review ed current case files; and

• interview ed form er STPU case officers and current SBPIU case officers.

Examination results 2.43 The ATO and ANAO initially identified a possible 124 sales tax fraud cases, w hich included 123 sales tax fraud cases investigated by the ATO and one case relating to a sales tax refund paym ent m ade by Customs. The ATO sales tax cases investigated by the H urstville office included:

• 53 cases that w ere recorded in the CaMRA case m anagem ent system;

• 49 cases c a ta lo g u e d by th e ATO o n a s p re a d s h e e t d a te d

23 N ovem ber 2000 (ATO Spreadsheet N o.l) after an initial search of the H urstville office;

• 19 cases cata lo g u e d by the ATO on a seco n d s p re a d s h e e t d a te d

11 December 2000 (ATO Spreadsheet No.2) following a further search of the H urstville office; and

• two case files that were located by ANAO at the H urstville office but n o t e n te re d in to the CaM RA sy ste m or re c o rd e d on eith er ATO

spreadsheet.

44 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Sales tax cases investigated by the ATO 2.44 The ANAO reconciled all cases recorded in the CaMRA system , on the tw o ATO spreadsheets and the hand-over list. The ANAO and the ATO jointly interview ed ATO case officers to verify relevant case details;

determ ine an accurate status for all the cases; and to identify any case duplication. The ANAO also reconciled the ongoing cases w ith an ATO- w ide stock-take of sales tax cases undertaken w hen the ATO Fraud Section w as established in A ugust 2000.

2.45 A fter excluding 33 duplicate case records, the ANAO review ed 90 ATO sales tax cases that included:

• 53 cases recorded in the CaMRA system;

• 28 cases recorded on 23 N ovem ber 2000 (ATO Spreadsheet No.l);

• seven cases recorded on 11 D ecem ber 2000 (ATO Spreadsheet No.2); and

• two cases not recorded in either the ATO spreadsheets or the CaMRA system .

2.46 Table 1 outlines the status of the 90 cases review ed by the ANAO.

Table 1 Sales Tax cases reviewed by ANAO

Status o f cases l3> A Ongoing

Investigation

F inalised ® U n k n o w n 101 N o Further

A ction

Total

Source o f cases ψ ATO DPP

C aM RA 6 11 0 28 8 53

Spreadsheet No. 1 0 12 7 6 3 28

Spreadsheet No. 2 3 1 0 3 0 7

Cases w ithout record - - 2 - - 2

T o t a l 9 2 4 9 3 7 1 1 9 0

Notes:

(a) The status of the sales tax cases was current at the time of the ANAO review, 12 December 2000 .

(b) The status of ‘Finalised’ has been attributed to cases where prosecution action has occurred and the case has been closed.

(c) The ANAO was unable to verify the status of these cases from the case files and discussions with ATO case officers.

(d) No Further Action (NFA) decisions were made by either the DPP or the ATO as a result of circumstances that made further investigation or prosecution action of a case unlikely to obtain a successful outcome.

Source: ANAO analysis based on information provided by the ATO

45

Case file management 2.47 The ATO w as unable to locate the case files for 20 cases. To

determ ine the status of these cases, the ANAO relied on discussions w ith ATO case officers and reviewed CaMRA system records.

2.48 In addition, the ANAO found that some of the case files review ed by the ANAO h ad been 's trip p e d ' of docum entation. The ATO advised that, prior to disbanding the STPU, files w ere stripped. Only basic file contents w ere retained and stored in the basem ent of the H urstville office. The A N A O w as in fo rm e d it w a s th e p ra c tic e of STPU to re tu r n

docum entation to the business line that referred the case for investigation.

Cases not entered in the CaMRA system 2.49 The ATO undertook tw o separate searches of the H urstville office (23 N ovem ber and 11 December 2000) to locate sales tax case files. The case files w ere subsequently catalogued into tw o Excel spreadsheets: the first spreadsheet listed 49 cases; the second listed 19 cases.42 The ANAO analysed the spreadsheets and found that, of the 68 cases listed on the tw o sp read sh eets, 31 cases had been entered in the CaMRA system .43 The status of the rem aining 37 cases could therefore only be determ ined by reviewing the case files. The ATO was unable to explain the reasons

for these cases not being recorded in the CaMRA system . The status of nine cases could not be verified.

2.50 In addition, the ANAO located and review ed tw o case files that h ad not been recorded in eith er the CaMRA system or the tw o ATO spreadsheets. The ATO advised the 'sensitivity' of the case and related security concerns (it was p a rt of evidence in a Royal C om m ission of Inquiry) m ay have been the reason th a t one case w as not recorded in CaMRA. The other case had been allocated a CaMRA num ber but a search of the system failed to locate any corresponding entry. The ATO w as not able to ad v ise the cu rren t s ta tu s of these cases an d it could n o t be

ascertain ed th ro u g h an A N A O rev iew of th e case files. The A N A O recognises that the sensitivity of a case may prohibit all case details being recorded in the CaMRA system . H ow ever, if even lim ited case details are n o t re c o rd e d , the p o te n tia l fo r th e case n o t to be a d e q u a te ly

m onitored, or reviewed, increases considerably. There is also a risk that the case could be overlooked completely.

42 There were an additional two cases identified on the first spreadsheet that the ATO advised were not actually prosecution cases but only intelligence information. Consequently, they have not been included in the 90 sales tax fraud cases that were the subject of ANAO analysis.

43 When cataloguing the sales tax cases files, the ATO Liaison Officer documented the CaMRA number where available. If there was no CaMRA number on the file, the Officer numbered the files consecutively according to the order in which they were located.

46 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Cases transferred to SBPIU at the closure of the STPU 2.51 W hen the STPU w as disbanded, any outstanding cases held by the Unit at the time w ere to be transferred to the SBPIU for com pletion. The m anager of the STPU, on his last day in the U nit, gave the SBPIU Regional M anager a h an d -o v er list containing 15 case sum m aries. The Regional M anager advised the ANAO th a t he believed these w ere the only cases to be transferred to the SBPIU teams. The ANAO understands th a t no case file c e n s u s o r re c o n c ilia tio n w ith th e CaM RA case

m anagem ent system w as u n d erta k en p rio r to transferring cases to the SBPIU.

2.52 The 15 cases w e re in c lu d e d in th e A N A O re v ie w a n d are

incorporated into the analyses outlined in Table 1. Two cases were listed on Spreadsheet No.2 and the other 13 cases w ere recorded in the CaMRA system . O ne case is c u rre n tly u n d e r in v e s tig a tio n , four have b een

finalised, and 10 cases w ere considered to w arran t no further action (four by the ATO and six by the Director of Public Prosecution (DPP)).

Cases considered to warrant No Further Action 2.53 A broad range of circum stances can lead to a decision to take no fu rth e r actio n . These can in c lu d e m issin g or in su fficien t ev id en ce, u n co o p era tiv e case w itnesses, reso u rcin g difficulties, or tim e delays

d u rin g the investigation. In m ore than 50 per cent of cases (48 cases) review ed by the ANAO, a decision to take no fu rth er action had been m ade by either the ATO (37 cases) or the DPP (11 cases). This m eant the investigations had been closed w ithout culm inating in prosecution action.

SBPIU initiated review 2.54 In February 2000, the Acting SBPIU Regional M anager requested a form er team leader to review the cases in the CaMRA system . As a result of this review, 21 cases w ere deem ed to require no further action. The officer w ho u n d e rto o k th e rev iew a d v ise d the A NA O th a t the

ra tio n ale for his decisions w ere based on: cases n o t being active or

allocated to a case officer; cases not having been looked at for a long p e rio d of tim e and th e re fo re th e re b e in g little p e rc e iv e d m e rit in

proceeding w ith the investigation; and the lack of resources—there being no c a p a c ity for SBPIU te a m s to u n d e rta k e th e w ork. The A N A O

u n d e rs ta n d s this rev iew also d id not in c lu d e a case file census or

reconciliation of case files w ith CaMRA entries to determ ine an accurate case status. Table 2 outlines the reasons th at the ATO considered cases required no further action.

47

Table 2 ΑΤΟ reasons for deciding cases required No Further Action (NFA)

ATO re a so n for NFA d ecisio n Year th e c a s e w a s N o F urther A ction

U nknow n 1996 1997 1998 1999 2 0 0 0

Lack of resources 1

Case too old and resourcing issues 1

Insufficient evidence 2 1 1

No offence disclosed 2 1 1

Cases too old/lnsufficient evidence 1 1 1 1

Taxpayer not able to be located 4

Case not allocated to SBPIU presume NFA |a>

3

Case too old and not referred to SBPIU ®

16

Total = 37 Sub-totals: 6 1 1 3 2 24

Notes: (a) The CaMRA system entry for these cases state: Case was apparently not allocated prior to the demise of the WHT Prosecution Unit in September 1998. Case was not referred to the SBPiU and has been presumed to have been NFA’d. Prosecution system updated on 21/2/00.

(b) The CaMRA system entry for these cases state: Case was apparently not referred to SBPIU, following the demise of the WHT Prosecution allocated prior to the demise of the WHT Prosecution Unit. Therefore it is assumed that the case was finalised prior to the WHT Prosecution Unit being disbanded in September 1998. Prosecution system updated on 21/2/00.

(c) The date when the decision was made that no further action would be taken in relation to the investigation could not be determined from the case file review. It was not possible to verify the date through CaMRA entry records, as cases were not entered into the system.___________

Source: ANAO analysis based on information provided by the ATO

2.55 In 19 of the 37 cases considered by the ATO to w arran t no further action, the reason given w as th a t the cases w ere too old because they h ad a p p a re n tly n o t been refe rre d to the SBPIU w h en the STPU w as disbanded. The age of the case w as also a factor in five other cases.

Director of Public Prosecution 2.56 The A NA O also review ed the cases considered by the DPP to require no further action. Of the 11 cases, age w as a contributing factor in five cases,44 and insufficient evidence in four. For the rem aining two cases there w as no avenue to prosecute in one instance and the taxpayer had disappeared in the other.

44 One case was considered too old to pursue. The other four cases were not pursued for prosecution because they were deemed too old and also for additional reasons including insufficient evidence, lack of admissible evidence and that the DPP considered it was not in the public interest to proceed with prosecution.

48 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Analysis of the duration of sales tax case investigations 2.57 The ANAO analysed the sales tax cases to determ ine the tim e taken to com plete the investigations. Dates relating to the com mencement and com pletion of the in vestigation could only be found in 60 of the 90 cases. F urtherm ore, the date recorded w as n o t reliable because the referral date listed on the CaMRA entry could reflect either the date the case was received by the investigating unit, the date the case w as allocated to a case officer, or the date the u n it m anager entered the case in the

CaM RA sy ste m . Table 3 o u tlin e s th e tim e ta k e n to fin a lis e th e

investigations.

Table 3 Analysis of the length of case investigations

D uration o f In ve stig a tio n

S ta tu s o f C a s e s

TOTAL O n g o in g F in a lis e d N FA -D PP NFA-ATO

< 12 months 3 1 1 4 9

12-24 months 1 7 3 4 15

25-36 months 2 4 1 5 12

37-48 months 2 0 1 15 18

> 48 months 1 0 0 5 6

SUBTOTAL: 9 12 6 33 60

Source: ANAO analysis based on information provided by the ATO

2.58 The ANAO appreciates that the duration of an investigation will vary depending on the com plexity and size of the case. In 40 per cent of cases (24 cases), it took longer than 36 m onths to finalise the investigation.

Of these 24 cases, three are still being investigated and 21 cases w ere considered to w arrant NFA (20 by the ATO and one by the DPP).

2.59 Of the 24 cases th a t took longer th a n three years to com plete,

none was finalised through prosecution action. Also, in 18 of these 24 cases, the decision of NFA w as m ade during the SBPIU-initiated review of the CaMRA system in February 2000. In one case the investigation continued for alm ost eight years before the ATO decided the case required NFA.45 These results w ould suggest that, the longer an investigation continues, the less likely there w ill be a successful outcome.

45 This particular investigation commenced in April 1992 and was made NFA during the SBPIU initiated review of CaMRA in February 2000. Reasons for NFA included the age of the case, resourcing problems and difficulty with securing the case informant as a witness for prosecution purposes. The investigation also suffered from difficulties in securing necessary documentation from the alleged offender and complications with other key witnesses in the case.

49

2.60 The ANAO found little evidence that, prior to commencing an investigation, any planning or assessm ent was undertaken to determ ine the complexity of a case or the priority it should be afforded. The ANAO also found little evidence of ongoing participation of team leaders in monitoring and m anaging the overall progress of STPU or SBPIU cases. The ANAO considers that the reviews of case progress should have been more frequent to ensure that the investigating U nits' time and resources were being used effectively.

2.61 The ATO advised that regular meetings were held between case officers and team leaders to discuss ongoing case progress and to make decisions relating to the conduct of investigations. The ANAO was also advised that there was no formal mechanism for inform ing the referring officer, area or agency of the progress of an investigation or when a case was finalised and that this type of feedback rarely occurred.

Potential revenue relating to cases 2.62 Recovery of lost revenue is only one of several driving factors behind the investigation and prosecution of sales tax fraud. There can be additional benefits such as the opportunity to identify and close dow n the fraudulent operations of highly organised, serial sales tax offenders, media exposure in penalising sales tax fraud, and the resulting deterrent it provides to other potential offenders. However, the revenue recovered from successful prosecution action can provide some indication of the success of the ATO in prosecuting sales tax fraud.

2.63 The rev en u e reco v ered by th e ATO th ro u g h the successful

prosecution of the sales tax cases was only available from CaMRA system entries or case files for 14 out of the 18 successfully prosecuted cases. For these cases, approxim ately $43 100 was recovered in remitted sales tax, penalties and fines.

2.64 Inform ation relating to the potential revenue involved for the other 72 cases reviewed was only available for 16 cases. Table 4 details the potential revenue relating to these cases.

50 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

Table 4 Revenue identified in sales tax cases reviewed by ANAO

Status o f cases Total num ber

o f cases

review ed

Cases w ithout

revenue

estim ates

Cases with

revenue

estim ates

Total revenue

recovered /

estim ated ($)

(a)

Finalised (successful) 18 4 14 43 100

Finalised (unsuccessful) 6 4 2 826 800

NFA - ATO 37 31 6 1 040 000

NFA - DPP 11 10 1 157 000

Unknown outcom e 9 8 1 170

O ngoing 9 3 6 7 640 000

T O T A L : 9 0 6 0 3 0 ( b )

Notes

(a) Amounts greater than $1000 have been rounded to the nearest $100

(b) No total for Total Revenue recovered/estimated has been provided as the column incorporates two types of revenue— recovered, and estimated.

