Commonwealth Director of Public Prosecutions (CDPP)

Tax and the criminal law

Date of Publication: 
19 November 1993

Author: Rozenes, Michael Date: 19/11/1993 Venue: Address to the Institute of Chartered Accountants Luncheon, Sydney

When I was first invited to speak to a Luncheon Club meeting of your Institute I tried to think of a good excuse not to. In my position, self preservation is a most powerful instinct. I put the matter off and then two events occurring almost one after the other prompted me to accept the invitation. Firstly, there were a couple of articles in The Canberra Times by Rod Campbell reporting on a sentence appeal I conducted in the Federal Court in the matter of Whitnall.1 The Headlines in The Canberra Times on 5 and 9 June read: "Federal Court rejects demands to jail all tax and welfare cheats"; and "Mandatory jail term sought for revenue offenders" Mr Campbell commenced one article with the rhetorical question "What does one make of the assertion ..... that everyone convicted of defrauding the Commonwealth should automatically be jailed?" I was quite horrified at such a concept and more so that it had been attributed to me. I wrote to the editor of The Canberra Times responding in detail to the two articles but whereas Mr Campbell had been permitted to write expansively on the matter, I was informed by the editor that unless my response was limited to 200 words it would not be published - and it was not. My outrage at what I believed to be a misrepresentation of my position and that of my Office went unrequited. I finally consoled myself with the thought that not too many people outside Canberra would in any event read The Canberra Times and as the story had not been picked up by any of the dailies elsewhere I thought it would go away. It did not. Not too long afterwards I was reading the Australian Accountant (August 1993) when I saw an article by Robert Richards (a partner with Baker & McKenzie) in which Mr Richards after observing that the criminal law had rarely been used against tax offenders in Australia, commented that it is becoming clear that those who understate income or claim excessive deductions are at an increased risk of attracting criminal penalties. He went on to give two recent examples. In the matter of Vlahov v FCT2 the defendant taxpayer was prosecuted in the Magistrates Court for failing to remit $132,000 of group tax. Mr Vlahov was fined $50,000 and ordered to make reparation in the amount of $132,000. On appeal the fine was reduced to $10,000 and the repatriation order was cancelled. The court found that Mr Vlahov had made no personal gain from his offence but rather that he had simply sought to defer the remission of group tax until his company was in a better financial position to pay it. The second example given was that of Whitnall. After dealing with the facts of the case the author picked up the theme, that in pursuing the appeal, the DPP was seeking to establish a prima facie rule that an offender against the revenue laws of the Commonwealth must go to gaol. The author went on to say - "Given the complexity of the tax laws, that is a rather frightening objective. One can only suspect that the Director of Public Prosecutions is not a tax lawyer" This last statement gave the me the second reason to accept this invitation. Not to demonstrate that I am a tax lawyer but rather to argue that one does not have to be a tax lawyer to recognise that most fraud against the revenue is easily identified and then ought to be treated in no different way than fraud against any other public or private institution. I thought I would seize the opportunity to articulate my position on fraud against the revenue to a more receptive audience and to explain my submissions in Whitnall without being limited to 200 words. Two issues seem to be raised in the debate surrounding the Whitnall Case, namely: the assertion that there is a new attempt to "criminalise" tax offences; and that those convicted of tax and other revenue offences must be sent to prison. So, I am here to do two things: first to explain where tax cheats fit in with the criminal law and secondly where sentencing for revenue fraud fits into the general sentencing system.

