6.1. The prior chapters of this report have considered the ATO's general process for verification of GST refunds pursuant to section 8AAZLGA of the TAA 1953. The ATO adopts more intensive approaches in respect of certain higher risk industries such as property development, agribusiness and precious metals. Complaints received by the IGT indicate that more recently the precious metals industry was the most affected by such approaches.

6.2. This chapter considers the ATO's approach to the precious metals industry as an illustration of how it addresses heightened risks and suspicions of GST refund fraud. The broader risk of GST non-compliance within the precious metal industry is being explored in another IGT review, namely the AFCM review.

Stakeholder concerns

6.3. Stakeholders acknowledged that there are serious risks within the precious metals industry that have to be addressed. However, they believed that in addressing those risks, the ATO should minimise adverse impacts on those that are compliant.

6.4. The concerns that have been raised with the ATO's approach to GST refund integrity in the precious metals industry were largely similar but more acute than those already discussed in previous chapters. These concerns include:

  1. undue delay in releasing refunds or issuing assessments, including many that had been retained by the ATO for over a year;
  2. undue delay in issuing decisions on objections to the ATO's retention; and
  3. a lack of transparency in the ATO's consideration of the 10 statutory factors and its disregard for the financial or personal impacts on affected taxpayers.

6.5. Stakeholders also question whether:

  1. it is appropriate for the ATO to use a narrow provision, such as section 8AAZLGA of the TAA 1953, to undertake intensive audits to address 'industry-wide risks' of fraud in the supply chain involving third parties; and
  2. section 8AAZLGA of the TAA 1953 appropriately addresses broader and serious compliance risks of this nature as the section raises expectations that either the ATO will release refunds or issue amended assessment while also being required to comply with a range of notification and other administrative tasks within short, specified timeframes.

ATO materials

6.6. The ATO considers that the risks presented by certain participants within the precious metals industry are serious and, if not appropriately addressed, they have the potential to diminish confidence in the administration of the tax system. The seriousness of such risk was noted in an October 2016 bulletin issued by the Serious Financial Crime Taskforce, which comprises a range of law enforcement agencies such as the Australian Federal Police and the ATO:

We are seeing sophisticated arrangements that attempt to obscure transactions of recycled 'investment form' precious metals.

We believe there are groups or networks of industry participants, including refiners, bullion dealers, gold kiosks, dealers and buyers within established supply chains involved in gold recycling (or carousel type) arrangements, seeking to exploit the GST rules in relation to precious metals.

These artificial arrangements are established to obtain a benefit from the tax system of which there is no entitlement and are tax crimes.237

6.7. The ATO has also established a separate project team to review the transactions of the entire supply chains within the precious metals industry that give rise to ITCs and GST refunds. In this regard, the ATO has stated that:

We maintained a strong focus on the deliberate and organised evasion of GST obligations within the gold bullion and precious metals refining industry as the evasive behaviour of taxpayers in this industry appears to be continuing. We have established some taxpayers are participating in a scheme. In one case, non-existent metal supplies were created in order to generate input tax credits from those supplies. Assessments were issued for $122 million with additional penalties of $58 million.

Our activities to mitigate this risk and deliver a fair and level playing field within this industry have so far raised around $181 million in GST liabilities.238

6.8. In addressing the risks within this industry, the ATO believes that it has done so in a manner which has not adversely impacted compliant taxpayers and has adhered to the requirements within section 8AAZLGA of the TAA 1953. Specifically, the ATO has advised that 14 taxpayers in the precious metals industry have been subjected to refund retention. Most of these taxpayers have common directors who had already been subject to compliance actions previously.

Risks within the precious metals industry

6.9. The ATO has explained by way of a hypothetical that the type of fraud it is seeking to address, called 'missing trader fraud', takes place through the series of transactions set out below in Figure 8.

Figure 8: Hypothetical 'missing trader' illustration

Source: ATO

6.10. Stage 1: The Missing Trader (red box) purchases gold bullion from a Bullion Dealer (yellow box) for $1,030. It is treated as an input taxed supply of precious metal or is GST-free if it is the first supply following its refinement.239

6.11. Stage 2: The Missing Trader melts, scratches or cuts the bullion to make it taxable as scrap gold (as bullion must be pristine in order to retain its status as financial gold) and sells it to a Gold Seller (blue box) for $1,078. GST attached to the transaction is $98. The mischief arises where the Missing Trader does not lodge its BAS or remits the GST and, therefore, makes a profit of $48. If the Missing Trader had lodged its BAS and remitted the GST, they would have made a loss of $50.

