The bungles that forged Australia’s biggest tax fraud

Bold action is required to stem bleeding revenue, avoid the obliteration of an industry and avert costly legal claims.

Gold ingots are stacked at a gold producing and refining plant in Mendrisio, Switzerland. (Photographer: Adrian Moser/Bloomberg)

Australia is in the midst of a crisis that has the potential to lead to a major tax revenue loss and result in the closure of most of one of our oldest industries — gold refining.

Firstly, the nation is being hit by the biggest gold tax fraud in its history.

At least $500 million is at stake. The final loss may be less but there is a real risk it could be a lot greater.

Secondly, the fraudulently obtained money is still leaving the country and there are some indications that Middle Eastern gangs have got control of the scam, with the possibility the hot money is now ending up with Islamic State, but no one can confirm that.

Thirdly, the ATO has begun issuing gold refiners retrospective GST assessments and taking other actions which will have the effect of sending much of the gold refining industry to the wall.

There are about 200 small- and medium-sized businesses in the industry with thousands of employees. At the weekend, one of Australia’s largest gold operators, M.A.K, told the industry that it was on the verge of liquidation. M.A.K is not a refiner, so is not directly affected by the ATO actions against them but in coming weeks, many refiners will go to the wall.

Australia’s top GST lawyers believe the retrospective GST assessments are illegal and, if the industry is virtually destroyed, it will trigger Australia’s greatest ever tax damages action, involving claims for several billion dollars. The tax-focused legal industry is thirsting for the action.

As readers will know, I began looking hard at the Australian Taxation Office to try and show the Australian Tax Commissioner that he has a deep anti-small business cultural problem (Retooling tax is part of the shift required to foster jobs growth, November 30).

Out of those efforts came the ATO fictitious legal opinion and the ATO’s back down in the Douglass case (Chris Jordan’s last shot at righting a wayward ATO, November 29). But the gold refining crisis I have discovered has implications that go way beyond the small business cultural crisis.

Given the depth of the gold crisis, I believe the relevant government ministers need to become immediately involved. I will suggest possible actions at the end if this commentary.

The gold fraud and its aftermath is one where everyone is partly responsible for leaving the nation open to huge losses — treasurers and finance ministers since 2003; taxation commissioners since 2003 and the gold refiners since about 2010.

Clearly the ATO blames the gold refining industry for the major fraud and believes it is justified in taking retrospective GST actions.

The ATO may be right and I am in no position to judge the guilt or innocence of the gold refiners. But Australia has a wonderful court system which we fought wars to maintain. The courts should decide the guilt or innocence of gold refiners and Canberra public servants shutting down an industry before the matter gets before the courts is not what our nation should be about.

In addition, such ATO actions create the risk of monumental damages if the legal opinions on which the retrospective and other GST actions are later discovered to be wrong, as happened in Douglass.

The terrible saga starts when former Treasurer Peter Costello introduced the GST into Australia in 2000. One of the problems he faced was deciding how gold should be handled given that the yellow metal in pure gold bars was in fact currency.

Costello followed the UK laws and declared that when people trade pure gold bars there should be no GST but, if they trade a gold bar that has been cut in half or in which there are impurities that must be refined out, then there must be a GST payable on the transaction.

In 2000, Australia felt very content with the London system because gold was being treated in a similar way to food.

And, so, if a person bought pure gold bars they would pay no GST but if they bought half a bar or there were impurities in the gold there must be GST on the transaction. But then the UK discovered its system was vulnerable to fraud.

In 2003, Londoners suffered big losses because unscrupulous dealers sold refiners impure gold for a price that included VAT (our GST equivalent).

The UK refiners claimed back the VAT when they removed the impurities. The people who sold the UK refiners the impure gold were supposed to pass VAT onto the tax authorities. But they were crooks and disappeared without trace with the UK government’s VAT in their pockets.

Londoners in 2003 changed their VAT rules and have since made even tighter regulations so that these days it’s rare for VAT to be charged on impure gold bought for refining and sold as an investment. VAT is normally charged only when it’s used for jewellery and industrial purchases.

Incredibly, while we based our GST on the flawed London system, Australia did not follow the 2003 or later UK changes. After 2003 we were sitting ducks to be scammed. But for a while nothing happened.

But in around 2010 and 2011, the volume of gold being refined in Australia went through the roof — rising 10 or 20 fold.

With the benefit of hindsight what was happening was the same as London pre 2003 — refined pure gold good that does not carry GST was being made impure with the addition of impurities and then sold to refiners for a price that was based on the gold price of the day plus a 10 per cent GST.

The traders were supposed to send the GST back to the government but they vaporised taking the GST money with them. In Australia, the crooks were skilled and had ABN numbers, bank accounts and other documentation.

As set out in law, the refiners claimed back the GST they paid to the rogue traders in their next business activity statement (BAS) and were paid by the ATO. It seems the same gold started going around and around in a big circle and each time the crooks took 10 per cent and disappeared.