The DPP and the agencies

First I must explain how the DPP discharges its duties. The Office of the DPP was established under the Director of Public Prosecutions Act 1983 and commenced operations in 1984. The primary role of the Office is to prosecute offences against Commonwealth Law. The majority of Commonwealth prosecutions, whether they be summary hearings or on indictment are conducted by this Office. The remaining cases consist of high volume work of low complexity which for reasons of convenience are prosecuted by agencies (such as the ATO) under an arrangement with the DPP. The DPP is not an investigative agency. It can only act In a matter when there has been an investigation by an agency which has an investigative role, although the DPP does often provide legal advice and other assistance during the investigative stage. The Commonwealth's main investigative agencies are the Australian Federal Police and the National Crime Authority. These agencies can be described as single purpose investigative agencies in the sense that their major purpose is to detect criminal conduct and then to investigate it with a view to prosecution. This is not to say that neither agency is concerned with prevention of crime - they are. However a number of other agencies have an investigative role as part only of a much broader function in administering their particular program. There are a number of Commonwealth agencies in this category, the main ones being the Australian Taxation Office, the Australian Securities Commission, the Australian Customs Service, the Department of Social Security, and the Health Insurance Commission. These agencies are to be distinguished from the so-called "pure" or single purpose law enforcement agencies in that they clearly have a predominant role other than investigating alleged breaches of Commonwealth law with a view to prosecution. The ATO has a clear priority in collecting revenue, just as the ASC is primarily concerned with corporate regulation and market integrity. Most programs administered by the agencies are underpinned by a legislative framework which makes provision for enforcement at a number of levels, ranging from disciplinary proceeding, through civil remedy, administrative penalty and criminal prosecution. Clearly criminal prosecution is reserved for the more serious breaches. There is an obvious need to strike a balance between these functions and regard must be had to resource implications and to general law enforcement considerations. The prioritising of investigative effort which may give rise to a criminal prosecution is clearly a matter for the particular agency. I am not here to attempt to estimate whether the ATO is successful in striking a satisfactory balance in its deterrent program. That is something for analysis by others elsewhere. But I will shortly provide you with some raw figures.

Tax Cheats

There is no doubt that most people in the community are law abiding and pay their fair share of tax. Sadly there is a significant number who do not. This not an occasion to parade before you horrific figures of what fraud on the revenue costs the Australian community. Suffice to say that fraud against the revenue is measured in billions rather than millions of dollars. Let me at the outset say that the criminal law is not concerned with the vast preponderance of legitimate tax planning and associated accounting work. Nor is it concerned with people who make genuine errors or who act on legitimate advice as to means by which to minimise income tax. We are all familiar with the tax fraud trials of the eighties and the climate that gave rise to those particular tax schemes. What we saw then was fraud on the revenue on a massive and unprecedented scale. Whether that era is over or not is a matter for some speculation. However, I do not on this occasion intend to explore the current position with respect to sophisticated tax minimisation techniques, rather I am concerned to deal with the relatively unsophisticated garden variety of tax fraud - understated income and false deductions. It is not the rule that all offences which come to the attention of the ATO must be prosecuted. In many cases it will be appropriate to dispose of the matter by way of an administrative penalty, and of course the vast majority of persons detected offending against tax law are dealt with in this fashion3. You may ask why are not all cases dealt with by way of administrative penalty? It is argued by those who favour the exclusive use of administrative penalties, that the prosecution process is expensive, slow and detrimental in terms of revenue collected. When it is decided to proceed by way of prosecution under the Taxation Administration Act, the Commissioner is required to refund any additional tax imposed before a prosecution proceeds 4 and the penalties which can be imposed under the Act are less than the administrative penalties which may be imposed absent prosecution. The better view, it is said, is for the Commissioner to stick to collecting revenue and leave the criminal process alone. I do not agree. In my view where the understatement of substantial income is accompanied by fraudulent documentation or the use of fictitious identities and bank accounts, the use of administrative penalties is inappropriate. To use the words of the technical director of the Taxation Institute of Australia, Mr Geoff Petersson as reported in The Financial Review of 4 August 1993 - "Where criminal conduct is involved, it shouldn't be dealt with administratively by the tax office" and "If people are engaging in illegal tax evasion, getting them to settle up without criminal proceedings means the wrong message is being sent to the tax-paying public" A person who deliberately understates income, defrauds the revenue, and through it the community as a whole. There should be no real debate upon this proposition. Yet there are those who say that cheating tax is not really criminal conduct. Rather it is more like a sport and that when discovered should only be visited with the payment of the tax sought to be avoided together with penalty tax and perhaps interest. In other words a slap on the wrist. After all, it is said, it is not as if the tax cheat has taken anyone else's money, no widows and orphans have lost their savings. Taxpayers, it is said, have been chancing their arm against the tax collector since feudal days, why should the criminal law be evoked to deal with such matters? There is a difference, it is argued, between wrongly keeping what is yours and taking that which you are not entitled to. I must confess, that in the context of self assessment, this is a difference I cannot appreciate. I do not think it can be legitimately argued that tax revenue is fair game and that the criminal law is only to there punish those who steal from the private sector. If there has been a perception in the community that cheating on tax was something less than defrauding the Commonwealth, that perception must be corrected. In this context let me say something generally about the role played by sanctions in the criminal justice system. In sentencing for dishonesty offences as for most other crimes, the element of general deterrence plays a most important role. It is hoped that by imposing a proper penalty other like minded offenders will be discouraged from committing similar offences. This is so particularly where offences are committed with a degree of planning and not on the spur of the moment motivated by some less than rational urge. Offences against revenue law, like most financial crimes, are committed for monetary gain. Accordingly, in my view an almost certain likelihood of detection coupled with a significant financial penalty should in almost all cases constitute an adequate disincentive. After all, like all business propositions, unless there are realistic prospects of making a profit who will risk the investment? You will have appreciated that the central feature in this concept is the certainty of detection. It follows that in order to secure compliance with revenue laws, and in the absence of a some concept of an overpowering universal financial morality, the incidence of detection must be sufficiently high to ensure that it is not worth the financial downside of being caught out. The ideal law enforcement picture would see sufficient resources devoted to investigation to lift the detection rate to such a level as to convince those minded to chance their arm that the risk of being caught out is too great. But is this realistic? Are there sufficient resources available to be committed to ensure such a level of enforcement? Probably not. It follows that as the rate of detection decreases, the level of the sanction must escalate. The message must be: "you may not be detected but if you are it will not be merely a matter of paying the tax and a bit of a penalty." There is no mistaking this message in social security cases where the courts fairly regularly sentence offenders to substantial periods of imprisonment where the facts warrant it. There is no difference in my opinion between welfare, tax and other cheats. It cannot be the case that offences against the revenue are treated differently than offences against other public institutions or private enterprises. I recognise that there is a difference between defrauding a large institution of say $250,000 and defrauding a private individual of the same amount. The law has always treated more harshly those who prey upon the weak than those who steal from corpulent entities. Greater harm is obviously done to a retired person who loses all when a "financial adviser" misappropriates moneys entrusted to him or her, than is done to say a bank when a teller embezzles an equivalent amount. Both are subject to substantial penalties although the one that causes the greater harm may receive a harsher penalty. However in the case of tax fraud the courts have not in my opinion come to treat the tax offender in the same way as they treat the welfare cheat. We have an abundance of examples of welfare cheats in the $50,000 range receiving actual prison sentences, but very few examples where tax cheats have received similar dispositions. In my view there is a clear need for criminal sanctions to be employed where criminal acts are detected. Would anyone seriously suggest that the following cases should not have been dealt with by way of criminal prosecution and carry substantial penalties:

