Unexplained wealth can be a tax hazard

Avoiding tax can, in certain circumstances, lead to prosecution under criminal laws, with resultant criminal sanctions, including jail sentences.

The offences need to be serious to be prosecuted as criminal offences and, under the law, prosecution of tax offences under criminal laws falls into categories including:

• obtaining a financial advantage by deception;
• dishonestly obtaining a gain or causing a loss;
• making a false or misleading statement;
• providing false or misleading information and/or documents.

Jail sentences are imposed for serious tax offences and a number of cases that have come before the courts in recent years have highlighted this. It’s also worth noting that a substantial number of cases are fraud cases involving the failure to remit to the Tax Office PAYE instalment deductions and PAYG withholding amounts.

So why the sudden focus on the criminal law? Well, that’s because legislation recently introduced in Federal Parliament proposes to introduce a new element to the mix. The Bill in question – the Crimes Legislation Amendment (Serious and Organised Crime) Bill 2009 – proposes to introduce what it calls “unexplained wealth” provisions.

The Bill will, among other things, have an impact on the detection and prosecution of crimes that involve criminal taxation offences. It amends the Crimes Act 1914, the Criminal Code Act 1995, the Proceeds of Crime Act 2002 and a number of other Acts.

There’s a broad parallel here with what the Tax Office is doing in its use of data matching and data mining. For instance, the Tax Office already obtains details of sales of real estate, boats, expensive cars, etc with a view to determining the source of the funds used to purchase those assets and whether that financial information marries up with what is disclosed in tax returns. “Unexplained wealth” in these circumstances will lead to queries from the Tax Office.

In April 2009, the Standing Committee of Attorneys-General agreed to a set of resolutions for a comprehensive national response to combat organised crime. The Bill implements the Commonwealth’s commitment to enhance its legislation to combat organised crime by, among other things, strengthening criminal asset confiscation, including introducing unexplained wealth provisions.

Admittedly, the Bill is at the ‘serious’ end of the spectrum (ie. involving prosecutions for criminal offences), but that does include tax offences. Although ostensibly aimed at organised crime, the Bill’s practical effects will not necessarily be limited to that.

Unexplained wealth

The Bill amends the Proceeds of Crime Act 2002 to strengthen the Commonwealth criminal assets confiscation regime by introducing unexplained wealth orders. Unexplained wealth orders target wealth that a person cannot demonstrate that he or she has lawfully acquired.

According to the Government, while the Act contains existing confiscation mechanisms, these are not always effective in relation to those who remain at arm’s length from the commission of offences, as most of the other confiscation mechanisms require a link to the commission of an offence.

The Government said that senior organised crime figures who fund and support organised crime, but seldom carry out the physical elements of crimes, are not always able to be directly linked to specific offences.

Under the proposed unexplained wealth provisions, once a court is satisfied that an authorised officer has reasonable grounds to suspect that a person’s total wealth exceeds the value of that person’s wealth that was lawfully acquired, the court can compel the person to attend court and prove, on the balance of probabilities, that their wealth was not derived from offences with a connection to Commonwealth power.

If a person cannot demonstrate this, the court must order them to pay to the Commonwealth the difference between their total wealth and their legitimate wealth (the unexplained wealth amount).

The Government said unexplained wealth provisions have been successfully used in Italy in recent years in relation to the Mafia. The Northern Territory and Western Australia also have unexplained wealth schemes. The Government said it is estimated that more than $40 million in alleged criminal assets have been seized in the Northern Territory and Western Australia under unexplained wealth provisions since 2003.

The Commonwealth unexplained wealth regime draws on the NT and WA experience. The main differences between the Commonwealth’s scheme and those of the NT and WA is that the Commonwealth is limited to confiscating unexplained wealth derived from offences within Commonwealth Constitutional power (which can relate to taxation offences).

Information disclosure

The Australian Federal Police (AFP) may obtain a person’s bank statements that reveal significant amounts of income. If the AFP had reasonable grounds to suspect that the person had not declared all of their income in their income tax returns, the Government believes it is highly desirable that the AFP be able to pass the information obtained to the Tax Office for the purpose of protecting public revenue. The Bill provides for this disclosure.

Also under the Bill, information may be disclosed to the Tax Office if the person disclosing the information believes, on reasonable grounds, that the disclosure would assist the Tax Office discharge its function of protecting public revenue. However, any applicable existing immunity in relation to the information continues to apply to any information disclosed.

The introduction of this Bill again highlights the increasing inter-connectivity of law enforcement (not only domestically, but internationally too), whether it be in relation to tax laws or other laws. Shades of Big Brother maybe, but it’s indicative of the approaches being taken by governments and their agencies to combat crime (organised or otherwise) in all its guises.