At one point, around 2013, the Australian Federal Police, tax officials and others raided a number of refineries. They stormed into the homes of executives as well as the offices of the refineries.

There was great consternation in the gold refining industry but in my book I give full praise to both the police and the tax officials. There was a clear tax fraud taking place and everyone was fair game.

Some of the crooks were caught and charged but they were not the key criminals. We did not change the law so the fraud naturally continued.

Regularly, tax auditors would come to the premises of refiners but nothing happened and the refiners kept buying impure gold for a price that was boosted by the GST. I emphasise that there were many genuine people who paid the GST back to the government but rouge traders bought a lot of the gold.

Clearly the tax auditors were not finding material that would enable them to take the refiners to court — an ominous sign for the looming multi-billion court damages cases.

The ATO believe the refiners must have known that they were dealing with crooks; that it is possible that there were kickbacks in some cases (although the auditors did not pick them up); and in some cases the gold was 99 per cent refined so hardly heeded extra treatment … the ATO list of alleged industry sins is long. But the issues have not been tested in the courts.

To illustrate what is happening in gold refining I am going to select one refiner, the Focus Metals group which is owned and controlled by a couple aged over 70 — Marianne and Howard Cooklin.

They have been operating for 37 years. Marianne is managing director. They will be forced by the ATO to cease trading before Christmas and they will retrench their 20 staff. The Cooklins are very emotional about what has happened, I am in no position to judge the innocence or guilt of the Cooklins but, in my view, their guilt or innocence (and that of the Focus group) should be determined by the courts not by the ATO putting them out of business.

In fairness to the ATO, they can’t discuss specific cases and so my material comes from the Cooklins and does not include the ATO side.

Like other refiners, the turnover of Focus went through the roof after around 2010. In 2013 police and ATO officials stormed their house and offices as they did other refiners. They have received some 12 tax audits but each year they filed their BAS statements and received their GST back as happened around Australia.

Refiners say that they are obliged to buy impure gold that is offered for sale. But after the police/tax raids, a number the refiners, including Focus, were troubled so began reporting any suspect gold purchases to Australia’s financial intelligence agency — AUSTRAC. Enormous sums were involved in the alerts being raised.

Marianne Cooklin also informed the tax office of what they were doing and received an incredible ATO letter stating that the two bodies were separate. I have seen the letter. If there is to be a multi-billion dollar damages case, those Cooklin filings with AUSTRAC and the ATO letter are likely to be crucial.

Then, late last year and more significantly during 2016, the ATO game started to get ugly for Focus. The tax office began issuing retrospective assessments for GST looking to recover amounts that had previously been paid to Focus.

Of course, Focus (and the other refiners that got retrospective GST assessments) never had the money because the amounts of GST they had claimed back had been paid to the sellers of the impure gold.

Every single person in the tax office must have known that if they continued to retrospectively impose GST they would bankrupt the refiners because they could not pay and could not trade.

Focus received one GST back bill for $1.7m, which they were able to show had involved impure gold where sellers had actually passed the GST onto the government.

Focus says the tax people were double dipping — but of course that has not been tested in the courts.

But the big retrospective Focus GST bill was for some $33m plus Douglass-style penalties and interest that took the bill past $44m.

Focus naturally could not pay and were advised to sell the business to a new entity owned by the Cooklins to enable the refinery to continue operating and the staff to remain employed.

The idea was that this new trading entity would not be affected by the past transactions and could buy impure gold add the GST and then claim it back. Again I can’t pass judgment on the legality of such actions.

And so new GST claims were made.

The ATO did not reject the claims but rather delayed the payments by issuing first one list of questions, then another and bigger one, then another finally leading to a list of hundreds of questions many of which were asked in previous lists. Each list of questions delayed paying the claim and given the amounts are large the company cannot trade.

The new company must therefore close its doors, which is no doubt what the tax people had in mind by delaying payment but they did it in a way that has dangerous precedents for the nation.

In my view, the courts that should decide whether the refiners are innocent or guilty. The absence of proper court hearings to determine guilt or innocence, while sending them broke as ‘punishment’ and causing thousands to lose their jobs for unproven offences, is not the Australian way.

How do we solve the problem and avoid a court fight that will enrich lawyers beyond belief and possibly seriously affect the nation’s bottom line?

The Parliament must change the act in regard to gold and GST on the first day of sitting in 2017. That way we stop the bleeding.

We need to quickly get people from the auditor general’s office to decide on whether the ATO actions are appropriate in these circumstances.

Subject to the Auditor General’s view, I would freeze the retrospective assessments and negotiate personally, face-to-face, on how to handle the current day-to-day crisis.

Meanwhile, vast amounts of impure Australian gold are now being refined in Singapore and the crooks have found a way to bypass the Australian refiners and keep the fraud going. And they happily keep pocketing the GST.