  • a barrister understated his income by some $500,000 over 10 years by simply failing to disclose approximately half of his income and thereby evaded tax of $270,000 In increasing his penalty from a fully suspended sentence to one involving him to serve six months imprisonment the Victorian Court of criminal Appeal found that "In our opinion the critical consideration is that taxpayers cannot be permitted to defraud the revenue in the belief that detection can lead to no more than a requirement merely to make financial repatriation and to pay a monetary penalty so as to enable the offender to 'purchase' immunity from prosecution under the criminal law"5 (Morris)
  • A South Australian company traded in abalone. The directors set up a scheme of false invoicing with the connivance of offshore companies. The scheme permitted the company to understate its income. Between 1985 and 1987 the company evaded tax totalling $350,000. The company and its five directors pleaded guilty to defrauding the Commonwealth. The company was fined $50,000 and the directors were each fined $10,000 and sentenced to a suspended sentence of twelve months imprisonment. (Phoenix Enterprises Pty Ltd)
  • partners in a firm of solicitors requested some twenty of their clients to pay fees in cash and then deliberately omitted income of $180,000 over three years and thereby evaded tax of some $100,000. The partners pleaded guilty and were sentenced to a suspended sentence of twelve months imprisonment and ordered to pay a pecuniary penalty of $18,000 (Reilly and ors)
  • the defendant undervalued mining machinery imported from Scandinavia. He arranged for the vendor's agent to provide false invoices which understated the sale price of the equipment. There were six shipments of equipment and the total amount of duty evaded was $200,000. The defendant was convicted after a trial and sentenced to a total of three years imprisonment. (Hastie)
  • Another importer evaded $294,000 duty between 1983 and 1987 by importing timber products under a dual invoice scheme. After a four month trial the defendant was convicted and sentenced to imprisonment for four and a half years with a minimum of two years and eight months. The company was fined $134,500. (Bazos)
  • real estate agents bought and sold property in false names and operated bank accounts in false names to conceal income and thereby evaded tax of $404,000. They pleaded guilty and were sentenced to a suspended sentence of eighteen months imprisonment. (Wetherall & Cessario)
  • a wholesale liquor merchant understated his sales by nearly $1.3 million and thereby avoided sales tax of $250,000. He was sentenced to a two year sentence of which twelve months was suspended. (Manton)
  • to help players avoid income tax a football club a football club kept 2 sets of books over a period of 3 years.

