Fool’s Gold: GST and Precious Metals Fraud

It has been two years since ACN 154 520 199 Pty Ltd (in liq) v Federal Commissioner of Taxation (2020) 282 FCR 455; [2020] FCAFC 190 (EBS & Associates) and avoidance and fraud in the precious metals industry remains a serious risk to the revenue. The AFP-led financial crime taskforce (Taskforce) currently maintains an intelligence alert for targeting fraud in the precious metals industry.

The alert notes that law enforcement and regulatory agencies are continuing to see sophisticated arrangements that attempt to obscure transactions of recycled ‘investment form’ precious metals. In this regard the alert notes:

We believe there are groups or networks of industry participants, including refiners, bullion dealers, gold kiosks, dealers and buyers within established supply chains involved in gold recycling (or carousel type) arrangements, seeking to exploit the GST rules in relation to precious metals.

The operation of “the GST rules in relation to precious metals” is complex and exploitation may result in civil indirect tax consequences as well as criminal liability. The high-profile case of EBS & Associates was primarily concerned with potential civil liability to indirect taxes (rather than criminal liability for an indirect tax-related crime) although illegitimate behaviour was observed in relation to EBS & Associates’ suppliers.

EBS & Associates

EBS & Associates involved the acquisition and refining of scrap and other metal to produce precious metal for sale to dealers. EBS & Associates acquired gold that was not in investment form (scrap gold), which it converted or refined into precious metal (ie gold in investment form of at least 99.5% fineness). The gold was then sold by EBS & Associates to dealers in precious metal.

The Commissioner issued an assessment disallowing GST-related input tax credits (totalling approximately $122 million). The Commissioner’s position was that the relevant supplies of precious metals by EBS & Associates to the dealers were not taxable supplies for A New Tax System (Goods and Services Tax Act 1999 (Cth) (GST Legislation) and therefore were input taxed supplies. Accordingly, EBS & Associates was denied an entitlement to the relevant input tax credits in relation to its acquisitions of scrap gold. In the alternative the Commissioner sought to rely on anti-avoidance provisions.

EBS & Associates objected to the assessments. The objections were disallowed. EBS & Associates then applied to the Tribunal for review of the objection decisions. The Tribunal affirmed the decisions under review. EBS & Associates then appealed to the Federal Court. Ultimately, the Federal Court held that supplies of gold to the dealers constituted the “first supply of that precious metal after its refining by … the supplier” according to the GST legislation. They were, therefore, GST-free supplies and not input taxed supplies under the GST Legislation.

Precious Metals Fraud

Although EBS & Associates was not a criminal case, it was observed therein that a number of the suppliers to EBS & Associates were illegitimately retaining amounts collected as GST that they should have been remitting to the Commissioner. It also transpired that a number of the suppliers of scrap gold were:

  1. purchasing gold in precious metal form (directly or indirectly) from the dealers to which EBS & Associates sold gold in precious metal form;
  2. defacing or damaging the gold so that it was no longer in investment form; and
  3. selling the gold (now, scrap gold, but still of 99.99% fineness) to EBS & Associates.

It is this kind of behaviour – ie “gold recycling” or “carousel type arrangements” – that is the subject of the Taskforce’s intelligence alert. According to the Financial Review, leaked ATO documents prepared for the newly elected government in May 2019 stated that:

The ATO is seeking recovery of GST that has been avoided in schemes related to the adulteration of gold bullion (there are in excess of $1.15 billion in assessments for primary tax and penalties in relation to these schemes).

Although the above statement appears to relate to pre-EBS & Associates calculations, the illegitimate behaviour observed in that case by EBS & Associates’ suppliers hints at precious metals fraud nevertheless posing a serious risk to the revenue.

The Taskforce regards schemes that exploit GST rules using artificial arrangements to be fraud. Although this may be an oversimplification in terms of regulatory outcomes following an investigation, it does mean that the Taskforce is likely to use criminal coercive powers available to it, such as search warrants (as was the case in EBS & Associates), to facilitate investigations. The Taskforce also utilises data matching and analytics in its fight against these indirect tax crimes.

Precious metals fraud is one of a number of indirect tax fraud typologies. Generally, GST-related fraud involves one or all of the following:

  • inventing a fake business;
  • lodging a fraudulent Australian business number (ABN) application; and
  • submitting fictitious business activity statements (BAS) to attempt to gain a false GST refund.

Separate from the Taskforce, the ATO takes GST-related statements involving more than carelessness or accident (ie deliberate and deceitful behaviour) as fraudulent and takes them very seriously.

Despite the complexity of the application of the GST Legislation to precious metals, the Taskforce appears to be catching up with deliberate and deceitful attempts to use precious metals to engage in indirect tax fraud. EBS & Associates was a civil case in which the taxpayer was found not to have misstated its GST liability although its suppliers were observed to have engaged in “gold recycling” and/or “carousel type arrangements”. Offenders (and potential offenders) should now be on notice that the ATO, singularly and as part of the Taskforce, has focused its capability here and, like in the case of GST fraud generally, treats matters most seriously with ultimate sanctions ranging from repayment of illegitimate claims to gaol.

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