Source: ANAO analysis based on information provided by the ATO

2.65 Based on the ATO estimates provided in the case files and CaMRA entries, the potential revenue is approxim ately $9.6 million, including six ongoing cases w ith an estimated value of $7.6 million.

2.66 A lth o u g h estim a te s of re v e n u e w ere o n ly av ailab le for a

proportion of cases, these figures suggest that a considerable am ount of potential revenue was lost through the NFA of cases. Also, the revenue estim ates do not include the additional revenue that could have been recovered through the im position of penalties or fines, if the cases had

been successfully prosecuted.46

Conclusion 2.67 M easures w ere taken by the ATO and C ustom s to im prove

coordination arrangem ents w ith regard to sales tax. Initiatives such as the establishment of the National Liaison Committee supported by a MoU that clearly defined the roles and responsibilities of the tw o agencies created a more effective working relationship.

46 Depending on the offence committed, the ATO could impose penalties of up to 200 percent of the amount of sales tax involved or unpaid in the case, for offences committed against the Commonwealth under the sales tax legislation and related acts. The courts can also impose heavy fines for a conviction of sales tax fraud.

51

2.68 The A N A O 's analyses have raised a num ber of issues relating to the ATO's m anagem ent of sales tax fraud cases. Tw enty sales tax case files could not be located and som e of the files review ed d u rin g this exam ination h ad been 'strip p e d ' of docum entation. The absence of file docum entation m eant the ANAO w as unable to conduct a detailed review of those cases and, in some instances, could not determ ine the outcome of the case.

2.69 The hand-over of ongoing cases to the SBPIU team s did not include a case file census or reconciliation w ith the CaMRA case m anagem ent system to determ ine the status of all STPU sales tax cases. U ndertaking this reco n ciliatio n w ould h av e id e n tified th a t th ere w ere m ore th an 15 cases to be h anded over. O ver 40 per cent of the cases review ed by the ANAO (37 cases) had not been entered into the CaMRA system and for nine of these cases, their status could not be verified from either the case files or discussions w ith ATO case officers. As not all cases w ere recorded in the case m anagem ent system , the potential existed for the CaMRA system to have been open to abuse.

2.70 A re v ie w of the CaM RA sy stem b y SBPIU in F eb ru ary 2000

resulted in 21 cases w arranting no further action as they w ere considered too old to be p u rsu ed . Of these 21 cases, 19 h ad ap p are n tly n o t been referred to the SBPIU w hen the STPU w as d isb an d ed . H ow ever, this review , w h ic h a g a in d id n o t in c lu d e an y case file cen su s o r file

reconciliation, w as conducted som e 15 m onths after the hand-over of ongoing cases to the SBPIU.

2.71 It is appreciated that the CaMRA system w as not an ideal case m anagem ent tool and that ATO case officers experienced difficulties in using the system. It is also apparent that no post-im plem entation review of CaM RA w as h e ld to id e n tify a n d a d d re s s th e p ro b le m s a n d

inadequacies of the system. However, the ANAO does not consider that the deficiencies of this system negate the responsibility or accountability of team leaders and case officers to m anage their case w orkload; m onitor the progress of their cases; and com plete them w ithin a reasonable tim e­ frame. A properly im plem ented quality assurance program should have reinforced such a m anagem ent fram ew ork.

2.72 The revenue involved in the cases considered to w arrant no further actio n c o n s id e ra b ly exceeded th e am o u n t of re v e n u e reco v e re d in finalised cases. Also, it w ould ap p ear that the longer an investigation continues, the likelihood of a successful outcom e dim inishes. In m ore than 40 per cent of cases (24 cases) w here the relevant inform ation was available, the tim e taken to com plete the investigation exceeded three years and none w ere finalised through prosecution action. In 18 of these cases, the decision to take no fu rth e r action w as n o t m ade u n til the

February 2000 CaMRA review.

52 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

2.73 E xtended investigations th a t do n o t culm inate in a successful prosecution are not an efficient or effective use of ATO resources and also raise issues relating to the fair treatm ent of the taxpayers involved. Five out of the nine ongoing cases (with potential revenue estim ates of $4.6 m illion) have been u n d er investigation for over two years and, in one instance, for four years.

Recommendation No.1 2.74 To en su re the effective use of in v e stig a tio n resources an d in

fa irn e s s to th e ta x p a y e rs in v o lv e d in in v e s tig a tio n s , th e A N A O

recom m ends that the ATO F rau d Section finalise, as expeditiously as possible, all ongoing sales tax fraud cases, w ith priority given to those cases that have been un d er investigation for m ore than two years.

ATO response 2.75 A greed.

Lessons to be learnt for future fraud investigations 2.76 The ANAO identified deficiencies in the ATO's m anagem ent of sales tax frau d cases sim ilar to those id en tified by the C ontestability Review rep o rt and Reform P rogram paper. The ANAO considers that the following areas m ust be addressed by the ATO Fraud Section if fraud investigations are to be m anaged properly in the future:

• an effective case m anagem ent fram ew ork w ith clearly defined and a rtic u la te d p ro ced u res an d p ro cesses for case referral, selection, p rio ritisin g , planning, reco rd in g , m o n ito rin g an d review ing fraud investigations;

• a case m anagem ent system th a t allow s all cases to be recorded and m onitored by investigators and review ed by team leaders, regional and n atio n al m anagers an d w ith the capacity to p ro v id e relev an t m anagem ent and perform ance reports;

• the capacity to identify potential ATO fraud risks and analyse overall patterns and trends;

• properly developed and im plem ented file m anagem ent practices;

• a quality assurance program th a t is developed in accordance w ith CLEB Quality Assurance Review Guidelines and im plem ented nationally;

1 clearly e n u n c ia te d n a tio n a l g u id e lin e s th a t are u n d e rs to o d an d

im plem ented by all staff; and

• a com prehensive staff training program .

53

Sales tax cases involving Customs 2.77 C ustom s w as required to refer any cases of suspected sales tax fraud to the ATO for investigation and prosecution. A lthough Custom s did not participate in the investigation for any of the sales tax cases the ANAO exam ined, it was the referring agency in 11 cases. Of these cases, four have been finalised through court action, four w ere considered by the DPP to require no further action and the rem aining three are currently under investigation by the ATO.

Additional sales tax refund payment 2.78 The ANAO also exam ined a refund paym ent of $460 027 ($113 002 in cu sto m s d u ty an d $347 025 in sales tax) m a d e b y C u sto m s on

24 June 1997. C ustom s h ad d eterm in e d th ro u g h a u d it activity th a t a com pany had overstated the value of their im ports for a specified period of time and w ere entitled to a refund of the custom s d u ty and sales tax overpaid.

Legislative requirements 2.79 The Customs Act 1901 and Regulations (section 163 and regulation 128(1)) specify w h at constitutes an application for refund. An application m ust be in the approved form, be signed, have the fee payable ($45) and be given to a Collector. Each application m ust address one entry only.47

U nder authorisation by the ATO, Custom s w as delegated to:

• a u th o ris e p a y m e n t of a sales tax re fu n d u n d e r $200 w ith o u t a

declaration about w hether the tax had been passed on through sale of the items;

• request a declaration from the refund claim ant about the 'passed on' sales tax w here the refund am ount applied for is over $200; and

• authorise a refund of sales tax up to $1000 to the extent that the am ount of sales tax had not been passed on in any sale of the items subject to the refund application.

2.80 C ustom s w as required to seek ATO authorisation for all refund paym ents over $1000.

2.81 Custom s officers in New South Wales m ade the refund paym ent of $460 027 using a Treasury Form 17. A ccording to regulation 61(1) of Finance Regulations, T reasury Form 17 w as to be u se d in processing re fu n d s of re v e n u e (o th er th a n acco u n ts for C u sto m s re fu n d s and

47 ‘Entry’ refers to the shipment of imported goods.

54 Examination of Allegations Relating to Sales Tax Fraud

Management of Sales Tax Fraud Cases

draw backs) or refunds from a Trust Fund. It w as not an a p p ro p ria te m ethod for refunding d u ty or sales tax.48 A lthough the officers concerned acted on oral advice from their Regional Finance and Legal sections, this advice w as contrary to a w ritten instruction issued by N ational Office.

2.82 A ppropriate fees w ere not collected, as Custom s had not required the com pany to lodge refu n d applications for each of the 699 entries identified as having been overpaid. H ad the correct applications been lodged, as required by (section 163 (1C) of the C ustom s Act), refund application fees w ould have totaled $31 445.

2.83 R efu n d s for 64 en tries w ere for am o u n ts less th a n $200 and

therefore could have been processed by C ustom s w ithin its delegated a u th o rity a n d w ith o u t r e q u ir in g th e c o m p a n y to m ake sa le s tax

declarations.49 For the rem aining 635 entries, the com pany should have been required to make declarations to C ustom s about the w hether the sales tax had been passed on. In addition, 70 of the 635 applications w ould have been for am ounts over C ustom s' authorised refund lim it of $1000

and w ould have needed to be referred to the ATO. Only 10 percent of the 699 en tries listed in the schedule by the co m p an y 's bro k er w ere ch ec k ed b y C u sto m s to e s ta b lis h w h e th e r or n o t the claim s w ere

legitim ate and therefore payable.50

Details relating to the case 2.84 Following an internal review, the NSW Regional Director directed on 17 October 1997 that no further action be taken in relation to the matter. In June 1998, the Custom s Legal U nit recom m ended that Custom s seek the endorsem ent of the ATO in respect of the refund of the sales tax and that a subm ission be m ade to the M inister for Finance seeking a w aiver of the am ount of the duty and (subject to the view s of the ATO) of sales tax overpaid. Customs advised that it did not seek a w aiver of the duty

and sales tax because the validity of the refund itself was not in question. It w as the m ethod of paym ent that was inappropriate.

48 !n 1989, r.61(1) was repealed by Finance Regulations (Amendment) No. 142 of 1989, making Treasury Form 17 no longer a statutory form. It was therefore no longer an appropriate means by which to refund duty or sales tax. Regulation 61(1) was merely a machinery provision and did not create any entitlement to a refund.

49 The total amount of sales tax claimed from the 64 refunds under $200 would have been $8096.

50 Customs considered that a 10 per cent random selection (from random number generation) would give an assessment of the accuracy of the claim for $479 463 duty and sales tax overpaid. This meant an examination of 70 entries.

55

2.85 The ΑΤΟ w as not advised of this refund paym ent in October 1997 w hen it w as decided that no fu rth er action w ould be taken to recover the paym ent. Also, no assurance w as sought from the ATO at the time that there w ere no outstanding taxation debts to w hich the refund may have applied. This assurance w as not requested u n til Septem ber 1998

and a response from the ATO w as not received until M ay 1999.

2.86 Custom s acknowledge that the action taken by their officers was not in accordance w ith legislative requirem ents. In response to a request b y th e A N A O , C u sto m s re c e n tly s o u g h t a s s u ra n c e an d re c e iv e d

confirm ation from all Regional M anagers that Treasury Form 17 had not been used to process any other refunds.

2.87 Custom s advise that it is less likely entities w ill seek refunds from C ustom s for the GST p a id on im p o rts. U n d er The N ew Tax System , registered entities are able to claim input tax credits on their Business Activity Statem ent for any GST they have paid at im portation. Details of all refund paym ents are forw arded to the ATO to verify that the im porter has not claim ed an in p u t tax cred it as w ell as a re fu n d of GST from

Custom s.51

Specific cases provided to the Senate inquiry 2.88 D uring the Senate inquiry, specific cases w ere cited as exam ples to highlight concerns about sales tax fraud investigations. These cases have been review ed and are included in the ANA O 's analyses. The ANAO

found that, in com m on w ith a n u m b e r of o th e r ATO sales tax fraud

investigations, these cases have not been investigated in a timely manner.

51 The arrangements between ATO and Customs for the collection of GST on imports are discussed in detail in Chapter 3.

56 Examination of Allegations Relating to Sales Tax Fraud

3. Im plications for th e Goods and Services Tax

This chapter discusses the coordination arrangements between the ATO and Customs for the implementation of the GST and the framework for administering and collecting the GST, LCT and WET on importations.

Introduction 3.1 The Senate Economics References Com m ittee raised concerns as to w hether the allegations relating to sales tax h ad im plications for the introduction of the GST.

3.2 The ANAO exam ined the coordination arrangem ents betw een the ATO and Custom s to ensure industry stakeholders and agency staff were fully inform ed of the changes to the sales tax regim e. The assessm ent of risks associated with the introduction of the GST and the fram ew ork for adm inistering and collecting GST, LCT and WET on im portations were also review ed. The ANAO did not examine any other com ponents of the GST.

3.3 The ANAO sought to provide assurance that m easures are in place to collect the GST, LCT and WET. As these taxes w ere only introduced in July 2000, it was considered too early to fully assess the effectiveness of the new system s and processes, p articu larly as, in some instances,

these are still being refined.

Communication and education strategies for tax reform 3.4 The introduction of the N ew Tax System required an extensive, highly organised program of public com m unication and education to ensure that taxpayers understood the tax reform s, and to assist them in m eeting their responsibilities u n d er the new system . To achieve this, a

'W hole of G overnm ent' (WHOG) approach w as adopted, w ith the ATO's Tax Reform Business Education and C om m unication (TRBEC) Program team coordinating the WHOG tax reform cam paign.

57

Tax Reform Business Education and Communication Program 3.5 TRBEC developed an in te g ra te d co m m u n icatio n strategy th a t included television, radio and p rin t advertising, and direct m arketing. A com prehensive range of new publications w ere produced for the internet, the ATO faxback service, mass and targeted m ailouts, sem inars and one- on-one presentations. Telephone inquiry lines w ere also established to answ er questions.

3.6 The TRBEC team also functioned as an inform ation centre offering advice and assistance regarding potential com m unication strategies and jo in t p ro d u c tio n of tax refo rm m a te ria ls. To e n s u re co n siste n cy of inform ation, C om m onw ealth agencies were required to discuss their plans and the needs of their clients w ith the TRBEC team. M aterial requiring ATO technical clearance p rio r to release w as also coordinated through this team.

3.7 The ATO recruited and trained a large num ber of new em ployees as p art of its p rep aratio n for tax reform . Training sem inars w ere also co n d u cted for existing ATO em ployees an d in te rn a l com m unication strategies52 w ere initiated by the ATO C orporate Affairs and M arketing group to ensure agency staff had access to detailed inform ation relating to the introduction of the GST.