6.12. Stage 3: The Gold Seller sells the scrap gold to a Gold Refiner (purple box) for $1,100. The sale has $100 GST attached to it which the Gold Seller remits. The Gold Seller is also entitled to a credit of $98 (for the GST paid in Stage 2) and, therefore, remits a net amount of $2, making a profit of $20.

6.13. Stage 4: The Gold Refiner refines the scrap gold and sells it as bullion for $1,020 to the Bullion Dealer. This transaction is treated as first supply of bullion after refinement which is GST-free. The Gold Refiner is not required to remit any GST but is entitled to claim a credit of $100 (for the GST paid in Stage 3). The credit offsets the loss of $80 that would otherwise have been made and the Gold Refiner makes a profit of $20.

6.14. The total loss of GST revenue to the Commonwealth from the above hypothetical transactions is $98, which represents the $100 refund received by the Gold Refiner (Stage 4) and the net GST of $2 remitted by the Gold Seller (Stage 3). The cycle then commences again with the Bullion Dealer and Missing Trader transactions at Stage 1.

6.15. In October 2013, the ATO issued a press release announcing that it had jointly, with the Australian Federal Police and Australian Crime Commission, executed search warrants on premises associated with companies, operating in the precious metals industry, who were suspected of committing $65 million in GST fraud.240 Since that time, the ATO has observed that the attack on the revenue has escalated with more recent internal management reports noting that such loss is significantly higher with over $700 million in primary tax having been raised.241 In discussions with the ATO towards the end of this review, the IGT has been advised that the liabilities raised, inclusive of penalties, are $905 million and likely to reach $1 billion when all cases have been completed.

6.16. Pertinent to this review, the GST refund verification portion of the above fraud, that is the amount of refund withheld, totals $2.4 million and $21.5 million for the financial years ended 30 June 2016 and 30 June 2017, respectively. It should be noted that figures cited in relation to refund retention do not reflect the totality of the lost revenue arising from missing traders who have not remitted GST. The ATO estimates such amounts to exceed $225m.

6.17. The current Australian experience in relation to the precious metals industry has parallels across similar jurisdictions. It is a risk that is apparent and managed by a range of different governments and revenue authorities.242 The UK, Canada, New Zealand, Singapore, Malaysia, Germany and South Africa have all adopted different legislative and administrative processes for combatting such fraud. A summary table showing the comparative approaches adopted by these jurisdictions appear in Appendix 4.243

6.18. It is noteworthy that 'reverse charging', as a means of combating the above fraud, was implemented by the UK in as early as 1993.244 It was only introduced in Australia with an effective date of 1 April 2017. The reverse charge mechanism requires the purchaser to remit GST rather than the supplier.245 In this way, by combining the purchaser's right to claim ITCs with the supplier's GST remittance payments, the transaction is neutral for GST purposes. This is achieved by the purchaser's credit claim and supplier's refund payments being set off by the supplier. The implications of the GST 'reverse charge' mechanism are considered in more detail in the AFCM review for the reasons noted earlier.

Scope of the GST refunds retention provision

6.19. As the term 'verification' is not defined within the legislation, the intent has to be drawn from the Explanatory Memorandum which states:

As the term verification is not defined, it (and the terms verify and verifying) is intended to take on its ordinary meaning. In the context of the provision, this could refer to actions or enquiries that may need to be taken to prove or establish the correctness or accuracy of the information provided.

The discretion is intended to allow the Commissioner to consider the correctness of the information provided by the taxpayer before refunding an amount the Commissioner would otherwise have to refund. It is not intended that the Commissioner use this discretion to withhold a refund merely where the Commissioner and the taxpayer disagree about how the law applies to the facts. The appropriate course of action for the Commissioner in these circumstances is to issue an assessment to reflect his or her view of the law. 246

6.20. The ATO is of the view that 'verification' may be applied to a broader range of considerations and investigations, rather than simply the immediate transaction that gives rise to the taxpayer's GST refund claim. To date, there have been no judicial pronouncements on the scope of section 8AAZLGA of the TAA 1953.

Audit and verification timeframes

6.21. The ATO's timeframes for dealing with BAU GST refund cases were discussed earlier in Chapter 4. In comparison to those figures, the timeframes in precious metals cases are considerably longer. The ATO attributes the longer timeframes to the complexity of the arrangements and the number of entities within the supply chain. Table 7 below sets out the number of precious metal retention cases actioned in each of the 2015-16 and 2016-17 financial years.

