An apparently unguarded, unnoticed loophole has the potential to make criminals of hitherto blameless citizens. This is exactly what happened when someone first stumbled across one such unguarded loophole in Australia’s tax system that allows businesses to claim Goods and Services taxes: an opportunity to claim unwarranted taxes, and it was taken wholeheartedly. GST fraud is not a new occurrence: what is new in the most recent incident is the proliferation of the crime that social media facilitated.
Official reports of the incidents date the series of fraudulent GST claims to as far back as late 2020. The crime involved people obtaining an Australian Business Number (an ABN) under false pretences and falsely claiming GST refunds on bogus expenses. Westpac, one of Australia’s oldest financial institutions, was the first to register suspicious activity in accounts held in the bank, of which the bank along with other financial institutions informed the Australian Taxation Office (ATO). Indeed, the incident is said to be marked by an uncharacteristic lack of response from the ATO, at least until the Australian Reserve Bank was notified informally by certain bank personnel.
According to the ATO however, the necessary steps were already set in motion in early 2022, and the lack of communication of such was solely due to taxpayer secrecy laws. The internal division of opinion on how the incident should be handled has also been blamed as a causal factor for the apathy on the ATO’s part by news media.
The GST tax
A form of value-added tax, the Australian goods and services tax amounts to 10% for most goods and services sold in Australia, with a few exemptions. Businesses that have been registered with the relevant authorities (and obtained their ABN credentials) can refund the portion of GST taxes paid in the purchase of goods and services relevant to the operation of their business. This ensures that the same good or service is not taxed multiple times as it passes through the business cycle.
Proliferation of GST fraud due to TikTok virality
2021 saw an explosion in the number of GST frauds reported, fuelled unexpectedly by social media influencers promoting the scam online. Those who had found the loophole had taken to promoting the fraud on their social media platforms, often misrepresenting the loophole as an opportunity to obtain a government ‘loan’. Content that had been posted on TikTok detailed how individuals could use their falsely obtained ABN numbers, together with their MyGov account to obtain a 10% tax refund on the expenses incurred in the setup of a supposed business.
As the content gained traction, the increase in incidents would have posed a clear challenge for the ATO to meet in a timely fashion. Initial reports suggested that the average claim made was close to A$ 20,000 per individual: later investigations raised this to A$80,000 per individual.
Banks and financial institutions had been the first to notice a rapid increase involving GST tax refunds, at times even exceeding A$100,000, even by beneficiaries of social welfare due to the virality of the scheme. Banks were quick to respond by placing these transactions and accounts on hold while informing the ATO of the sudden increase in the incidence of tax refund claims. Sydney was the reported hotbed for incident reports, a phenomenon attributed to the virality of social media content promoting fraud in the area.
Banks came together to respond to the situation in early 2022 in the face of what was seen as the apparent lack of response by the ATO. However, between frozen accounts and transactions and the ATO, both the banks and the Austrac (Australian Transactions Reports and Analysis Center) found themselves at a loss as to how they could proceed in establishing the scale at which the fraud had taken place.
Informal communications ring alarm bells in the Reserve Bank
It is in this context that certain bank personnel resorted to reaching out to the Reserve Bank through informal channels to voice their concerns. This ultimately led to a high-level meeting with the Taxation Office in the middle of February 2022. The media response that followed the meeting was directed by both financial institutions and the Reserve Bank to the ATO, who denied accusations of unresponsiveness to the mounting concerns of the banking sector.
Australian Financial Review reported ATO Deputy Commissioner Will Day as saying that the agency had responded swiftly to complaints.
“When our combined intelligence first discovered the rapidly escalating fraud attempts in early 2022, we swooped in quickly… By late February 2022, we had dialled up our efforts to put a stop to these fraudulent attempts to a ’10 out of 10’. We pushed our efforts to an ‘11’ when we commenced Operation Protego.”
Operation Protego
Operation Protego was first launched by the ATO in May 2022 as a response to the intelligence gathered through various financial institutions and data sourced through various risk analysis models used by the ATO which both indicated an abnormal surge in GST tax refunds. The Operation includes the Serious Financial Crimes Taskforce working in alliance with other government and territorial agencies to identify the perpetrators of GST fraud.
Initial reports suggested that the operation had been successful in preventing the fraudulent claim of A$1 billion, while A$850 had been paid out on falsified claims. A$66 had also been recouped as part of the operation’s activities, notably from accounts that the banking sector had taken preemptive steps to freeze. The net loss to the people is estimated to be at least A$1.2 billion in falsified GST claims.
Operation Protego was also carried out in the form of a series of raids across Sydney, Melbourne, and Brisbane. These raids, which were conducted with the assistance of state and territory law enforcement agencies have so far led to the convictions of 10 individuals. The ATO has also so far taken compliance action against over 56,000 individuals. According to the ATO, the accused could face up to one to two years in jail, depending on the amount defrauded.
Meeting the challenges posed by social media in calling this fraud ‘trend’ to a halt is also a vital component of Operation Protego. Accordingly, the ATO has been working closely with the social media platforms that caused the proliferation of GST fraud to remove content that either promotes the scam or deliberately spreads misinformation, such as the claims that the ATO either provided ‘loans’ or COVID-relief funds to the public.
The ATO also advises the general public against accepting financial advice provided on social media at face value, adding that low production values and lack of professionalism were some of the red flags to look out for in consuming such media. The ATO also urges people not to share their myGov details with any third party to avoid being exposed to the risk of fraud.
Unusual criminals
The investigation into the perpetrators of the GST frauds is unusual in that the accused are not organised crime syndicates or sophisticated criminals. It is the sheer number of people involved that has necessitated the involvement of the task force. The investigations are expected to have a ripple effect in that GST fraud is not expected to be the sole transgression that the perpetrators will be found to be guilty of. Speaking to CPA Australia, the leading professional body for certified practising accountants, Michael Morton, Assistant Commissioner for the ATO said that tax evasion and fraud will only be ‘the tip of the iceberg’ for most under investigation. He went on to warn perpetrators of tax fraud that the ATO would follow through in recouping all the money lost and substantial penalties implemented to further deter future attempts at fraud in the future.
Ignorance of consequences
In addition to the number of perpetrators of fraud, the ATO also draws attention to the clear ignorance of the consequences of fraud that the number of perpetrators reflected. In addition to recouping the falsely claimed GST refunds, the ATO further warns that being on record will have added administrative ramifications for those proven guilty. Future opportunities to launch a legitimate business would be severely hindered if found guilty of financial fraud for example, as would any attempt to finance the purchase of a house, a car, etc. The staggering number of people involved in the scam could also be due to a misunderstanding that tax fraud is a victimless crime.
Tax fraud is very emphatically not a victimless crime. Taxes provide the government with the revenue needed to provide the general public with social welfare. Tax fraud, especially on this scale, means that there are fewer resources to be allocated for public health services, public education, infrastructure development, public services, and the like. ‘Stealing’ from tax funds is therefore akin to stealing from one’s own community. This is also why combating tax fraud should take a multi-stakeholder approach, rather than delegating the issue to the ATO as solely their responsibility.
The challenges facing those interested in safeguarding the community’s funds will only increase in the future. The speed at which modern technology evolves will make it all the more difficult for the ATO to face these alone. Content published by free individuals, including tax professionals especially, warning their audience to take part in fraudulent schemes is pleasing to see in a situation where conventional systems are struggling to meet the needs of the hour. Such support from the community will be vital for the ATO in ensuring that justice is served to all who took part in committing and propagating the scam.
(Theruni Liyanage)