Customs Tax Reform Project 3.8 The C ustom s Tax Reform Project (CTRP) team w as responsible for: assisting the ATO and Treasury w ith the developm ent of policy and leg islativ e ch an g e rele v an t to C u sto m s o p e ra tio n s; estab lish in g the p ro c e s s e s for im p le m e n tin g tax refo rm ; m a in ta in in g an o n g o in g

re la tio n s h ip w ith the ATO a n d T re a su ry ; a n d c o o rd in a tin g th e

com m unication and education strategies to inform industry stakeholders and staff.

3.9 The CTRP team developed a detailed com m unication and education s tra te g y th a t w as d e sig n e d to e n s u re C u sto m s m e t its tax refo rm

re sp o n sib ilitie s co n cern in g e d u c a tio n of, a n d co m m u n ica tio n w ith , custom s bro k ers, im porters, ex p o rte rs and staff to en su re th a t these groups knew how to operate w ithin the new tax environm ent.

3.10 From October 1999 through to June 2000, the CTRP team conducted inform ation sessions and sem inars for, and p resen ta tio n s to, v arious industry groups,· especially im porters and exporters, about tax reform. A

52 Communication strategies included professional development seminars, a weekly electronic magazine (ATO Extra), a satellite system linking all ATO offices (ATO Live), the ATO Intranet system (ATO Connect), access to TRBEC websites and ATO brochures, information booklets and fact sheets.

58 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

national program of inform ation sessions w as undertaken to inform all Custom s staff and com prehensive staff training sem inars were conducted from J a n u a ry to June 2000. In fo rm a tio n on tax refo rm le g isla tiv e , adm inistrative, procedural and policy changes w as also incorporated into relevant C ustom s internal docum entation.53

Joint ATO/Customs public education and communication strategies 3.11 The TRBEC Program team , w orking w ith the ATO Business Lines and the CTRP team, developed several joint A TO /C ustom s com m unication strategies for the introduction of GST, WET and LCT. A Customs officer w as seconded to the TRBEC team to assist w ith this process.

3.12 A lth o u g h each A T O /C u sto m s co m m u n icatio n strategy v aried according to the needs of the particular targeted industry, they w ere all sufficiently similar to be coordinated and com plem entary. Joint activities

fo llo w in g on from these stra te g ie s in c lu d e d the d ev elo p m en t of an industry-based booklet for im porters, several A TO /C ustom s fact sheets an d scripts, and answ ers to questions likely to be raised d u rin g the

cam paign. This inform ation w as p ro v id e d to ATO and C ustom s call centres. It w as also used in the establishm ent of a tax reform internet site linked to the ATO and Custom s sites. The inform ation form ed part of key m essages included in ATO cam paign products. Customs technical elem ents included in the ATO's tax reform p ro d u c ts w ere cleared by Custom s and Customs products w ere cleared through the ATO.

Assessment of risks associated with the introduction of the GST

Assessment of risks by ATO 3.13 The Tax Reform Project Com pliance M anagem ent Team undertook a com pliance risk analysis to identify and evaluate the risks associated w ith the adm inistration of the GST by the ATO and also to indicate w hat controls and response strategies should be introduced to m anage these ris k s .54 T he risk s w e re id e n tif ie d in c o m p lia n c e w o rk sh o p s an d

consideration was also given to the com pliance risks identified by other countries55 that adm inister a GST.

53 Customs developed, with the assistance of the University of Canberra, a comprehensive resource and training package for introducing staff to the new tax system. The package Customs Practices— Indirect Taxes, is a part of the Commercial Education Program.

54 Tax reform Project Compliance Management Team, Goods and Services Tax (GST) Compliance Risk Analysis, August 1998, p. 3.

55 Countries included Canada, New Zealand, United Kingdom and France.

59

3.14 The risks associated w ith im portations and the capacity to defer paym ent of GST w ere assessed and the controls necessary to lower either the consequence, or likelihood, of the risk w ere identified. These controls w ere in c o rp o ra te d in the d e v e lo p m e n t an d im p le m e n ta tio n of th e

D eferred GST Scheme,56 w hich is discussed in p aragraphs 3.25 and 3.26.

3.15 W ithin the ATO, the ong o in g assessm ent of risk is conducted through a num ber of forum s and strategies that include the following:

• C om pliance M anagem ent In teg ra tio n F orum (CMIF): This forum com prising senior com pliance practitioners from all business lines and key tax reform project m anagers, w as established to provide assurance to the C om m issioner th a t all com pliance risks a n d o p p o rtu n itie s em erging from the Tax Reform P rogram w ere being identified and a d d re sse d . The role of the CM IF is to: d ev elo p a co m p reh en siv e u n d e r s ta n d in g of th e tax re fo rm c o m p lia n c e ris k s , in c lu d in g

interdependencies, linkages, relationships and drivers; shape design of co m p lian ce strategies to a d d re ss em erg en t risks; influence the design of the com pliance m an ag em en t b u sin ess arch itectu re; and identify and guide developm ent of new enabling system s w ithin the ATO to su p p o rt com pliance m anagem ent efforts.

• C orporate Risk Register: This is the intelligence an d risk database developed to store intelligence inform ation that can be easily accessed w hen needed. Individual business lines are req u ired to assess risks against certain criteria57 and to record them in the register. This allows the capture of qualitative inform ation from m any sources of compliance risk across th e ATO an d in c lu d e s m u ltip le view s such as m ark et segment, policy and client perspectives. This data is then assessed by a Business Line Reference G roup (BLRG).

• BLRG: This is a forum m ade up of representatives from all Business Lines and is responsible for the effective cross-line m anagem ent of ATO risks through a process of risk registration, analysis and treatm ent to achieve realistic risk reduction w ithin operational constraints. A m onthly report prioritising ATO com pliance risks is prepared for the CMIF.

56 The Deferred GST Scheme allows importers to defer the payment of GST on importations until their next Business Activity Statement is lodged, provided approval has been given by the ATO.

57 Criteria includes: risk description; legislative impact; segments, focus areas, industry groups, political; external and internal capability; core process stages; risk analysis; risk owners; risk status, treatments, and drivers; management and reporting; and related risks.

60 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

• H ealth of the System A ssessm ent (HOTSA) process: This process is designed to form the basis of a continuing assessm ent of the risks involved in the collection of tax, and is im plem ented w ithin all ATO business lines. The risk assessm ents provide the basis for identification

of priorities and subsequent resource allocations. The process requires each of the ATO business lines to identify and assess their major areas of risk, to establish p la n s to m anage those risks w ith in available resources and to justify conclusions on risk areas, m anagem ent plans an d reso u rcin g . These risk s extend b ey o n d com pliance risks and in c lu d e b u s in e s s ris k s re la tin g to in f r a s tr u c tu r e a n d in te r n a l

capabilities.

• ATO F raud Control Plan: This plan identifies internal and external fraud risks. The ATO com m enced the form al risk assessm ent process for a n u m b e r of GST projects in M ay 2000.58 The ATO ad v ised in F ebruary 2001 that the form al risk assessm ent process for GST has not yet been com pleted and GST areas have been requested to provide

inform ation on their functions and activity lists.59 It is expected that the GST elem ent w ill be form ally in co rp o rated into the ATO F raud Control Plan by the end of 2001.

3.16 The identification of new and em erging risks, strategies to address these risks, and progress on im plem entation of the strategies are reported to the ATO Executive through m onthly perform ance reports and biannual corporate governance reports.

Assessment of risks by Customs 3.17 C ustom s assessed the risks associated w ith tax reform and the introduction of the GST as p art of its N ational Compliance Im provem ent Plan (NCIP). The purpose of the NCIP is to docum ent all relevant risk m anagem ent decisions and to develop national and regional action plans to ad d ress areas of g reatest risk. The P lan consists of a C om m ercial Strategic Risk Profile (CSRP) containing strategic directions, risk registers for each industry, national strategies or risk treatm ents to address the risks, and regional com pliance activities.

58 The AN AO noted this occurrence in Audit Report No.16, 2000-2001, Australian Taxation Office Internal Fraud Control Arrangements.

59 Fraud Prevention and Control (FP&C) has overall responsibility for the ATO’s Fraud Control Plan. FP&C will conduct workshops to identify GST high-risk areas and anticipate workshops will be completed by about mid-2001.

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3.18 The CSRP id e n tifie s an d ra te s risk s re le v a n t to com m ercial

operations and has been developed in consultation w ith all areas of the C ustom s C om m ercial, In v estig atio n s and In tellig en ce D ivisions and external governm ent stakeholders. A lthough the CSRP is not concerned w ith op eratio n al risks, as these are ad d ressed in branch and regional Action Plans, it does provide a basis for the developm ent of these plans. The profile is updated as necessary as part of the m onitoring and review phase of the risk m anagem ent cycle.60

3.19 N ational Business Com pliance m anagers are required to provide six m onthly reports to the N ational M anager, Com m ercial Compliance, outlining perform ance against the Plan including m ajor activities and results, trends detected and general perform ance. Results of all activities are recorded in the Compliance A ctivity R eporting D atabase (CARD).

Process for collecting/deferring payments on imported goods

Coordination arrangements between ATO and Customs 3.20 The joint N ational Liaison Com m ittee established under the sales tax regim e continued w hen sales tax on im ported goods w as replaced by the GST, LCT and WET on 1 July 2000. The Com m ittee provided a forum w h e re is s u e s re la tin g to th e re s p o n s ib ilitie s a n d a d m in is tra tiv e

a rra n g e m e n ts fo r co lle c tin g th e se new ta x es c o u ld be ra is e d an d

addressed. The Comm ittee m et frequently during the developm ent and im plem entation phases of the GST to ensure that the necessary system s and processes for collecting these taxes w ould be in place by 1 July 2000. It continues to m eet on a regular basis.

Memorandum of Understanding 3.21 The N ational Liaison Com m ittee continues to operate under the M oU s ig n e d in June 1997. A n e w M oU fo rm a lis in g the c u rre n t

arran g em en ts is being d ev elo p ed by the ATO an d C ustom s an d w ill in c lu d e th re e s c h e d u le s to s p e c ific a lly a d d re s s : th e ro le s an d

responsibilities of each agency; reporting and data transfer requirem ents; and the funding arrangem ents un d er the Purchaser-Provider agreem ent between the tw o agencies to adm inister the GST, WET and LCT. Custom s and the ATO envisage that the new MoU and supporting schedules will be com pleted by mid-2001.

60 Ongoing research by Customs Research and Analysis groups, using internal and external sources of data, also seeks to ensure that each phase of the cycle is reviewed regularly.

62 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

3.22 The ATO has delegated to Custom s the responsibility of collecting the GST, LCT and WET on im ported goods. To ensure that the pow ers delegated to Customs officers by the Taxation Commissioner are properly exercised, the ATO has advised that it w ill be negotiating w ith Custom s for the in clu sio n of the follow ing m a tters in the P u rch aser-P ro v id er A g reem en t th a t covers the services to be p e rfo rm e d by C ustom s in undertaking these responsibilities:

• services to be d eliv ered an d the asso ciated p erform ance outcom e m easures;

• consultation between the tw o agencies on planning, strategic direction, relevant operational issues, m onitoring and assurance system s and reporting arrangem ents;

• data access by the ATO; and

• reporting on the exercise of pow ers delegated to adm inister the GST, LCT and WET.

3.23 The P u rch aser-P ro v id er A greem ent, w h ich w ill be one of the schedules of the new MoU, m ust be consistent w ith the requirem ents set d o w n in the ATO's agreem ent w ith the States an d T erritories on the adm inistration of GST (the Interim Perform ance A greem ent (IPA)).61 The

ATO and Custom s have agreed not to finalise their Purchaser-Provider A g re e m e n t u n til the a g re e m e n t w ith th e S ta te s an d T e rrito rie s is

finalised.62

3.24 W ith the im plem entation of the N ew Tax System, the ATO and Custom s recognised the im portance of establishing an effective ongoing partnership arrangem ent that w ould allow a greater exchange of ideas, in fo rm atio n and access to the k n ow ledge and resources of the other

agency. Both agencies consider th a t the level of cooperation betw een them has increased and the w orking arrangem ents under the New Tax System are m ore effective th a n they w ere u n d er the sales tax regim e. Figure 2 illustrates the relationship betw een the ATO and Customs under

the New Tax System.

61 The Interim Performance Agreement (IPA) is based on the arrangements set out in the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA).

62 The IPA passed through Ministerial Council on 30 March 2001 and the ATO expects it to be entered into in mid-May 2001.

63

Figure 2 ATO/Customs Arrangements under the New Tax System

Calculation of LCT

Calculation of GST

Calculation of WET

Collection/Deferral/Refund of GST, LCT, WET

Report to the ATO

Collections to Official Public Account at the Department of Finance and Administration

TA Impact on Customs roles Exchange 1 Customs processes and system s 4and responsibilities— ►Information with ATOd e t e r m in e s a r r a n g e m e n ts fo r c o l le c tin g ta xGSTWETr e q u ir e se n c o m p a s s e sRelevantlegislationAustralianBusiness Numbera d d r e s s e sl e a d s toBalance between different forms of taxationThe need for tax reformSource: Based on Customs Practices - Tax Reform Process: Commercial Education Program Customs internal document (2000) p.10.64 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

Deferred GST Scheme 3.25 GST is payable on taxable im portations by both businesses and private individuals, reg ard less of w h eth er they are registered for the GST. For form ally e n te re d g o o d s, GST w ill n o rm a lly be p ay ab le to Custom s at the time im ported goods are entered for hom e consum ption— that is, w hen Customs releases them for use in A ustralia.

3.26 The D eferred GST Scheme allows paym ent of GST on im ported goods to be deferred until an entity's next Business Activity Statem ent is lodged, provided the ATO has given approval to defer the GST. Im porters m ust m eet certain eligibility requirem ents to be able to defer GST.63 The ATO m ay revoke the approval to defer GST if entities do not lodge their

BAS or paym ents by the due date; are subject to adm inistrative penalty under any Act adm inistered by the ATO; or no longer meet the eligibility criteria. It is estim ated that $10.5 billion of GST w ill be deferred out of a total im ported goods GST liability of $12.5 billion for 2000-01.

