Hand grenades lobbed at our taxation system

Some of ATO’s actions “may be perceived as unfair and without basis”.

The Inspector-General of Taxation and Taxation Ombudsman have thrown hand grenades on the doorsteps of Scott Morrison and Josh Frydenberg that, if left unattended, will unleash revolutionary forces.

Australia desperately needs clear legislated rules for collecting tax and a simple appeal system, along US lines, that protects genuine taxpayers.

The Inspector-General of Taxation’s first grenade is to reveal that in March 2015 the tax ­office knew that $2.45bn of GST revenue had been stolen in gold transactions.

But the ATO did not block the loophole for another two years, which enabled the criminals to continue their thieving. Almost certainly at least another $1bn in GST was stolen while the loophole remained open. State governments, led by WA Premier Mark McGowan, have a clear case to demand that the $3bn-plus of their revenue that was stolen be returned by Canberra as soon as possible.

The second grenade is even more powerful. The Inspector-General has undertaken a lengthy review of the ATO’s garnishee actions against a small Queensland gold refiner and concludes that the tax office approach was “contrary” to the taxation commissioner’s statement in parliament.

“The commissioner in his statement to parliament explained that the ATO uses garnishees and other firmer debt recovery actions only after attempts to engage with a taxpayer has failed and that the ATO on average makes 19 attempts to engage with the taxpayer before issuing garnishee notices,” it said.

Clearly tax commissioner Chris Jordan will need to be recalled to the parliament to refute the Inspector-General’s accusation. As every senior public servant knows, the penalties for misleading parliament are severe so this is an issue of importance.

The Brisbane refinery case is a perfect example of all that is wrong with the tax collection system. But the stolen money raises different issues.

The GST loophole dates back to 2000, when we followed the British system of GST taxing on gold that proved to be flawed. Except Australia, every country that was using the British system had blocked the loophole by 2003. We waited until April 2017 and even then it required five of my commentaries to convince the ATO to stop the thieving of state GST money.

The exact wording of the Inspector-General’s revelation is: “In March 2015 the ATO increased its quantification of the estimated revenue at risk in the precious metals industry from $300m to $2.45bn.”

Why did the ATO not block the loophole in March 2015 when it discovered the extent of the thieving of GST revenue?

The two most obvious explanations are incompetence and a perceived need to cover up the huge mistake.

The ATO responded to the 2015 revelation by attempting to bankrupt all Australian gold refiners other than the Perth Mint. Had the refiners actually been the thieves it would have been a criminal, not a tax enforcement matter. But its immaterial because in a court case the ATO withdrew any allegations of refinery criminal behaviour. Accordingly, the best explanation appears to be a combination of the need for a cover-up and incompetence in parts of the ATO. But there may be other explanations.

Meanwhile the cabinet will be sickened by the actions of the ATO in the Brisbane refinery case. The Inspector-General is demanding the ATO issue a comprehensive apology and pay compensation.

Separately, other gold refiners are considering action against the ATO as a result of the Federal Court ruling that the ATO’s business destruction techniques were invalid. The ATO did not seek leave to appeal to the High Court on that landmark ruling but rather is appealing on a different issue related to the Administrative ­Appeals Tribunal.

Now to the sickening Reid family story. Lynn and Jerry Reid are married and migrated to Australia from the UK in 2005. Jerry was a recovery diver for the Royal Navy, then a security specialist in Tony Blair’s elite protection squad. On migrating to Australia, Jerry served in the South Australian and then Queensland police forces. Lynn served in the US Navy. In Queensland, Lynn worked for a small gold refiner on the Gold Coast, Precious Metals Technology (PMT).

In 2015, they decided to sell their house to buy the refinery business from Lynn’s employers, a couple who were retiring after running the business since 1997.

The Reids had no idea that the ATO had just discovered the $2.45bn theft and were looking for a cover-up. They also didn’t realise the ATO has unlimited legal powers that enable it to destroy any small business at a whim. Those powers were set to be used on the Reids.

As is common in situations like this, the ATO attack on the Reid family was on three fronts:

● GST freezing. In July 2016 the ATO refused to pay to the Reids the GST refund they were entitled to. In all the refused GST totalled $1.3m.

● Penalties. The ATO declared that the GST money it held frozen was actually a tax “debt” and therefore imposed an additional debt penalty of $502,856. In lay terms the whole penalty exercise was a fabrication.

● Without proper notice, and before the “fabricated” debt was due, the ATO garnisheed the Reids’ business and personal bank accounts.

This meant their accounts were frozen, effectively stopping them running their business and their lives. Lynne and Jerry were compliant with their PAYG and superannuation obligations. Whistleblower Richard Boyle alerted Australia to this vile ATO practice and for telling the truth he faces a court action that could see him jailed for life.

The Inspector-General was scathing of the ATO in its use of this business destruction method and stated: “We are unable to provide assurance that the ATO’s garnishee action was reasonable in the circumstances and was in accordance with Practice Statement Law Administration.”

It concludes that some of ATO’s actions “may be perceived as unfair and without basis”.