Case Law on Tax Fraud

The below two cases illustrate how the principles of tax fraud are applied in Australian courts.

R v Lannelli

The 2003 matter of R v Lanelli, decided by the NSW Court of Criminal Appeal, dealt with a company director who had failed to pay his employees’ income tax. The defendant in the matter was the director of two companies.

The court was satisfied that at all material times the returns lodged by the defendant’s companies were true and correct. There was no evidence of any false or misleading statements or evidence of the failure to pay income tax being concealed. The defendant’s companies, in the usual fashion, had deducted amounts from their employees’ income for the purpose of satisfying income tax obligations. It appears, however, that due to severe cash flow issues, these amounts were never paid to the Commissioner.

The defendant was indicted on two charges of “Defrauding the Commonwealth” through not remitting in full the amounts owed to the Commissioner. In other words, the Commonwealth alleged that it was defrauded by the debtor’s failure to pay his debt. The debtor was found guilty and sentenced to six months’ periodic detention for the offences at first instance.

The Defendant appealed against the finding. On appeal, the court held that simply not paying a debt was not fraud in the absence of evidence that the defendant had somehow concealed either information or the non-payment of the debts. The court said “in the present case… there was no evidence companies made any false or misleading statements to the Commissioner or concealed their failures to pay or that the Commissioner was deceived…”. Thus the company’s returns contained no fraudulent misrepresentations or non-disclosure, and in any event the Crown did not establish that they deprived the Commonwealth of the group tax or put that tax at risk.

On this basis the court held that there had been no defrauding of the Commonwealth and allowed the appeal, dismissing all the charges.

R v Pearce

In the matter of R v Pearce, three accountants were charged with conspiracy to defraud the Commonwealth in relation to tax advice and tax lodgements made on behalf of and with their clients.

The advice given was in relation to a scheme to set up an internet service provider. It appeared that the scheme was essentially a scheme of round-robin transactions, where the only purpose was, so the Crown alleged, to obtain deductions for their clients that would, in the end, have a positive cash flow result.

Essentially, the Court of Criminal Appeal held that the dishonesty and fraudulent conduct arose from the facade created around the transactions which did not accurately reflect the true facts. The defendants were sentenced to jail for five years with a non-parole period of 18 months. Two other accountants who pleaded guilty were sentenced to four years each with the same minimum terms.

It is important to distinguish this kind of criminal prosecution from any action under part 4A of the Taxation Assessment Act. Any action taken by the Tax Office to retrieve amounts or re-assess parties has little to do with whether any action against the promoters of the scheme will be successful. The allegation would be that the actions of the marketers in creating, and then the actions in marketing the scheme were fraudulent in their nature and acted to deceive other people, and it was upon this basis that the defendants were pursued.

It should also be noted that the fraud alleged was a fraud against the Commonwealth, not against individual persons. Whilst it is perfectly possible that the actions of a marketer may in some way act to defraud a person, for example by making false promises or by making claims that cannot be defended, it was the case in this matter that the defendants were pursued for defrauding the Commonwealth. The basis upon which this would be alleged would be that the defendants created a “scheme” wherein they would assist and facilitate persons who wished to defraud the Commonwealth.

There does not appear to be any particular reason why a dual charge of defrauding taxpayers and defrauding the Commonwealth could not be filed under particular circumstances.

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