Processing by Customs 3.27 Im porters (or their custom s brokers) in p u t entries electronically through the Customs COMPILE System. This system , which is used for lo dging custom s duty, uses an ow ner code to id e n tify clients. Since

1 July 2000, im porters have been able to link th eir ABN to this ow ner code.

3.28 Im p o rters w ishing to defer p ay m en t of the GST p ro v id e their

ABN to C ustom s w hen they enter goods for hom e consum ption. If the im p o rte r h a s b een a p p ro v e d b y th e ATO to d e fe r GST, C u s to m s '

COMPILE system will record the deferred GST liability of each shipm ent as it is cleared.

3.29 The ATO advises Custom s through an autom atic transfer of data each n ig h t of those ABNs th a t are eligible to d efer GST. Each tim e a deferral-approved ABN is used to enter goods for hom e consum ption, the COMPILE system validates the ABN and records the deferred GST liab ility for the shipm ent. O n the first d ay of each calendar m onth,

Custom s autom atically transfers to the ATO the aggregated GST deferred liability for the previous m onth's im ports for each importer.

63 Eligibility requirements include: have an ABN and be registered for GST; lodge their BAS monthly and electronically; pay their BAS liabilities electronically; deal with Customs electronically; have a satisfactory compliance record with the ATO, including, as a general rule, not having debt or returns outstanding; and have approval in writing from the ATO to defer payment of GST on

imported goods.

65

Processing by ΑΤΟ 3.30 D e fe rre d GST d a ta re c e iv e d fro m C u s to m s each m o n th is

processed electronically by the ATO's Deferred GST System. The system com pares the records w ith the activity statem ents held in the ATO system and flagged as having a deferred GST liability and then generates the activity statem ents including the deferred GST liability. The BAS m ust be lodged w ith the ATO, and any liability paid. Im porters are able to

offset the deferred GST liability by claim ing an in p u t tax credit to the extent that the goods are acquired for a creditable p urpose.64

Wine Equalisation Tax 3.31 WET is a v a lu e -b a s e d tax of 29 p e r c e n t th a t re p la c e d th e

41 per cent sales tax on w ine from 1 July 2000. Wine m anufacturers, w ine w holesalers and w ine im porters w ill usually have a WET liability and are required to collect and rem it WET to the ATO65 for the A ustralian domestic m arket and Custom s for im portations. Generally, WET will be included in the price for w hich retailers purchase the w ine and the retailer is not entitled to an input tax credit for WET.66 Exports of wine are not subject to WET.

3.32 WET on im portations is payable at the same time and place and in the same m anner as custom s d u ty unless the im porter quotes an ABN to defer p a y m e n t.67 If im p o rte rs d efer p ay m en t th e y are req u ire d to include WET on their BAS after the sale has been com pleted. P rivate im porters pay WET on entry for hom e consum ption.

3.33 The q u otation system w as designed to p rev en t WET becom ing payable before the wine is sold at the w holesale level. Registered entities, including im porters of w ine, are only entitled to defer paym ent if they are reg istered for GST, have an ABN and in ten d to use the w ine for

specific purposes.68

64 The deferred GST liability on importations that relate to making supplies that are input taxed or of a private or domestic nature cannot be claimed as an input tax credit.

65 Registered entities that make an assessable dealing (other than an importation) must include the amount of WET on their BAS.

66 The WET forms part of the retailers' cost base and is passed on in the retail price of the wine to the end consumer. If retailers make their own wholesale sales of wine (that is, to a reseller) they may have a WET liability.

67 Section 13-5 of the WET Act outlines the grounds for quoting.

68 These purposes include: selling the wine by wholesale or indirect marketing sale; or using the wine as a material in manufacture or other treatment or processing; or making a supply of wine that will be GST-free.

66 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

Luxury Car Tax 3.34 The 45 per cent WST on luxury cars was replaced by a 25 per cent LCT.69 LCT is in ad d itio n to any GST payable on luxury cars. U nlike GST, no in p u t tax credit is available for LCT, regardless of w hether the luxury car is used for business or private purposes. When entities such as retailers, w holesalers and m anufacturers make a taxable supply of a luxury car, they are req u ired to charge LCT and rem it it to the ATO. Im porters (including private buyers) w ho make a taxable im portation of a luxury car also pay LCT, unless they are entitled to quote their ABN to defer paym ent. LCT on im portations is generally payable to Custom s at the sam e tim e and place, an d in the sam e m anner, as custom s duty.

Im porters are responsible for calculating the am ount of custom s duty, GST and LCT payable.

3.35 A q u o ta tio n system w as d esig n ed to p re v e n t LCT becom ing

payable before the car is sold or im ported at the retail level. Registered entities, including im porters of luxury cars, are only entitled to defer p a y m e n t for the s u p p ly or im p o rta tio n of a lu x u ry car if th ey are

registered for GST, have an ABN, and intend to use the car for a specific p u rp o se.70

Monthly exchange of data for WET and LCT 3.36 Custom s provides the ATO w ith m onthly data of the ABNs quoted for LCT and WET.71 The ATO m onitors the relev an t business activity statem ents to ensure th a t the WET liability is correctly accounted for and that the LCT is paid w hen the luxury vehicle is sold. M onitoring of the WET liability involves a relatively small population of approxim ately

100 entities72 and the LCT population is approxim ately 1500.73

69 LCT applies at the rate of 25 per cent of the value of the car that exceeds the luxury car tax threshold which, for 2000-01, is $55 134.

70 These purposes include: holding the car for trading stock, other than holding it for hire or lease; carrying out research and development for the manufacturer of the car; or exporting the car in circumstances where the export is GST-free. Subdivision 38-E of the GST Act applies.

71 The monthly download of Customs data includes aggregated liability (deferred GST) and ABNs quoted for WET and LCT. The Customs Alcohol Business Group in Adelaide also provides summary reports to the ATO WET Unit.

72 Figure is based on the July to September 2000 WET reports.

73 Total population involved is approximately 1500 of which there are about 20-50 importers.

67

Additional reporting requirements 3.37 Currently, Customs and the ATO have agreed to exchange high- level ABN, im port deferral and export verification data to enable deferral arrangem ents to operate and, at the same time, su p p o rt some analysis of clients (e.g. export verification). In addition, arrangem ents have already been established for Custom s to p ro v id e the ATO's Revenue A nalysis

Branch w ith high-level financial reports on collections.

3.38 The ATO has requested C ustom s to provide additional rep o rts74 to support the analysis of the GST client base and the ongoing GST system and compliance m anagem ent. As the system is relatively new and dynam ic, the additional reporting requirem ents are likely to evolve over time as the two agencies learn to app reciate/id en tify the aspects of their various d a ta , w h ic h w h e n c o m b in e d , p ro v id e s tra te g ic a n d v a lu e -a d d in g

intelligence.

Processing of GST, WET and LCT collected by Customs 3.39 The COMPILE system calculates the GST that is payable and, if a client is not approved to defer GST, the GST is paid at the same time as the custom s duty. Similarly, if an ABN is not quoted for WET and LCT,

these are also p aid at the same tim e as the custom s duty.

3.40 The am ount of d u ty and tax p aid can be m ade by direct debit

from clients' accounts or receipted by Custom s. M oneys collected are d ep o sited into C ustom s' b an k account and are th en 's w e p t' into the Official Public A ccount at the D epartm ent of Finance and A dm inistration each day.

3.41 C ustom s accounts for the collection an d d isb u rsem en t of the

m oney collected on behalf of other agencies in its Financial M anagem ent Inform ation System. Each m onth, an executive m anagem ent report is sent to the ATO detailing the G ST/LC T/W ET collected for the previous month.

3.42 The A N A O will be rev iew in g , as p a rt of its 2000-01 financial

statem ent au d its, the relevant system s and controls p ertain in g to the GST and the extent that they im pact on C ustom s' financial statem ents. Custom s is also undertaking a GST Post Im plem entation Review75 as part of its 2000-01 Internal A udit Plan.

74 Information will enable a better understanding of the activities of the common client base, the nature and costs of exemptions and the composition and cycles of GST revenue/liability raised at the barrier and the relationship to overall GST collections.

75 This review will, amongst other things, review the reconciliation process for the collection and remittance of GST to the ATO and assess the adequacy of controls over the manual collection of GST.

68 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

Processing of Business Activity Statements by the ATO 3.43 The BAS is the form an entity is required to complete and retu rn to the ATO to rep o rt th e ir o b lig atio n s a n d en titlem en ts, re la tin g to, am ongst other things, GST, WET and LCT, at the end of each tax period or reporting period. A ny am ount ow ing w ill be refunded only after it has been offset against any other outstanding tax debts.

3.44 The BAS is processed w ith in the ATO's Installm ent Processing System (IPS) w here it is required to pass a num ber of integrity checks.76 If the statem ent fails any of these checks a w ork item is autom atically

g e n e ra te d so the file can be assessed b y the rele v an t B usiness Line

A utom ated Workflow A llocation (AWA) team leader. Figure 3 outlines the IPS process.

76 Checks include client data, Fringe Benefit Tax (FBT) liabilities, Withholding Tax liabilities and Pay As You Go (PAYG) installments.

69

Figure 3 ATO’s Installment Processing System

D o e s r i s k

e x i s t ? ,

C l i e n t d a t a

. c h e c k /

F B T c h e c k

P A Y IT I

c h e c k

P A Y I T W

c h e c k

A r i t h m e t i c

^integrity/

B A S r e c e i v e d

in t h e A T O

B A S

p r o c e s s e d

a u t o m a t i c a l l y

C r e a t e s w o r k

i t e m

I n s t a l l m e n t

P r o c e s s i n g

S y s t e m

E v a l u a t e r i s k

in R R E

B A S

p r o c e s s e d b y

B S L

P r o c e s s B A S

R e f u n d s t o p p e r

p l a c e d o n

a p p l i c a b l e i t e m s

W o r k i t e m

a l l o c a t e d t o B S L

t e a m l e a d e r t o

a c t i o n

Source: ANAO analysis of ATO data

70 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

3.45 The lodgm ent of an original or revised activity statem ent w ill trigger a risk profile of the taxpayer by the Risk Rating Engine (RRE).

Risk Rating Engine

3.46 The ATO developed the RRE to assist in identifying p o ten tial fraud and non-compliance behaviour. A lthough the initial focus w as on GST, the RRE has been ex p an d ed to m anage associated risks in other business tax revenue lines.

3.47 The risk profile of a taxpayer consists of tw o com ponents: Risk Scores and Exception Test Results. A risk score is an aggregated percentage indicating the com parative level of risk a taxpayer represents in a specific risk area, w hereas an exception test m easures the risk of fraud or n on­ com pliance based on a single criterion. The exception tests include both fraud and compliance tests77 w ith the fraud tests being given the higher priority.

3.48 The RRE in terfaces a n d read s d a ta from o th er ATO system s

including the Autom atic Integration System (AIS); Tax Return Database (TRD); N ational Tax System (NTS);78 Electronic Funds Transfer database (EFT); and m onthly data received from Custom s.

3.49 W hen the RRE is called by the IPS to risk-profile an activity

statem ent, it will examine w hether sufficient taxpayer data are available to allow the risk profiling process to proceed. If problem s occur regarding the com pleteness and integrity of data, the RRE w ill, depending on the processing, either create an error or miss the particular characteristic.79

77 Compliance tests are carried out for GST Compliance, Large Enterprise Client GST Compliance and Small Business Compliance.

78 NTS is the ATO computer mainframe that processes income tax for companies, individuals, partnerships, trusts and PAYG. AIS is the computer mainframe that processes withholding tax. It is used for PAYG (relating to group employees), GST and prescribed payments.

79 Characteristics are scored according to the weightings that have been applied to each characteristic to determine a risk rating. The risk rating determines the level of likelihood of an entity registering with the ATO and committing fraudulent actions against the ATO. During the Client Update phase, if the data is not there or is invalid, it will cause an error to be written to the

RRE error table. During the Risk Profiting phase, there may be rules that if the data is not available, the characteristic will not be counted towards the total risk score. If an error is present on the error table when an activity statement is received, it will automatically stop processing, return an error to IPS and an IPS (not RRE) work item will be created.

71

3.50 The RRE process will look at all potential risks and if any of these are present w ill generate a w orkflow item 80 in the AWA system. W here the case involves a refund, a stopper is placed on the taxpayer's file to ensure a BAS refund is not issued until the case is assessed. The case is then passed to the Fraud Intelligence Section, if the w ork item is generated by the fa ilu re of a frau d te st, or to the re le v a n t B usiness Line for

assessm ent. A fter the w ork item is finalised, the RRE refund sto p p er will be cleared and the BAS refund processed.

3.51 The ATO has experienced some problem s w ith the RRE in relation to activity statem ent lodgm ents. This has resu lted in a num ber of the characteristics w ithin the com pliance tests being tu rn ed off, as incorrect data was distorting the risk profile balance of clients. The ATO is currently

review ing the characteristics, data sources and business rules that support the tests. These will be m odified, w here necessary, to better risk-profile taxpayers. These m odifications w ill be m ade over the next 18 m onths. The RRE is a new system that w as introduced as p art of the ATO's tax reform p ro g ra m an d , as su ch , w ill re q u ire o n g o in g ev alu a tio n and m odification, particularly as som e of the processes associated w ith the introduction of the GST are constantly changing. Figure 4 outlines the RRE process.

80 The system will generate a workflow item for the highest risk identified. Results of the other tests that have also created a work item are attached to this work item.

72 Examination of Allegations Relating to Sales Tax Fraud

GO

Figure 4 Risk Rating Engine Process

Source: ANAO analysis of ATO data

ABN GST Registration data

RRE client profile

Client Updates Data (monthly, quarterly, yearly)

Generates automated work item

Fraud test

Generates * automated

work item

Compliance . test GST ,

/ L a r g e \

Enterprise Client GST \ t e s t / /

Small Business x test /

Installment processing continues

>

>

Refund

stopper placed on applicable item

W ork item to relevant BSL

W ork item to Fraud Intelligence Section

Refund

stopper placed on applicable item

3

£

I δ1 X

the Goods and Sei

Conclusion 3.52 The 1997 MoU betw een the ATO and C ustom s established the fram ew o rk for the two agencies to w ork to g e th e r effectively across portfolios. In view of the increased involvem ent of Custom s u n d er the N ew Tax System , a revised M oU an d associated schedules are being

developed. The ATO needs to be assured that the system s and procedures used by C ustom s are capable of identifying and cap tu rin g all taxable im portations. The new Purchaser-Provider A greem ent betw een the ATO and C ustom s w ill form p a rt of this MoU and, w hen finalised, should allow the ATO to ensure that the pow ers delegated to Customs officers are being properly exercised.