In each case, with the exception of the football club, the court imposed a sentence of imprisonment.. You might think that this says as much about the role played by football in this country as it does about tax avoidance. These were some of the cases prosecuted by my Office over the past few years but to give you some idea of what all this means in terms of numbers, let me give you a breakdown. In 1992-93 the DPP prosecuted 158 cases nationally under Taxation legislation. The figure for 1991-92 was 138. In addition an estimated 50 cases involving allegations of tax fraud are prosecuted each year under the provisions of the Crimes Act. By comparison, in 1991-2, and not counting failure to lodge or failure to remit deductions, the ATO prosecuted a total of 125 cases Australia wide for false statements and failing to keep prescribed records. On the assumption that the 1992-3 figures from the ATO were roughly the same, we have a total of something less than 400 prosecutions by ATO and DPP. I do not contend that every persons detected evading tax should be dealt with by way of criminal prosecution. Neither the ATO nor the court system could manage such a work load. But a sufficient number of such case must be prosecuted so that there is an apprehension in the community that there is a real risk that offenders against revenue laws will be prosecuted.

Who should prosecute and how - DPP/ATO Liaison guidelines

The DPP and the ATO have developed guidelines with respect to the investigation and prosecution of offences against taxation laws. The purpose behind the guidelines was to regulate the relationship between the two agencies. The guidelines recognised that the responsibility for investigating tax offences rested with the ATO and the AFP. ATO has settled guidelines with the AFP which essentially provide that ATO investigates less serious offences whilst referring the more serious offences to the AFP. Although Income Tax ruling No.2246 addresses the question of when alleged offences should be prosecuted under a taxation law as opposed to being disposed of by the imposition of an administrative penalty, it should be noted that this policy does not purport to determine whether the offence, once it has been earmarked for criminal prosecution, should be dealt with by way of prosecution under the Crimes Act or the Crimes (Taxation Offences) Act on the one hand or the Tax Administration Act on the other. It is appropriate that this decision will be made by the DPP rather than the ATO. The liaison guidelines do note however that in general terms, charges under the Crimes Act or the Crimes (Taxation Offences) Act should be reserved for matters involving serious fraud and cases in which there is an aggravating circumstance such as the bribery of, or corruption on the part of an ATO officer. As I indicated, by agreement with all investigative agencies, high volume work of low complexity is for reasons of convenience prosecuted by the relevant agency. Accordingly we have agreed with ATO that they may conduct summary prosecutions for offences against the Taxation Administration Acts provided that the DPP will prosecute all offences where:

  • the maximum penalty includes a term of imprisonment exceeding 12 months,
  • there is a realistic possibility of a court imposing a sentence of imprisonment,
  • a novel or difficult question of law arises
  • cases which involve prominent or high profile figures, or which are likely to attract public attention
  • appeals
  • cases which include a challenge under the Administrative Decisions (Judicial Review) Act
  • defended cases in which the defendant is represented by counsel or whilst unrepresented, it is likely that substantial issues will be raised in the defence

These are the obvious cases where, notwithstanding that the matters are not prosecuted under the Crimes Act or the Crimes (Taxation Offences) Act it is nevertheless desirable for the prosecution to be conducted by a professional prosecutor. There are other criteria itemised in the guidelines.

Crimes Act and Crimes (Taxation Offences) Act - Serious fraud

As to what constitutes serious fraud against the revenue. I must concede that there is room here for debate and it is difficult to exhaustively define such conduct. The liaison guidelines in my view go a long way to setting out those factors which in some cases alone and in other in combination are indicative of serious fraud and hence require prosecution. Clearly deliberate and organised conduct seeking to evade a substantial amount of tax will generally constitute serious fraud. These cases will usually be accompanied by the preparation and presentation of false documentation. In cases such as these I believe that there will be universal concurrence that a fraud has been committed and I do not believe that even the most imaginative accountant would argue that these were cases of genuine tax minimisation. The tell tale indicators will usually include: the maintenance of more than one set of records; the use of false names; the deliberate concealment of assets or income; and the significant understatement of income or the overstatement of deductions. As to what is significant - the deliberate evasion of say, $50,000 is probably enough. It must however be understood that the amount of money involved is not always a true indication of the seriousness of the conduct. Early detection may result in only a small amount of tax being evaded, whereas the fact that false named bank accounts and false accounting records had been prepared in contemplation of a highly lucrative enterprise.