Table 7: Overview of retention in precious metals industry 2015-16 and 2016-17

Year ending
30/06/2016 30/06/2017
Taxpayers with retained refunds 5 17
Number of BAS retained 19 45
Total refunds claimed $2,452,918.00 $21,503,593.00
Released with adjustment 16 4
Release without adjustment 3 0
Still retained 0 41
Total adjustments $18,572,873.30 $7,716,468.00

Source: ATO

6.22. As highlighted above, the number of BASs retained has increased across the two years. In 2015-16, a small fraction of BASs were released without adjustments, whilst the remainder contained not just denial of refunds but also included a large upward liability revisions from a total of $2,452,918 net GST credit to an amended net GST liability assessment of $18,572,873 (being a gross liability increase of $21,025,791).

6.23. In the 2016-17 year, for the BASs where the ATO had retained the relevant GST refunds, none were released without adjustment and the majority remained outstanding.

6.24. The ATO's statistics in Table 8 show the time elapsed from case creation until finalisation (or the progress up to and including 16 November 2017) for cases within the precious metals industry.

Table 8: Days elapsed – precious metals industry retention 2015-16 and 2016-17

Entity Case created Case Finalised Days elapsed
Year ending 30 June 2016
Entity 1 7 October 2015 21 February 2017 503
Entity 2 6 October 2015 18 October 2016 378
Entity 3 16 December 2015 20 June 2016 217
Entity 4 7 September 2015 31 October 2016 420
Entity 5 14 October 2015 4 May 2017 568
Average days elapsed 417.2
Year ending 30 June 2016
Entity 1 6 December 2017 N/A N/A
Entity 2 13 October 2016 N/A 399
Entity 3 24 November 2016 N/A 357
Entity 4 6 September 2016 N/A N/A
Entity 5 27 September 2016 N/A 415
Entity 6 31 January 2017 N/A 289
Entity 7 20 September 2016 N/A N/A
Entity 8 9 June 2016 N/A 525
Entity 9 N/A N/A N/A
Entity 10 N/A N/A N/A
Entity 11 6 January 2017 N/A 304
Entity 12 23 November 2016 N/A 358
Entity 13 14 November 2016 N/A 367
Entity 14 10 January 2017 N/A 310
Entity 15 10 February 2017 N/A 279
Entity 16 10 May 2017 N/A 181
Entity 17 N/A N/A N/A
Average days elapsed 344

Source: IGT - Constructed from ATO source information.
Note 1: The retentions for entities 1, 4 and 7 have not been finalised.
Note 2: Entities 9, 10 and 17 have been flagged but no cases have been created.
Note 3: All remaining entities still have ongoing retentions. The days elapsed are calculated from the case creation date until 16/11/2017. The average is based only upon the days elapsed for entities where all relevant information was available.
Note 4: The above timeframes necessarily include periods during which the ATO issued and awaited the receipt of information from taxpayers.

6.25. Table 8 shows that in 2015-16, the average number of days elapsed between the ATO case creation and finalisation date for verification was 417.2 days. In the 2016-17 year, the ATO could only identify case creation dates for 11 of the 17 taxpayers. For those cases, the average number of days elapsed (having not yet been finalised) is 344 days as at 16 November 2017.

6.26. In respect of some of the cases with no finalisation date, in the above table, the ATO has advised the IGT that, even though amended assessments have been issued to those taxpayers, they remain open for operational reasons.

Objections

6.27. As discussed in Chapter 4, although taxpayers have objection rights against the ATO's retention of GST refunds, it has not been widely used in the BAU context with only 3 cases being received between 1 July 2015 and 13 October 2017. In contrast, 24 objections have been lodged by precious metals taxpayers during the same period. Objections lodged by taxpayers are considered by officers within the Law Design and Practice Group of the ATO, separate from the Client Engagement Group which made the initial decision to retain the refund.

Table 9: GST Retention of Refund Objections – 1 July 2015 to 13 October 2017247

GST Retention of Refund objections Precious Metals
Receipts 24
Allowed 0
Allowed in Part 0
Disallowed 20
Otherwise finalised (these objections became invalid prior to an objection decision issuing because of the release of the retained refund) 2
On hand as at 13 October 2017 2
Notices received pursuant to section 14ZYA of the TAA 1953 8
TOTAL 24

Source: ATO

6.28. Of the 24 objections received by the ATO, 20 were disallowed and 2 became invalid by reason of release of the refunds in question.