3.53 The ATO and Custom s are developing a strategic partnership that will enable a greater exchange of ideas, inform ation and allow the partners to gain access to the know ledge and resources of the other agency. As agencies m ove to an o u tp u t/o u tco m es fram ew ork for m anaging resources and m easuring perform ance, this ongoing relationship will help achieve the outcom es of both agencies.

3.54 The ATO and C ustom s dev elo p ed , co o rd in a ted and deliv ered com m unication strategies and cam paigns for p ro m o tin g the N ew Tax System and educating industry stakeholders and agency staff.

3.55 Both agencies identified the risks associated w ith the introduction of the GST an d in c o rp o ra te d th e tre a tm e n t s tra te g ie s and co n tro ls

necessary to ad d ress these risks d u rin g the d ev elo p m en t of the their re sp e c tiv e sy ste m and p ro c e sse s. Each ag en c y h a s also d ev e lo p e d strategies to ensure the ongoing assessm ent, analysis and reporting of risks.

3.56 The ATO and Customs are cognisant of their respective roles and responsibilities in relation to the GST, LCT and WET and have developed a fram ew ork for collecting, deferrin g and processing these taxes. This fram ew ork includes the capability to exchange and validate data across agencies. It also incorporates a n u m ber of controls and integrity checks to ensure th a t the taxes are collected by C ustom s on im p o rtatio n or rem itted to the ATO through the business activity statem ent. D uring this rela tiv e ly early stage of im p lem en tatio n , the ATO a n d C ustom s are continually review ing these system s and processes and refining them w here necessary.

74 Examination of Allegations Relating to Sales Tax Fraud

Implications for the Goods and Services Tax

3.57 The ANAO will review, as part of the 2000-01 financial statem ent au d it process, the system s and controls w ith in the ATO and C ustom s relating to the GST to the extent necessary to form an opinion on their financial statem ents. As p a rt of the p la n n ed perform ance A udit Work Program, the ANAO also intends to undertake in 2001-02, a perform ance audit of the im plem entation of the GST th a t will focus prim arily on ABN re g is tra tio n s . In 2002-03, th e A N A O p la n s to exam ine GST fra u d prevention and control focusing on external GST fraud.

75

4. Fram ework for m anaging GST Fraud

This chapter reviews the assessment of fraud risks and detection of potential fraud by the ΛΤΟ Fraud Intelligence Section and the management of fraud investigations by the ATO Fraud Section.

Introduction 4.1 The w ork undertaken by the ATO to prevent, detect, investigate and prosecute fraud is im p o rtan t for m aintaining the P arliam ent's and com m unity's confidence in the operations of the ATO. The w ork is equally im portant to protect C om m onw ealth revenue.

4.2 F raud is generally categorised by the ATO as either internal or

external frau d . In tern a l fra u d in c lu d es all fra u d com m itted by ATO em ployees, such as u n a u th o rise d access to tax p ay er data, conflict of in te re st, a b re a c h of th e code of c o n d u ct, c o llu sio n and any fra u d

co m m itted by ATO c o n tra c to rs .81 In te rn a l fra u d w ith in the ATO is investigated by the Fraud P revention and Control Section (FP&C).

4.3 E x te rn a l fra u d is a d e lib e ra te in te n t to d e fra u d th e

C o m m o n w e a lth b y o b ta in in g a tax b e n e fit th r o u g h d e c e itfu l an d

intentional unlaw ful actions by taxpayers and non-taxpayers that result in m oney or other benefits being received to w hich they are not entitled.82 As previously noted in p arag rap h 2.18, external fraud can fall w ithin the classification of serious non-com pliance and is related to the Crimes Act. F raud encom passes m atters th a t are dealt w ith th ro u g h investigation and prosecution action.

4.4 The purpose of the ANAO exam ination was to provide assurance th a t th e ATO h a s d e v e lo p e d a d e q u a te s y ste m s a n d p ro c e sse s for

p re v e n tin g , d etectin g an d in v e stig a tin g GST ex te rn a l fraud. As the system s and processes are relatively new and, in som e instances, still being d ev elo p ed and refined, the ANAO could n o t fully assess their effectiveness.

4.5 H ow ever, in review ing the ATO's ability to detect and m anage GST fraud, the ANAO exam ined the m easures taken to overcom e the

81 ANAO Audit Report No.16 2000-01 Australian taxation Office Internal Fraud Control Arrangements, p. 14.

82 Australian Taxation Office Sales Tax Practice Paper No 11 A, Special GST Credit for Sales Tax Fraud Cases, July 2000, p. 1.

76 Examination of Allegations Relating to Sales Tax Fraud

Framework for managing GST Fraud

shortcom ings highlighted in our exam ination of the sales tax fraud cases in v e stig a te d by the STPU an d SBPIU an d th e fin d in g s of the ATO

C ontestability Review u n d e rta k e n in 1999. The ANAO considers that these deficiencies need to be addressed if fraud investigations are to be properly m anaged. The ANAO review ed the assessm ent of fraud risks and detection of potential frau d by the F raud Intelligence Section and the m anagem ent of fraud investigations by the ATO Fraud Section.

Role of ATO Fraud Intelligence and ATO Fraud Sections 4.6 The ATO Fraud Section w as established in A ugust 2000, following the in teg ratio n of the GST F rau d Section and SBPIU. The ATO F raud Intelligence Section, previously p art of GST Fraud, w as established as a separate section in Septem ber 2000. The com bined roles of the ATO Fraud Intelligence and ATO Fraud Sections are to m inim ise the risk of external fraud to the ATO through the prevention, detection and investigation of all potentially fraudulent activities relating to all business taxes, including

the GST. The ATO Fraud and Fraud Intelligence Sections operate w ithin the Specific Field Stream of the Small Business Business Line. Figure 5 outlines the current organisational structure.

Figure 5 Specific Field Organisational Structure

Specific Field

Specials (Audit) AUSTRAC

Fraud

Intelligence ATO Fraud

• Investigations

• Case management framework

• Case management system

• Quality Assurance

• Training

• Information gathered

• Intelligence assessment

• Prioritisation of cases

• Registration of cases

• Allocation of case to region

• Fraud risk assessment

^ ------------------ w

Source: ANAO analysis based on information provided by the ATO.

77

Fraud Intelligence Section 4.7 The F raud Intelligence Section83 is located in the ATO's N ational Office. It is responsible for alerting ATO m anagem ent to fraud control issues and representing the ATO in external forum s on fraud, providing fra u d d e te c tio n analysis to s u p p o rt the o p e ra tio n s of the ATO and

identifying cases for investigation.84

Assessment of Fraud Risks 4.8 Prior to the introduction of the GST, the then GST Fraud Section facilitated GST fraud risk assessm ent w orkshops for project teams. The aim of the w orkshops was to assist ATO officers to prepare high quality control and risk self-assessm ents for their projects. The w orkshops w ere based on the Control and Risk Self A ssessm ent (CRSA) Model and the m ethodology used is outlined in A ppendix 3.85 The consolidated results of these w orkshops are to be u sed by FP&C in the p rep aratio n of the GST elem ent of the ATO Fraud Control Plan. The ATO advised that these w orkshops are continuing and have been expanded to include all ATO business lines.

4.9 The F ra u d In te llig e n c e a n d ATO F ra u d S ectio n s p ro v id e a

consolidated fraud report identifying fraud risk areas to Specific Field m an ag em en t on a m o n th ly an d q u arte rly basis. The rep o rts include 'lessons le arn ed ' from investigations such as control breakdow ns and system w eaknesses.86 The Fraud Intelligence Section advised the AN AO that it has recently developed initiatives w hereby the relevant business line is advised of any system w eaknesses and control breakdow ns. In conjunction w ith the business line, Fraud Intelligence w ill undertake a risk a s s e s sm e n t to id e n tify p o te n tia l fra u d ris k s a n d a p p ro p ria te

treatm en t strategies.

83 The Fraud Intelligence Section has a total of 25 staff. This includes a Section Head, two RRE project officers, three team leaders, 16 intelligence analysts and three administrative support staff.

84 Australian Taxation Office, Fraud Intelligence SB-Specific Field, Intelligence Plan 2000-2001, p. 2.

85 CRSA is defined as any activity where the people responsible for a business area, task, or objective, using some demonstrable approach, analyse the status of control and risk to provide additional assurance related to the achievement of one or more business objectives.

86 Fraud investigators provide the Fraud Intelligence Section with a summary of their significant cases.

78 Examination of Allegations Relating to Sales Tax Fraud

Framework for managing GST Fraud

Fraud intelligence information

4.10 The F raud Intelligence Section is the central repository for all fra u d in te llig e n c e in fo rm a tio n . In te rn a l s o u rc e s of in te llig e n c e

inform ation includes referrals87 from regional fraud units, business lines, call centres, the C om m unity Inform ation, Storage, Com m unication and O bservation (CISCO)88 database and w ork item s generated by the RRE. Inform ation is also received from external agencies, including financial in s titu tio n s , te le c o m m u n ic a tio n s p ro v id e rs a n d o th er g o v e rn m e n t agencies. Intelligence in fo rm atio n can be sent eith er electronically or manually, and all inform ation is stored on an electronic docum ent register.

Processing fraud intelligence 4.11 Intelligence inform ation is analysed to determ ine w h eth er the potential for fraud exists and if further investigation is w arranted by the ATO Fraud Section. If the inform ation is not fraud related, b u t rather a

com pliance issue, the inform ation is passed to the relevant business line. Intelligence analysts are responsible for assessing inform ation referrals and all w ork items generated by the RRE.

4.12 Priority is given to those w ork item s w here a stopper has been

placed on the taxpayer's file to stop the processing of any refund. This practice is know n as activating a 'refund stopper'. If a refund stopper is not finalised w ithin 14 days,89 the RRE autom atically alerts the RRE project

officers and the intelligence analyst responsible for ensuring the w ork item is actioned. If the Fraud Intelligence Section considers that potential fraud exists, it has the discretion to extend the refund stopper.

4.13 If ATO fraud regions90 receive inform ation relating to p otential fraud, an Inform ation Report outlining the details of the case is subm itted to the F ra u d In te llig e n c e S ection. A re g io n w ill e ith e r re q u e s t an

intelligence assessm ent or th a t the case be registered to enable further investigation to be conducted.

87 ATO officers are required to complete a Fraud Referral Form, which includes: date information received; reporting officer; contact details of persons involved and a short narrative of the alleged fraudulent activity.

88 CISCO was established in July 1998 to ensure the consistent capture of community ‘tip-offs’. It is designed to allow the ATO to maximise its intelligence and is used to disseminate that information to the appropriate areas as efficiently and effectively as possible.

89 Under the Taxpayers Charter the service standard states that refunds are to be dealt with within 14 days.

90 There are five regions located in Brisbane, Sydney, Melbourne, Adelaide and Perth.

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Priority level 4.14 As p art of the intelligence assessm ent process, a priority level is assigned to each case. A priority m odel is used to assess the potential im pact of the frau d u len t activity an d to d eterm in e a prio rity level of 'high', 'm ed iu m ' or 'low '. This level influences the responsiveness of the Fraud Intelligence and ATO F raud Sections in review ing and allocating

the case for investigation.91

4.15 If th e in tellig en ce a sse ssm e n t id e n tifies p o te n tia l fra u d u le n t activity w arranting an investigation by the ATO Fraud Section, the m atter is registered as a fraud case on the GST F raud C ontrol (GSTFC) case m a n ag em e n t sy stem ,92 an d fo rw a rd e d w ith a p rio rity re p o rt to the appropriate region. The central registration of all potential fraud cases in the GSTFC system w ill pro v id e im proved m anagem ent control and enable the progress of all cases to be m onitored at regular intervals.

4.16 As at A pril 2001, 623 potential fraud cases had been registered in the GSTFC system and forw arded to the ATO Fraud Section for further investigation. Of these cases, 92 cases related to GST fraud.93 Figure 6 illustrates the fraud intelligence assessm ent process.

91 The ATO Fraud Intelligence Section considers the levels should not be based solely on a monetary figure and that other impact scenarios should be evaluated when allocating a priority level to a case.

92 The GSTFC case management system was developed for use by the GST Fraud Section. It is now used by the ATO Fraud Section to record, monitor and manage fraud investigations. Intelligence analysts within the Fraud Intelligence Section are responsible for the registration of all fraud cases in the GSTFC.

93 The ATO Fraud Intelligence Section assesses all ATO fraud including GST. Of the GST cases detected, 49 have been finalised and 43 are currently under investigation.

80 Examination of Allegations Relating to Sales Tax Fraud

Figure 6 Fraud intelligence assessm en t process

P o t e n t i a l

Fraud

Case registration

POTENTIAL FRAUD CASE

Compliance issue

Intelligence assessment

Intelligence analysis

Research or data analysis

Input into GSTFC and allocate case number

Referral to relevant region for investigation

Apply priority model

Internal and external information sources

Risk Rating Engine test workflow item

Regional Information reports

Feedback to referring agency/source

Information

Referral decision

Work

____ i_ ____

Re-allocate AWA work item to relevant business

line for action

Source: ANAO analysis of ATO data

Work items generated by Risk Rating Engine 4.17 As noted in paragraph 3.46, the ATO developed the RRE to assist in identifying potential fraud and non-com pliance behavior by applying risk-profiles to taxpayers. The RRE conducts fraud tests and com pliance tests w ith fraud tests being given the higher priority. In the case of the GST, RRE fraud tests are ap p lied against A B N /G ST registrations and activity statem en t lodgem ents. RRE project officers w ith in the F raud Intelligence S ection are re sp o n sib le for ex am in in g , d is trib u tin g and m onitoring the w ork item s generated by the RRE follow ing the failure of a fraud exception test.

Assessment of RRE work items 4.18 The RRE has an autom atic filtering process, w hich enables w ork items to be prioritised according to groupings called 'w ork item types'.94 For exam ple, if a w ork item type is assigned a p riority level of '! ', the intelligence analyst is required to undertake any necessary research and analysis im mediately. The priority placed on these w ork item types relates to initial research and analysis only. It is n o t the p rio rity level th a t is assigned for fraud investigation purposes.