Negotiated settlements

Voluntary disclosure, like restitution must stand any tax payer in good stead. In fact it may do more. It may result in a decision not to prosecute. The DPP and the ATO have settled guidelines, effective from 1 February 1991 for negotiated settlements of tax liability. Where, in the course of tax audit, a taxpayer requests that no prosecution be instituted in respect of conduct disclosed at the audit the tax officer should refer the matter to the Audit Prosecution Unit of the ATO. That unit will consider wether prosecution by the ATO or referral to the DPP is warranted. In appropriate cases ATO officers may inform the taxpayer that the ATO does not intend to institute proceedings for a criminal offence or refer the matter to the DPP. However, the ATO cannot offer immunity from prosecution. Nor should it be able to. Any promise given by ATO of no prosecution if the tax is paid is a promise that cannot be kept unless, the DPP considers that a prosecution is not feasible or not warranted in the public interest. Such a decision will be made in accordance with the Prosecution Policy of the Commonwealth. Morris6 was just such a case where the Taxpayer received a "promise" that he would not be prosecuted. The taxpayer, a barrister, had come forward when it became known that barristers were being targeted for audit. The ATO treated his disclosure as voluntary and in effect gave him to believe that he would not be prosecuted. That was not to be the case. Morris was prosecuted and pleaded guilty. The court held that his disclosure was not a voluntary one. Nevertheless it is clear that he honestly believed that he would not be prosecuted and that accordingly he was entitled to have taken into account in sentencing that a promise given by ATO had been broken.

Whitnall

Finally I would like to briefly discuss with you the Whitnall Case. The accused pleaded guilty to 8 counts of fraud contrary to S29D Crimes Act 1914. That section provides that a person who defrauds the Commonwealth is guilty of an indictable offence and liable if convicted to be fined $100.000, imprisoned for 10 years or both. In the present case the accused defrauded the Commonwealth by understating his income by a total of $155,612 over four years resulting in tax of $74,667 being evaded. The judge who heard the plea found that the offences were a calculated and systematic fraud and were carefully concealed. A bank account in a false name was opened for dishonest purposes. Over the period of the offences the accused completed extensions to his home to the value of $52,000. The Judge was satisfied that "there is no question, really, that there must be, on the face of it, a custodial sentence" and that no other sentence was appropriate in the circumstances of the case. His Honour then sentenced the accused to 3 years imprisonment and ordered that the sentence be fully suspended and also ordered that the accused perform 208 hours of community service. In suspending the sentence the judge considered it necessary to give effect to a settlement of the Whitnall's tax position arrived at the day before whereby a bank loan was obtained virtually on condition that Whitnall was able to continue in business. The DPP appealed the sentence essentially on the grounds that it was inappropriate in the circumstances of the case for the sentence to have been fully suspended. It was not part of any submission put to the Full Federal Court on the appeal that all tax and welfare cheats be jailed or that there be a mandatory jail terms for revenue offenders. Nor was it urged that "... tax ,social security and related fraud cases were in a different category from all other criminal offences." On the contrary it was submitted that for the purposes of sentencing there can be no distinction drawn between theft of monies belonging to private institutions and fraud or imposition on the Commonwealth. It is clear that persons who prey upon the public purse must, if convicted, expect to suffer the same penalty as those who steal from the private sector. Of course different considerations apply in the sentencing of different persons but ultimately the primary responsibility of the court is to impose a sentence of severity appropriate in all the circumstance of the case. It is not now and never has been asserted that everyone convicted of defrauding the Commonwealth should automatically be jailed. What has been submitted is that those who systematically defraud the revenue, and through it the whole community of substantial amounts over extended periods for profit and greed should be treated no differently than those who steal directly from private citizens. It is invariably the practice of courts all over Australia to sentence the latter category of persons to serve actual periods of imprisonment. Thank you ladies and gentlemen, I am happy to answer any question you may have.

Footnotes

1 25 ATR 16 June 1993 2 25 ATR 11 June 1993 3 See ATO prosecution policy - IT 2246. 4 Section 8ZE Taxation Administration Act 5 R v Morris (1992) 61 A Crim R 233 6 Supra