6.29. Table 10 sets out the mean and median of time elapsed between receipt and issue of objection decisions for cases within the precious metals compliance project as at 13 October 2017.

Table 10: Average time to complete precious metals refund retention objections

Objections Mean (days) Median (days)
Finalised 136 128
On Hand 166 n/a

Source: ATO
Note: These times are calculated as at 13 October 2017.

6.30. Based upon the statistics provided by the ATO above, the average time taken to finalise an objection within the precious metals project is 136 days with a median of 128 days. Of those currently remaining on hand, the average time elapsed so far has been 166 days. The ATO considers this to be reflective of the complexity of the cases.

6.31. The ATO appreciates that an additional factor that may contribute to extended objection timeframes is the need for ATO officers to consider all relevant information available at the time a decision is made regarding the reasonableness of the retention. The information to be considered is not limited to that available at the date of the objection but includes additional information that becomes available later, for example as a result of an audit.248

IGT observations

6.32. The IGT, along with all stakeholders, acknowledge that there is non-compliant behaviour and serious risk of tax fraud in the precious metals industry and that these risks have to be addressed effectively without impacting compliant taxpayers.

6.33. In contrast to the BAU cases, the audit timeframes for the ATO's precious metals refund verification actions are more than 10 times longer on average and a larger proportion of affected precious metals taxpayers have exercised their rights to object. The consideration of the latter objections has taken longer than the ATO's prior service standard of 56 days249 to finalise. It should be noted that, since 30 June 2016, the ATO has not set a service standard for its completion of any objection. Rather, the ATO has a range of service commitments in relation to resolving disputes, such as, to 'deal with the issue in a timely manner, seeking to understand and accommodate any issues of commercial urgency where possible'.250

6.34. In audits and objections, relating to retention of refunds in the precious metal industry, examined by the IGT, the ATO has adhered to its obligations under section 8AAZLGA of the TAA 1953. However, certain practical difficulties in using provisions such as section 8AAZLGA of the TAA 1953 to address serious non-compliance risks have been identified in this review. As the ATO has observed in an internal briefing document:

The efforts to retain refunds and contain revenue leakage are significantly limited by section 8AAZLGA of the Taxation Administration Act 1953, in particular the requirement that it must be 'reasonable' to retain the refund. The complex nature of the schemes means that there is insufficient time to make required enquiries prior to the release of refunds. It is not "reasonable" to retain a refund on a suspicion of tax avoidance or evasion alone, without evidence. Identifying and gathering evidence is made more difficult as WH&S [work health and safety] risks increase, and is also hindered where some of the participants have been drawn into schemes unknowingly.251

6.35. Having considered both the taxpayer and the ATO positions, it appears that the fundamental problem is a mismatch between the expectations of both parties regarding the administration of these provisions.

6.36. On the one hand, the ATO has to conduct reviews and audits to fully explore, and where necessary prosecute, the issues under investigation, including undertaking enquiries of other parties in the supply chain which invariably requires significant time. It should also be noted that, as the ATO continues with such enquiries, further administrative time and costs will necessarily be incurred in reconsidering the requirements of section 8AAZLGA of the TAA 1953 as new information comes to light. Furthermore, the ATO also considers that their actions in addressing these refund risks need to take into account compliance behaviours, such as directors of taxpayers that have been subject to compliance action previously in respect of other entities under their directorship. Accordingly, the ATO believes these directors should be well aware of the risks sought to be addressed and processes involved.

6.37. On the other hand, taxpayers are expecting prompt processing of refunds based on their understanding of section 8AAZLGA of TAA 1953. Clearly, these expectations are not being met in some cases in the precious metal industry. Taxpayers may be labouring under a misapprehension that their case is a straight forward compliance check of the invoice(s) underpinning the claim. The idea that the retention process and audit process may be one and the same is not so well-understood by taxpayers who feel that they are being subjected to an inefficient audit process.

6.38. Although the ATO has indicated to the IGT that it has communicated its approach in this area through a range of channels, taxpayer complaints and submissions lodged with the IGT do not indicate that they had a clear understanding of the high level of risks sought to be addressed and the length of time required to finalise their particular case.