Work items generated 4.19 D uring the period of N ovem ber 1999 to February 2001, the ATO processed 15.57 million GST related transactions, w hich included:

• 3.44 m illion ABN registrations;

• 2.15 m illion GST registrations; and

• 9.98 m illion BAS lodgem ents.95

4.20 D u rin g th is p e rio d , 69 432 w o rk ite m s (0.45 p e r c e n t of

transactions) generated by the RRE w ere passed to the Fraud Intelligence Section for assessm ent. Of these w ork items, 13 449 have been finalised and com pleted.96 The rem aining w ork item s are cu rren tly in progress, and include:

• 1343 w ork item s relating to GST R egistrations and BAS lodgem ents being assessed by intelligence analysts; and

• 54 640 w ork item s relatin g to GST reg istra tio n s, w hich have been passed to the RRE project area for analysis and evaluation.

94 A ‘work item type’ has a code and a brief description assigned to it so that Fraud Intelligence analysts can readily identify the fraud tests that detected the potential case of fraudulent activity.

95 This figure includes 7.38 million business activity statements lodged quarterly, and 2.60 million on a monthly basis.

96 Some 1072 work items were reviewed and completed but were not correctly updated on the system by the Intelligence Analysts.

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Framework for managing GST Fraud

4.21 The ATO advised that, after fraud profiling97 the 54 640 w ork items generated by GST registrations, it was found th a t that these related to 25 000 clients. The ATO also advised th a t these w ork item s have been assessed as low -priority and low-risk, as it is highly likely that the client data will again be tested should an activity statem ent be lodged. Given the high volum e of w ork item s generated by the RRE for the registration process, an d the lim ited resources available to assess them , the RRE project officers suspended one of the 'trig g e rs' or status event points related to GST reg istratio n .98 There are three sta tu s event points that

'trig g e r' the fraud tests and the rem ain in g tw o w ill still cap tu re the

required data for the fraud tests.

4.22 The ANAO w as advised that assistance has been sought from the ATO's Business R egistration Systems (BRS) to review each in d iv id u al w ork item, evaluate the fraud exception tests and identify any potential

system problem s or m odifications.

4.23 A lthough the RRE is considered by the ATO to be a major source of intelligence, it currently generates a significant num ber of w ork items th a t the F raud Intelligence Section is unable to process given existing resource levels. The ANAO also recognises that the RRE is a new system and, as such, will require ongoing review and m odification, particularly during its initial im plem entation phase. H owever, if the current w orkload generated by the RRE cannot be reduced through system m odification, the ATO m ay need to assess the benefits of the RRE as an intelligence source, determ in e the level of resources it is p re p a re d to devote to

p ro cessin g the w ork item s g en era ted by the RRE and a d o p t a m ore rigorous risk m anagem ent strategy for handling them.

97 Fraud profiling was undertaken within the ATO's Datawarehouse.

98 There are three status points relating to GST registration that ‘trigger’ fraud tests: on initial application, when changing details and when accepted by ATO. The ‘when accepted by ATO’ status trigger was suspended. Information is still captured by the other two ‘triggers’.

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Management of fraud investigations by the ATO Fraud Section 4.24 The Fraud Control Policy of the Commonwealth requires the A ustralian F e d e ra l P o lic e (AFP) to c o n d u c t in v e s tig a tio n s d ire c te d to w a rd

prosecution u n d er the Crimes Act 1914, subject to three exceptions:

• agencies that prosecute fraud cases under their ow n legislation, such as the ATO, should continue to investigate m atters w here the Crimes Act is c o n s id e re d m o re a p p ro p ria te a n d th e D ire c to r of P u b lic

P rosecutions (DPP) is satisfied th a t the p ro secu tio n brief does not require AFP involvem ent;

• agencies th a t can satisfy b o th the AFP and DPP th a t they have the

capacity and capability to investigate crim inal cases; and

• m atters in v o lv in g m u lti-ju risd ictio n al o rg an ised crim e, w hich are referred to the N ational Crim e Authority.

4.25 The ATO Fraud Section" undertakes fraud investigations either in d ep en d en tly or in conjunction w ith other ATO bu sin ess lines, other governm ent agencies and law enforcem ent agencies. F raud investigators are resp o n sib le for the collection an d p re s e n ta tio n of the necessary evidence to su p p o rt prosecution and adm inistrative outcomes. Briefs of evidence are prep ared for cases to be referred to the DPP for crim inal prosecution.

Standards for fraud investigations 4.26 The Com m onw ealth Investigation Technical Standards Comm ittee has developed the Commonwealth Fraud Investigation Standards that apply to the sam e agencies as the Fraud Control Policy of the Commonwealth. The stan d ard s outline the w ritten p rocedures each agency should have in place to undertake an efficient and effective investigation. The ATO Fraud Section is c u rre n tly d ev elo p in g its ow n S tatem en t of In v estig atio n s S ta n d a rd s th a t w ill be b a se d o n th e C o m m o n w e a lth in v e stig a tio n s ta n d a r d s , b u t also h a v e re g a r d to th e s p e c ia l fe a tu re s of tax

investigations.9 9 100

99 The ATO Fraud Section has a total of 117 staff. This includes a National Manager, five regional managers, two project manager, 85 investigators, 16 team leaders and eight administrative support staff.

100 The ANAO was advised that the Standards are at the final drafting stage.

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Framework for managing GST Fraud

Case management framework 4.27 Effective case m anagem ent requires case officers to follow logical processes and adopt strict protocols in the planning, conduct and recording of investigations. This will ensure a certainty of process th at all major steps in the investigation are logically determ ined, all possible alternatives considered and that decisions m ade are tran sp are n t and docum ented. M anagem ent review processes will provide further assurance that a case has been properly investigated.

4.28 Following the integration of the SBPIU and GST Fraud Section, it was recognised that there needed to be a consistent approach to the w ay in w hich cases were assessed, planned, recorded and investigated. To achieve th is, the ATO F rau d Section h a s d e v e lo p e d a n a tio n a l case m a n a g e m e n t fram ew o rk , s u p p o rte d b y a case m a n ag em e n t system

(GSTFC), that consists of:

• case referral and case recording by the Fraud Intelligence Section;

• assessm ent of cases, prioritisation, and allocation to case officers;

• case planning;

• evidence gathering and exhibit handling;

• preparation of prosecution brief;

• liaison and feedback arrangem ents; and

• quality review mechanisms.

4.29 W ithin this case m anagem ent fram ew ork, certain decisions taken during the course of an investigation m ust be recorded in the form of a Case Decision Record (CDR). This is to ensure that: the decision m aking process is a deliberate one; the details and reasons for each decision are recorded in w riting; the decisions provide a basis for review ing cases; an d a case can be tra n sfe rre d from one case officer to an o th er w ith

minimal continuity problem s. Decisions that are to be recorded on a CDR are those that have a major effect on the course of the investigation. For example, the acceptance or rejection of a case, referral to another agency or section, recom m endations, search w arran t action or term ination.

Case referrals, assessment and allocation 4.30 After being registered in the GSTFC system and allocated a case number, cases (and a priority report) are referred to the relevant regional Fraud Investigation Unit. Cases are then assessed by the regional m anager

or, in larger regions, by an assessm ent panel.101 This assessm ent determ ines

101 The assessment panel is made up of the regional manager and unit team leaders.

85

an o v erall ra tin g using a case co m plexity m o d el th a t co n sid ers the

offences involved, jurisdiction, resource im plications and the expertise of investigators.102 Regional staff m ay also re-assess and, if considered necessary, change the priority level assigned by the F raud Intelligence Section.103 For particularly large or complex cases, a prelim inary evaluation may be carried out by an in v estig ato r/team leader and a report prepared for the regional manager, as p art of this assessm ent process.

4.31 The case is then allo cated to an in d iv id u a l case officer or an

investigating team to u n d ertak e the investigation. The referring area, officer or agency is advised w hen a case referral has been received, is allocated to a case officer, or an investigation will not be conducted.

Refund stoppers 4.32 If a re fu n d s to p p e r h a s b e e n a p p lie d to a case, it is the

r e s p o n s ib ility of the F ra u d In te llig e n c e S ectio n to a d v ise the

investigators.104 Case officers become responsible for the refund stopper and have the discretion to either rem ove or retain it. Generally, a refund s to p p e r w ill re m a in d u rin g an in v e s tig a tio n , h o w e v e r, in c e rta in

circumstances, m ay be rem oved to allow a refund to be processed even though an investigation is being conducted.

4.33 The ANAO was advised that refund stoppers are regarded as a regional responsibility. Case officers and team leaders are required to m onitor refund stoppers to ensure that they are not left on indefinitely and w ith o u t v alid reason. The activ atio n of a re fu n d sto p p er is not

recorded in the GSTFC system and team leaders m ust refer to the case file to determ ine any details relating to the refund stopper. Also, there are no docum ented procedures for handling refund stoppers.

4.34 The ANAO considers that, if these stoppers are not recorded or reported on in any way, the possibility exists, particularly if there is a changeover of case officer or team leader, for re fu n d sto p p ers to be ignored. To ensure that refund stoppers relating to fraud cases are being properly m anaged, the ANAO considers that regional m anagers should be responsible for m onitoring, and reporting on, all refund stoppers in

their region. Procedural guidelines should also contain clear instructions for case officers and team leaders concerning the activation or deactivation of refund stoppers.

102 The complexity model outlines three levels of complexity: high; medium; and low and the necessary skill level of the investigators: advanced; high; and base level.

103 The priority model must be used in any re-assessment of the priority level assigned by the Fraud Intelligence Section.

104 The ATO advised that the intelligence analyst will advise the regional office concerned.

86 Examination of Allegations Relating to Sales Tax Fraud

Framework for managing GST Fraud

Conducting investigations

Investigation plan 4.35 The case officer is required to com plete an investigation p la n 105 that is to be reviewed and approved by the team leader. All investigations are to be c o m p le te d in a c c o rd a n c e w ith th e A TO 's S ta te m e n t of

Investigation Standards, w hich is currently being drafted. D uring the investigation, the case officer is responsible for ensuring the GSTFC system is up d ated to accurately reflect case details and investigation status. For m ore complex cases, details of the investigation w ill also be recorded on an Investigation Evidence Matrix or Tasking Matrix.

4.36 W hen the in v e stig a tio n is c o m p le te d , a b rief of ev id en ce is

p re p a re d and forw arded to the DPP for consideration of prosecution action. W hen the case is finalised, the team leader or regional m anager m ust approve closure of the case file.

4.37 C ase officers are to e n su re th a t case files are m a in ta in e d in

accordance w ith the Archives Act 1983. The ATO advised that the draft p ro c e d u r a l g u id e lin e s w ill in c lu d e g u id a n c e on p ro p e r case file

m anagem ent practices, including archival and disposal instructions.

4.38 W hen a case has been successfully prosecuted, the ATO F raud Section w ill advise the relev an t referral source and 'm ark et' the case internally through the ATO's fortnightly new sletter ATO Extra. To use successful prosecutions as a deterrent to others, cases will be publicised through m edia releases. Figure 7 outlines the case m anagem ent process.

105 The investigation plan includes: allegation; background; offences; targets; jurisdiction; special considerations/constraints; m ission; execution; adm inistration; costing; command and communication; recording system; security and any other relevant issues.

87

ns Re

Framework for managing GST Fraud

Timeliness of investigations 4.39 The time taken to complete an investigation was one of the issues raised in the ANAO's exam ination of the sales tax fraud cases. A num ber of these cases had been under investigation for several years. The ATO Fraud Section advised that, although it is difficult to determ ine in advance

the time required for an investigation, m easures have been p u t in place to manage the timeliness of investigations. These measures include:

• using the priority and complexity models to provide an indication of the time and workload required for a case;

• case planning and approval processes;

• team based investigation approaches and segm enting investigations by examining only particular elements of a case;

• regional and national m anagem ent reporting;106 and

• quality assurance processes.

4.40 A lth o u g h th e re is e v e ry lik e lih o o d th a t cases w ill n o t be

investigated due to resourcing constraints, the ATO advised that this d ec isio n w ill be m ad e at th e a s s e s sm e n t p h a s e and n o t a fte r an

investigation has commenced. For this reason, the ANAO considers it is im portant that there are clearly defined param eters for those cases w here an investigation will not be carried out.

4.41 The ATO also advised that investigation cases will only be closed w ithout a result if there is insufficient evidence or no offence has been disclosed. Although the decision to close a case will rest w ith regional

managers and their team leaders, these decisions will be tested through national management reporting and quality assurance processes.

Feedback arrangements between the Fraud Intelligence and ATO Fraud Sections 4.42 Currently, there are no form al feedback arrangem ents betw een the ATO Fraud and Fraud Intelligence Sections. However, the ANAO was advised that meetings are held on an inform al basis to discuss the

quality of fraud intelligence assessm ents, exam ine significant issues (in c lu d in g em erg in g p a tte rn s a n d tre n d s ) a n d d isc u ss re s u lts of

inv estig atio n s to ensure b e tte r case selection processes. The ANAO considers that a more form alised process w ould be beneficial.

106 These type of reports will include details of allocated and unallocated cases and the age of cases.

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Case management system 4.43 The ATO Fraud Section uses the GST Fraud Control (GSTFC) case m anagem ent system to record, m onitor and m anage fraud investigations. The GSTFC system is a M icrosoft Access database th a t was developed for use by the form er GST F raud Section.

Overview of GSTFC functionality 4.44 GSTFC is a national system that has been designed to allow fraud officers, depending on user access level, to:

• enter case details on the system and in clu d es-b u t is not lim ited to - case num ber, subject of case, team , region, costs of case investigation, case history, offence type, status, case officer and priority level;

• perform specific searches, using com binations of inform ation filters and p aram eters that lim it the field of p o ten tial cases, to identify a case or particular types of fraud cases;

• u p d ate entries relating to case costs, referrals of case, related fraud cases, and running sheet (ongoing case activity) entries; and

• trac k the reco v e ry of re v e n u e th ro u g h o u t th e in v e stig a tio n and

prosecution processes.107

Proposed system enhancements 4.45 The ATO advised that the GSTFC system is to be converted to an SQL database w ith greater system functionality and enhanced reporting capabilities. The proposed tim ing of these system developm ents, subject to available resources, is as follows:

• May 2001: GSTFC to be converted to an SQL database.

• A u g /S ep t 2001: New ATO Fraud case m anagem ent system called Fraud Investigation Records M anagem ent System (FIRM S). T h is sy ste m is th e GSTFC sy ste m

enhanced to provide greater system functionality.

• A u g /S ep t 2001: Enhanced reporting capability for the ATO Fraud Section's n atio n al and regional m anagers, team leaders and case officers.

107 GSTFC: GST Fraud Case Management System— User Guide., 30 November, 2000, pp. 21-22.

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Framework for managing GST Fraud

GSTFC security arrangements 4.46 There are a num ber of security arrangem ents in place to guard against unlaw ful or u n au th o rised access to the GSTFC system , w hich operates in both a netw ork and stand-alone environm ent. The system is installed on the ATO Fraud Section's own netw ork server, w hich is located in a secure area and m anaged by the Section's inform ation technology staff. Access to GSTFC is only available via passw ord protocols and staff m ust be security cleared to at least Ά Τ Ο P rotected'. Access levels are determ ined by the classification of user requirem ents.108

4.47 The system ad m in istrato r also has access to the system 's audit logs that record the details of access to cases.109 This function is largely to p ro tect against, and allow in v estig atio n of, instances of suspected internal fraud. A lthough this function exists, the ATO advised that it has not yet been used.

Additional security arrangements 4.48 There are additional security arrangem ents governing access to H ighly Protected (HP) cases.110 HP cases are recorded in the GSTFC case m a n ag em e n t system , b u t w ith o u t case-specific id en tity inform ation.

D uring the in v estig atio n , case d etails are re c o rd e d on a stan d alo n e com puter111 w ith a rem ovable hard disk th a t can be appropriately secured. The in v e stig atio n is m o n ito red and rev ie w e d by the team lead er or regional manager. At the conclusion of the case, the identity inform ation will be recorded in the GSTFC system only if it is considered appropriate

to do so by the Regional Manager.

Current case monitoring and reporting capabilities

Case monitoring 4.49 The GSTFC system currently allow s regional m anagers and team leaders to review and m onitor the p ro g ress of in d iv id u al cases. Case details can only be u p d ated or changed by the case officer. For a team

leader or regional m anager to am end case details or to close a case they need to reallocate the case to them selves.

108 There are five user levels categorised from Level 1 access, which is provided to all investigators and system users, through to Level 5 access, provided only to the system administrator.

109 Records include details of the actions taken by each user per session; cases that an officer has gained access to in a given period of time and officers that have gained access to a particular case within a period of time.

110 Cases are afforded the classification of ‘Highly Protected’ (HP) if there is a particular sensitivity in relation to the case, such as the identity of the taxpayer, a particularly dangerous criminal (or group), or where the circumstances of the case require a very high level of security to ensure a successful operation. The ATO advised that, currently, there are no HP cases under investigation.

111 The Fraud Intelligence Section, and each regional team, will have a stand-alone computer.

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4.50 The 'Search' function112 allow s any fraud officer to obtain details on an individual case only. The ATO's business rules restrict the 'Printing' capability for the 'Search' function. Team leaders and regional m anagers cannot p rin t details of individual cases relating to the following:

• Case Details—includes current status of the case, priority level assigned to the in v estig atio n , the in fo rm atio n source for th e case, an d the related business line.

• Case History—includes in fo rm atio n relating to the case p rio r to its investigation.

• Offence—includes the offence type and result.

• Officer—includes the w orking status of officer.

• People—includes details of people subject to investigation.

4.51 The ATO advised that the decision not to allow all case details to be p rin ted w as related to the sensitivity of the case inform ation and, also, because this inform ation is available on the case file.

4.52 The inform ation relatin g to in d iv id u al case details that can be printed is restricted to the following:

• Running sheet—records all activities that occur during the investigation.

• Related cases—displays other cases, if any, that are related to the selected case as part of a larger investigation.

• Referrals—displays any referrals to other investigation bodies for that case.

• Costs—displays all costs associated w ith the investigation.113

4.53 The inability to p rin t all case details m ay m ake m onitoring the progress of a case difficult for team leaders and regional m anagers, as currently each screen of the GSFTC system has to be carefully exam ined and checked against the other screen entries to form an overall opinion on the conduct and progress of the case. The ANAO considers that the present restrictions on printing case details should be reassessed if they

are found to im pede the ability of regional m anagers or team leaders to m onitor cases.

112 The tabs in the GSTFC search function include: case details; case history; case costs; offence; office; people; and running sheet. Within each of these search screens exists a number of fields that can be used to refine the search. It is also possible to limit the search according to whether the case is currently active or closed.

113 GSTFC: GST Fraud Case management system— User Guide., op. cit., p.13-49.

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Case management system reporting capability 4.54 Currently, there are lim ited reporting capabilities in the GSTFC system. Regional m anagers and team leaders cannot generate sum m ary reports relating to frau d cases u n d er th eir control, such as total cases allocated to investigating team s or officers, p rio rity levels of all cases, status of all cases, costing for all cases, or d u ra tio n of investigations. These reports can only be generated by the national system adm inistrator

at the request of regional staff. A lternatively, sum m ary reports can be co m p iled by rev iew in g in d iv id u a l case e n trie s an d collating in to a sum m ary docum ent. However, depending on the size of the region, this could prove to be a be resource intensive exercise.

4.55 A t present, GSTFC rep o rtin g capabilities are lim ited to reports that are generated by the national system adm inistrator on an ad-hoc, rather than regular, basis.

Proposed reporting and monitoring capabilities 4.56 The reporting and m onitoring capabilities of the case m anagem ent system w ill be extended u n d er Phase 2 of the system 's developm ent. The planned com pletion date is A u g u st/ Septem ber 2001. However, the ATO ad v ised that this project m ay be d elay ed because of resourcing

d ifficu lties. W hen co m p leted , the en h an cem en ts w ill allow n atio n al m anagers, regional m anagers and team leaders to autom atically generate a suite of reports. These reports will cover the prim ary functions of the Section and provide u p d ated data on a m onthly, quarterly and annual basis for the following:

• annual-—for reporting to Parliam ent and the ATO Executive;

• perform ance;

• adm inistration; and

• investigation.114

4.57 T he re p o rts are e x p e c te d to p ro v id e d a ta for th e d iffe re n t

o p eratio n al lev els-team , b ran ch , region and n ational. O ther fixed or flexible reporting requirem ents identified during the Phase 2 developm ent p ro cess w ill also be in c o rp o ra te d , w h e re p o ssib le , into the GSTFC system 's functionality.

114 All staff with user access levels 3-5 will be able to generate these reports at any time for their own management purposes. However, for management purposes at the National level, these reports will be generated at National Office.

93

Quality assurance 4.58 Q uality assurance (QA) review s of frau d cases should indicate w h eth er an a d e q u a te s ta n d a rd h a s been ach iev ed an d m ay su g g est im provem ents in terms of training, changes to procedures, investigation m anagem ent or investigation policies.

4.59 The ATO F rau d S ectio n is c u rre n tly d e v e lo p in g its q u a lity

assurance guidelines that will outline the procedures to be im plem ented for review ing cases at the follow ing levels:

• regional m anagers and team leaders;

• senior m anagers in N ational Office and the system adm inistrator;

• evaluation by the DPP on the quality of each brief of evidence prepared by the ATO; and

• quality assurance reviews by the AFP as p a rt of an annual program of reviews in APS agencies.115

4.60 Cases are to be m onitored and assessed at least m onthly by the team leader or regional m anager. W hen a case has been com pleted it should be review ed and signed-off by the regional m anager to ensure that all p ro p e r in v estig atio n processes have been follow ed. In larger regions, this process will be carried out by the team leader. This review will assess the quality of the investigation and the ATO control processes so that patterns and trends can be identified and m onitored.

4.61 A 'm acro' level case m anagem ent review w ill be carried out by senior m anagers to ensure that cases are being com pleted within defined priority and resource param eters and reasonable tim efram es. This process w ill be assisted by specific re p o rts g en era ted by the GSTFC system adm inistrator. D ata integrity checks can also be carried out to ensure that the case m anagem ent system is being u sed correctly and th a t all case details are being properly re c o rd e d .116

4.62 The DPP has been asked to evaluate the quality of each brief of evidence subm itted by investigators and to provide feedback to regional m anagers, team leaders and investigators. The ATO advised that the AFP has agreed n o t to undertake any QA review s u n til late-2001 to allow time for the Section to fully in teg rate and to develop and im plem ent guidelines and procedures.

115 The CLEB Quality Assurance Review Guidelines outline the AFR’s responsibilities for QA reviews of prosecution cases in APS agencies.

116 The system administrator advised the ANAO that data integrity checks have not yet been conducted and will only occur at the request of the ATO Fraud Section’s senior managers.

94 Examination of Allegations Relating to Sales Tax Fraud

Framework for managing GST Fraud

Training 4.63 Training for fraud intelligence officers and fraud investigators is m anaged by the training m anager w ithin the ATO Fraud Section. Prior to u n d e rta k in g fraud investigations, in v estig ato rs m ust com plete the C ertificate IV in G o v ern m en t (F raud C o n tro l Investigation) tra in in g course.117 The ANAO has been advised th at officers will also be required to com plete the Diplom a of G overnm ent (Fraud Control Investigation) as this h ig h er qualification has been set as the m inim um req u ired for investigations in the Fraud Section. The ANAO considers there m ay also be benefits, particularly for new staff, in including a course com ponent

that is tailored to ATO specific issues. These issues may include taxation legislation requirem ents, ATO inv estig ato rs' pow ers of access and the case m anagem ent fram ew ork, including the GSTFC system.

4.64 O ther training activities118 to com plem ent the established F raud C o n tro l In v e s tig a tio n T ra in in g P ro g ra m , a n d a tra in in g p ro g ra m

specifically tailored to m eet the needs of the Fraud Intelligence officers, are being developed.119

4.65 To provide access to training docum entation, inform ation relating to fra u d policies an d g u id e lin e s, reference m a te ria l (in clu d in g case m anagem ent proforma), and training m aterial w ill be stored on a 'frau d d riv e ', w hich can only be accessed by frau d in v estig ato rs and frau d in te llig e n c e officers. D o c u m e n ta tio n re la tin g to the S ta te m e n t of In vestigation S tandards, in tern al and external frau d policies, referral guidelines for other ATO business lines and procedural guidelines and stan d ard form s, w ill be available on the ATO F raud Section's w ebsite that is available to all ATO staff.

117 The Commonwealth Fraud Investigation Standards have been incorporated into this training course.

118 Other activities include a ‘Calendar of Internal Courses’, a ‘Skills Register’ to ensure the skills of officers are recognised and utilised and identifying suitable external courses.

119 The ATO advised that negotiations are being conducted with Customs to allow fraud intelligence officers to participate in the Customs Operational Intelligence Analysis course. On completion of this course the ATO anticipates that fraud intelligence officers will complete the Diploma of Government (Fraud Control Prevention/Detection).

95

Conclusion 4.66 T he 1999 SBPIU C o n te s ta b ility R ev iew id e n tifie d an

u n c o o rd in a te d , in c o n sisten t n a tio n a l a p p ro a c h to th e selection and m anagem ent of cases as a factor contributing to frau d cases not being prom oted and investigated by SBPIU. The ATO Reform Program paper also noted a lack of clear and consistent policies and guidelines on how ATO officers are to deal w ith m a tte r of serious non-com pliance. The A N A O 's a n a ly s is of th e s a le s tax fra u d cases id e n tifie d s im ila r

deficiencies.

4.67 The F ra u d In tellig en ce S ection h as im p le m e n te d assessm en t procedures and processes for selecting and p rioritising all fraud cases prior to registering the case on the GSTFC case m anagem ent system and fo rw arding it to the a p p ro p ria te ATO frau d region for investigation. Central registration of cases should address the problem of all cases not being reg istered on the case m anagem ent system , as w as noted for a num ber of the sales tax fraud cases.

4.68 The ATO Fraud Section has developed and im plem ented a case m anagem ent fram ew ork that incorporates the assessm ent and allocation of cases by the regional m anager or assessm ent panel. A rrangem ents are also in place to advise the referring area, officer or agency of the action being taken. The ANAO considers this to be a positive initiative that overcomes the previous lack of any feedback arrangem ents for sales tax in v e s tig a tio n s . In v e s tig a to rs a re re q u ire d to p la n and c o n d u c t

investigations in accordance w ith the ATO's Statem ent of Investigation S tandards and p rocedural guidelines, w hich are in the final stages of d ev elo p m en t. M easures to en su re th a t in v e stig a tio n s are com pleted w ithin a reasonable timefram e, and the im plem entation of the proposed

quality assurance review program , will also im prove case m anagem ent practices.

4.69 It is appreciated that the ATO Fraud Section w as only established in late 2000 and that m ost investigators have com pleted the Certificate IV in G o v e rn m e n t (F raud C o n tro l In v e s tig a tio n ) T raining C o u rse. H ow ever, th ere are cu rren tly no p ro m u lg a te d n a tio n a l in v estig atio n standards, case m anagem ent procedures and quality assurance guidelines for the ATO F raud Section. These stan d ard s and procedures are being developed, but until such time as they are published, and im plem ented, and ap p ro p ria te training provided, fraud investigators w ill have only lim ited g u id a n c e on how to p ro p e rly u n d e rta k e an d m anage frau d investigations. Consequently, until such action is taken, there could be an elem ent of inconsistency in the w ay investigations are conducted across ATO fraud regions.

4.70 Inform al processes exist for the Fraud Intelligence and ATO Fraud S ectio n s to c o m m u n ic a te le sso n s le a rn e d , im p ro v e th e q u a lity of

96 Examination of Allegations Relating to Sales Tax Fraud

Framework for managing GST Fraud

assessm ents and identify em erging issues. However, the ANAO considers there w ould be benefits in form alising these arrangem ents to ensure that control breakdow ns, system weaknesses and patterns and trends relating to fraud issues are identified and addressed ATO-wide.

4.71 The GSTFC case m anagem ent system has the potential to address the d eficiencies id e n tified w ith the CaM RA system . H ow ever, u n til p roposed system developm ents are com pleted an d the system is fully operational, the capacity of the system to be an effective case m anagem ent

tool is lim ited.

4.72 C u rre n t re stric tio n s on the p rin tin g c a p a b ility of p a rtic u la r

elem ents of the GSTFC search fu n ctio n m ay m ake m o n ito rin g cases difficult for team leaders and regional m anagers, particularly in larger regions. A lthough it is ap p reciated th a t this decision is based on the sensitivity of particular case inform ation, the ANAO considers that, if it is found that regional m anagers and team leaders are having difficulty in review ing cases, consideration should be given to providing them w ith the capability to print all case details.

4.73 The capacity to generate sum m ary and m anagem ent reports for national m anagers, regional m anagers, an d team leaders is currently limited. Phase 2 will extend the GSTFC reporting capability w ith a suite of standard reports available for different operational levels. However,

the possibility that this rep o rtin g capability could be delayed due to resourcing difficulties has im plications for the effective m anagem ent of fraud cases.