6.39. The underlying cause for the lack of understanding or the mismatch in expectations appears to be the meaning of the word 'verification' in section 8AAZLGA of the TAA 1953. The Tax Institute and the Law Council of Australia, in their joint submission to Treasury on the initial drafting of this section, warned that the use of the word 'verification' could be read as setting a high forensic threshold. Accordingly, they submitted that a lower threshold should be set.252

6.40. Whether 'verification' encompasses a higher or lower threshold is ultimately a matter for the Tribunal and Courts to determine. However, such determination may be difficult given the challenges for taxpayers in raising objections or progressing further appeals as discussed in Chapter 4.

6.41. Whatever the outcome of a judicial pronouncement on the meaning of 'verification', it is clear from the foregoing discussion that there would be benefits in amending section 8AAZLGA of the TAA 1953 to allow the Commissioner to effectively investigate and address serious risk of fraud such as those currently in the precious metal industry. However, such exception to section 8AAZLGA of the TAA 1953 should only be triggered where serious risks of fraud are clearly established.

6.42. One option would be to require the ATO to seek a Federal Court order before it can classify a case as posing a risk of serious non-compliance with taxpayers being given the opportunity to contest such a classification if they have evidence to refute it. Some consideration should be given to cases where the ATO may need to take covert action. In those cases, the ATO could apply to the Court on an ex parte basis with taxpayers being notified after steps are taken to avoid prejudicing the investigation. At the time of such notification, taxpayers may become entitled to a right to seek judicial review. It should be noted that there is time and costs involved in seeking a Federal Court order.

6.43. Another option may be an approach akin to the ATO's General Anti-Avoidance Rules (GAAR) Panel in which the ATO seeks advice from a panel comprising senior ATO staff as well as members from the private sector before GAAR is applied to a particular taxpayer. Given the nature of serious tax fraud risks and the cross-agency approach needed to combat them, it may be that the panel may also include senior officers from the AFP, Commonwealth Director of Public Prosecutions and other law enforcement agencies. However, this process may also be time consuming and costly. Furthermore, taxpayers and their representatives have raised concerns about aspects of the GAAR Panel process.253

6.44. The considerations about the ATO's powers to combat serious risks within the tax system are pertinent beyond the current work in relation to the precious metals industry. Questions in this regard have been raised in a recent Treasury consultation paper, entitled: 'Combatting Illegal Phoenixing', where the ATO's broader ability to retain refunds has been raised.254

Recommendation 6.1

The IGT recommends that the Government consider amending section 8AAZLGA of the TAA 1953 to allow the Commissioner, in appropriate cases, to effectively investigate and address risks of fraud the seriousness of which has been established by means such as obtaining a Federal Court order.

ATO RESPONSE

Matter for Government


237 - Australian Federal Police, Intelligence Bulletin: Targeting Fraud in the Precious Metals Refining Industry (October 2016) <www.afp.gov.au>.

238 - ATO, GST administration annual performance report, above n 52, p 37.

239 - A New Tax System (Goods and Services Tax) Act 1999 s 38-385.

240 - ATO, ATO investigates $65m GST fraud in gold bullion trade (Media Release 2013/33) <www.ato.gov.au>.

241 - ATO, 'Commissioner briefing May 2017', internal ATO document.

242 - Michael Walpole, 'Tackling VAT Fraud', International VAT Monitor (September/October 2014) pp 258-263.

243 - ATO, Precious Metals Industry Improving Industry Compliance GST Options Paper (April 2017) internal ATO document.

244 - House of Lords European Union Committee, Stopping the Carousel: Missing Trader Fraud in the EU
(25 May 2007) p 18.

245 - ATO, Reverse charge in the valuable metals industry (21 July 2017) <www.ato.gov.au>.

246 - Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No 1) Bill 2012, p 75.

247 - ATO, Communication with the IGT, 20 October 2017.

248 - ATO, 'Objection to retention decision made under 8AAZLGA – information that an R&L officer may consider', internal ATO document.

249 - Commissioner of Taxation, Annual Report, above n 19, p 137.

250 - ATO, Dispute or object to an ATO decision (31 May 2017) <www.ato.gov.au>.

251 - ATO, 'Action Brief GST treatment of precious metals', 26 August 2016, internal ATO document, p 6.

252 - The Tax Institute and the Law Council of Australia, Consultation on Exposure Draft Legislation - Submission re proposed section 8AAZLGA of the Taxation Administration Act 1953 (22 February 2012) p 5.

253 - IGT, The Management of Tax Disputes (2016) pp 45-46; IGT, Work Program 2012-2013 (10 October 2012) <www.igt.gov.au>.

254 - Department of the Treasury, Combatting Illegal Phoenixing (2017) p 32.