4.74 To ensure that the initiatives currently u n d er developm ent or in progress contribute to the effective m anagem ent of fraud cases, the ANAO considers there w ould be benefits to the ATO F rau d Section if a p o st­ establishm ent review w as com pleted w ith in the next 12 m onths. This

review should address the follow ing areas and evaluate w hether:

• the case m anagem ent fram ew ork has been im plem ented in all ATO frau d regions, is o p erating effectively and frau d investigations are being properly m anaged;

• the S tatem ent of Investigation S tandards and procedural guidelines have been im plem ented and clearly articulate the responsibilities of regional m anagers, team leaders and investigators and detail w hat is required to ensure that a case is investigated in a timely m anner;

• a q u a lity assu ran ce rev iew p ro g ra m has b een im p lem en ted th a t

provides an indication that investigations have been properly carried o u t an d an o p p o rtu n ity for co n stru c tiv e feedback to be given to

investigators and team leaders;

• the training program is m eeting the specific needs of fraud intelligence officers and fraud investigators; and

97

• the case m anagem ent system is fully operational and that the proposed system im p ro v em en ts allow cases to be re c o rd e d , m o n ito red and reported on by case officers and all levels of m anagem ent.

Recommendation No.2 4.75 To e n s u re th a t cases of a lle g e d fra u d are b e in g a d e q u a te ly

in v estig ated an d that the in itia tiv e s im p lem en ted by the ATO F raud Section are facilitating the effective m anagem ent of these cases, the ANAO recom m ends that the ATO F raud Section com plete a post-establishm ent review w ith in the next 12 m o n th s. This review sh o u ld focus on the follow ing areas:

• case m anagem ent fram ew ork;

• investigation standards and procedural guidelines;

• the quality assurance review program ;

• training program ; and

• case m anagem ent system.

ATO response 4.76 A greed.

Investigations with other entities 4.77 T here are in s ta n c e s w h e n th e ATO u n d e rta k e s jo in t fra u d

investigations w ith other ATO com pliance areas, Com m onw ealth agencies and law enforcem ent agencies. In these cases, the ATO currently operates under a Joint O perational A greem ent with the agency concerned. As the capacity for joint operations120 is increasing, the ATO Fraud Section advised the ANAO that, prior to drafting the ATO's form al policy for handling such investigations, it is seeking legal advice to address issues relating to access pow ers and inform ation secrecy provisions.

Involvement of Customs in fraud cases 4.78 In the context of this exam ination, the ANAO sought to identify the circum stances under w hich C ustom s m ay become involved in fraud investigations relating to GST, LCT and WET. The C ustom s process is that w here officers suspect fraud involving custom s d u ty and GST, LCT and WET, the m atter is to be referred to Custom s Investigations Branch,

120 The ATO advised that there is scope for joint operations with other Commonwealth agencies, Commonwealth and State law enforcement agencies, private sector accounting firms and financial institutions.

98 Examination of Allegations Relating to Sales Tax Fraud

Framework for managing GST Fraud

w hich will consult w ith the ATO in all cases. The referral of such cases could result in the ATO:

• declining to investigate the m atter;121

• conducting a joint investigation and prosecution using the Crimes Act; or

• applying an adm inistrative penalty.122

4.79 C ustom s will not investigate the fraudulent use of ABNs or fraud cases relatin g to GST, LCT a n d /o r WET th a t do not involve custom s duty. These cases will be referred directly to the ATO.

4.80 The ATO, in consultation w ith Custom s, is currently developing its Practice Statem ent for adm inistrative penalties. This statem ent will allow Custom s to im pose adm inistrative penalties that are consistent w ith ATO policies for GST im portations.

Referral of cases by ATO 4.81 The ATO process requires that w here officers identify fraud cases relating only to custom s duty, cases are to be referred to Custom s. If d u rin g an ATO investigation, a custom s d u ty com ponent is identified, Custom s will be advised. The decision will also be m ade as to w hether a joint investigation is appropriate.

C anberra ACT 10 July 2001

P. J. Barrett A uditor-G eneral

121 In these circumstances, Customs may decide to investigate and prosecute Customs offences and, with regard to LCT/GST/WET, apply an administrative penalty or, upon conviction for the Customs offences, seek a court order to recover GST/LCT/WET via s21B of the Crimes Act, The delegation to apply administrative penalties within the Customs lies with the Commercial Compliance Branch.

122 In these cases, Customs may then decide to investigate and prosecute the Customs offences. Customs Investigation Notice Number 2000/2, dated June 2000.

99

100 Examination of Allegations Relating to Sales Tax Fraud

Appendices

102 Examination of Allegations Relating to Sales Tax Fraud

Appendices

Appendix 1

Example of the Goods and Services Tax Supply of Goods

A bicycle importer imports a bicycle for $400 (including duty, freight and insurance) and pays $40 GST to Customs upon importation.

The bicycle importer then sells the bicycle to a wholesaler for $550 (including $50 GST).

The wholesaler packages and sells it to a retailer for $660 (including $60 GST).

The retailer sells the bicycle to a consumer for $770 (including $70 GST). The bicycle importer pays $40 to Customs when the bicycle is first imported. He offsets this $40 against the $50 GST payable on the supply to the wholesaler. The bicycle importer then pays $10 GST to the ATO.

The wholesaler offsets the $50 GST included in the price charged by the bicycle importer against the $60 GST payable on the supply to the retailer. The wholesaler then pays $10 GST to the ATO. The retailer offsets the $60 GST included in the price charged by the wholesaler against the $70 GST payable on the sale to the consumer. The

retailer then pays $10 GST to the ATO.

Only the consumer bears GST on the final product, as consumers cannot claim input tax credits for GST included in the price paid.

Bicycle importer imports Customs entry Customs

bicycle for $440 including $40 GST to pay $40 $40 GST paid

w to Customs

ATO $10 GST paid by bicycle importer to ATO

$10 GST paid by wholesaler to ATO

$10 GST paid by retailer to ATO

$70 total GST paid

Source: 4ΓΟ, Importing - The New Tax System (2nd Ed). Australian Taxation Office, April 2000, p. 10.

Bicycle importer sells bicycle to wholesaler for $550 including $50 GST

Business Activity Statement GST on sales $50

less input tax credit $40 )► GST to pay $10

Wholesaler packages and sells bicycle to retailer for $660 including $60 GST

Retailer sells bicycle to customer for $770 including $70 GST

Business Activity Statement GST on sales $60 -w

less input tax credit $50 r (

GST to pay $ 10

Business Activity Statement GST on sales $70

less input tax credit $60 GST to pay $ 10

Consumer pays $770 (including $70 GST) to retailer

103

Appendix 2

Customs functions relating to sales tax The prim ary functions of C ustom s in relation to sales tax included:

• conducting live (time of im portation) checks for both commercial and non-com m ercial goods, w h ich involved exam ining all entry details including sales tax;

• ensuring th a t for im p o rted goods the correct rate of sales tax w as

nom inated and the a p p ro p ria te am ount paid, th a t a valid sales tax registration num ber has been quoted by an eligible individual, or that a valid exem ption has been claimed;

• issuing notices of assessm ent for goods that w ere incorrectly entered, resulting in an underpaym ent of sales tax, and the subsequent collection of the un d erp aid tax;

• processing of claims for draw back of sales tax on goods to be exported, w hich had previously been im ported;

• verifying th at goods 'en tered for export' w ere either exported or the entry w as w ithdraw n;

• processing applications for refu n d s and draw backs of both custom s duty and sales tax paid at the tim e of im portation (w ith the exception of claims exceeding $10 000, or w here a registration num ber has been quoted to enable deferral of sales tax paym ent)123;

• im position of penalties for false statem ents relating to the value of goods w hich results in u n d erp ay m en t of sales tax, late paym ent of sales tax, or false statem ents for refunds or draw backs;

• pursuit of debt collection for unpaid sales tax;

• initial processing of objections to or requests for review of Custom s decisions relating to sales tax;

• referral of m atters giving evidence to serious non-com pliance or fraud relating to sales tax to C ustom s Investigation Branch (for referral to the ATO);

• the accurate recording of sales tax collections, refunds and penalties; and

• m aintenance of liaison, com m unication and operation betw een ATO and Custom s.

123 Prior to the M oll being signed between ATO and Customs on 26 June 1997, Customs had been authorised to process and refund all claims less than $1000 without referral to the ATO.

104 Examination of Allegations Relating to Sales Tax Fraud

Appendices

Appendix 3

Control and Risk Self Assessment (CRSA) Model

Source: ATO documentation on CRSA Model modified by ANAO, based on MCS Control Training and Design Inc. (MCS), 1997.

105

8. Process Oversight

Index

Australian Business Number (ABN) 15, 28, 29, 65-68, 75, 82, 99 activity statement 19, 20, 56, 60, 65-67, 69, 71, 72, 74, 82, 83, 103 allegations 11, 13, 15, 16, 25, 26, 30,

33, 44, 57 Automated Workflow Allocation (AWA) 69, 72

Business Activity Statement (BAS) 65, 66, 69, 72, 82

case management framework 14, 20, 21, 53, 85, 95-98 case management system 14, 16, 20, 21, 31, 33, 42, 44, 47, 52, 53, 80,

85, 90-94, 96-98 CaMRA system 16-18, 20, 31, 33, 42, 44-50, 52, 97 GSTFC system 80, 85-87, 90, 91,

93-95

Contestability Review 39, 42, 53, 77, 96 coordination arrangements 13-16, 30-32, 35, 51, 57, 62

Deferred GST Scheme 29, 60, 65

external fraud 13, 30, 38, 61, 76, 77, 95

fraud 11-18, 20, 21, 25, 26, 30-33, 35­ 47, 49-56, 61, 71, 72, 75-99, 104 Fraud Intelligence Section 13, 14, 20, 30, 72, 76-80, 82, 83, 85, 86, 89,

91, 96

fraud investigations 14-16, 20, 21, 31, 33, 44, 53, 56, 76, 77, 80, 84, 90, 95-98 fraud risks 53, 61, 76-78 Fraud Section 13, 14, 20, 21, 30, 31,

41, 42, 45, 53, 76-80, 84, 85, 87, 89, 90, 91, 94-98

Goods and Services Tax (GST) 12-15, 19, 20, 27-32, 42, 56-63, 65-69, 71, 72, 74-83, 85-87, 89-99, 103 GST fraud 13, 14, 15, 20, 30-32, 42,

75-81, 83, 85, 87, 89-93, 95, 97, 99 GST Fraud Section 13, 30, 42, 77, 78, 80, 85, 90

internal fraud 61, 76, 91

Luxury Car Tax (LCT) 12, 15, 19, 20, 28, 29, 57, 59, 62, 63, 67-69, 74, 98, 99

Memorandum of Understanding (MoU) 12, 15, 16, 19, 27, 35, 51, 62, 63, 74, 104

National Liaison Committee 12, 15, 16, 19, 27, 35, 51, 67 New Tax System 11, 15, 19, 25, 28, 56, 57, 59, 63, 64, 74, 103 No Further Action (NFA) 17, 40, 45,

48, 49, 51

106 Examination of Allegations Relating to Sales Tax Fraud

Index

Quality assurance (QA) 42, 43, 94

revenue 11, 12, 18, 25, 26, 29, 33, 34, 50-54, 68, 71, 76, 90 Risk Rating Engine (RRE) 71, 72, 78, 79, 82, 83

sales tax 11-21, 25-39, 41-47, 49-57, 62, 63, 66, 76, 77, 89, 96, 104 sales tax fraud 11-18, 20, 21, 25, 30-33, 35-39, 41, 43-47, 49-56, 76,

77, 89, 96 Sales Tax Prosecution Unit (STPU) 13, 14, 16-18, 30-33, 38, 39, 41,

42, 44, 46-48, 50, 52, 77 Senate Economics References Committee 11, 13, 25, 30, 57 serious non-compliance 12, 16, 30,

37-41, 76, 96, 104 Small Business Prosecution Investigation Unit (SBPIU) 13, 14, 16-18, 30-33, 38-44, 47-50, 52,

77, 85, 96 Status of cases 45, 49, 51

wholesale sales tax (WST) 27, 28, 67 Wine Equalisation Tax (WET) 12, 15, 19, 20, 28, 29, 57, 59, 62, 63, 66-69, 74, 98, 99

Withholding Tax (WHT) 12, 13, 27, 30, 38, 39, 41, 42, 48

107

B etter P ractice Guides

Rehabilitation: Managing Return to Work June 2001

Internet Delivery Decisions Apr 2001

Planning for the Workforce of the Future Mar 2001

Contract Management Feb 2001

AMODEL Illustrative Financial Statements 2000 Apr 2000

Business Continuity Management Jan 2000

Building a Better Financial M anagement Framework Nov 1999 Building Better Financial M anagement Support Nov 1999

Managing APS Staff Reductions (in A udit Report No.47 1998-99) Jun 1999

Commonwealth Agency Energy Management Jun 1999

Corporate Governance in Commonwealth Authorities and Jun 1999 Companies-Principles and Better Practices Managing Parliamentary Workflow Jun 1999

Cash Management Mar 1999

Management of Occupational Stress in Commonwealth Agencies Dec 1998

Security and Control for SAP R /3 Oct 1998

Selecting Suppliers: Managing the Risk Oct 1998

New Directions in Internal Audit Jul 1998

Life-cycle Costing May 1998

(in A udit Report No.43 1997-98) Controlling Performance and Outcomes Dec 1997

Management of Accounts Receivable Dec 1997

Protective Security Principles Dec 1997

(in A udit Report No.21 1997-98) Public Sector Travel Dec 1997

Audit Committees J u l 1997

Core Public Sector Corporate Governance (includes Applying Principles and Practice of Corporate Governance in Budget Funded Agencies) Jun 1997

Administration of Grants May 1997

Management of Corporate Sponsorship Apr 1997

Return to Work: Workers Compensation Case Management Dec 1996 Telephone Call Centres Dec 1996

Telephone Call Centres Handbook Dec 1996

Paying Accounts Nov 1996

Performance Information Principles Nov 1996

Asset Management Jun 1996

Asset Management Handbook Jun 1996

Managing APS Staff Reductions Jun 1996

108 Examination of Allegations Relating to Sales Tax Fraud

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

PARLIAMENTARY PAPER No. 140 of 2001 ORDERED TO BE PRINTED

ISSN 0727-4181