Promoters of R&D tax incentive rort whacked with $13.6m fine
The director of a Sydney accounting firm encouraged clients to claim offsets with a “complete disregard” for their legal validity, a court has found.
A Sydney business coach, a former tax agent and their accounting business have been fined $13.6 million for rorting the R&D tax incentive scheme by encouraging unwitting clients to claim offsets when the claims had no reasonable legal basis.
The Federal Court on Monday found Julian Bakarich, who ran related entities The Dream Consortium (TDC) and The Dream Accountants (TDA), showed a “complete disregard” for whether clients’ claims were legitimate.
It ordered Bakarich to pay a $4.5 million penalty in addition to $9 million in penalties for TDC and TDA. Accountant Thi Cam Tu Nguyen was fined $100,000.
Justice Geoffrey Kennett held that the aim of the fines was to deter others from promoting similar schemes exploiting a program intended to fund innovative projects.
“There were multiple contraventions rather than a single contravention,” he said.
“The scale of the fraud on the revenue sought to be perpetrated was significant … the schemes would have produced refundable tax offsets of around $7 million had they gone undetected.”
Justice Kennett said Bakarich promoted 12 tax exploitation schemes and engaged in deliberate tax evasion for 11 taxpayers between the 2015 and 2016 financial years, while Nguyen was involved in three schemes in 2015.
Approximately $591,000 was charged to clients for the schemes in which Bakarich was involved and approximately $16,000 for the schemes in which Nguyen was involved.
The schemes consisted of small business clients being recruited through referrals or marketing promising R&D tax benefits.
Information provided by clients was manipulated to prepare bogus R&D claims falsely identifying Nguyen as providing advice. When clients received refunds, TDC and TDA collected fees based on a percentage of the offsets obtained.
The scheme was uncovered by the ATO after launching an investigation in 2016.
Justice Kennett said Bakarich was central to the creation, operation and marketing of the schemes and benefited from the significant fees received by his companies, TDC and TDA.
“The admitted conduct reveals a culture at TDC and TDA which did not have regard to whether or not a client’s claim for the R&D tax incentive was reasonably arguable,” he said.
“Some of these admissions include encouraging employees to maximise claims for the R&D tax incentive to secure higher commissions for TDC; training employees to prepare AusIndustry applications and pitch the business to new clients; and being dismissive of employees who raised concerns about the R&D claims.”
He said Bakarich did not take any steps to avoid the contraventions, even after becoming aware of the ATO’s investigation.
Some clients suffered financial harm by way of administrative penalties and interest charges “as a direct consequence of wrongful R&D claims for tax incentives to which they were not entitled”.
One client, Precision Air, was placed into liquidation in August 2018 after being unable to pay debts to the ATO and other creditors.
Other clients also suffered non-financial harm, such as personal distress and reputational damage as a result of their association with Bakarich.
While the conduct only spanned two years, this was not given significant weight because it would reward Bakarich for the ATO’s early intervention.
Meanwhile, Nguyen was deemed to have a “relatively confined” role in the tax exploitation schemes and had her penalty reduced by 30 per cent after co-operating with the ATO and agreeing not to register or practice as a tax agent.
She was deregistered by the TPB in April 2019.
Justice Kennett noted she gave evidence that she was unaware of the R&D legislative regime and relied on Bakarich’s explanations.
“Her contraventions were not deliberate and the parties do not submit that they were a result of an honest and reasonable mistake of law,” he said.
ATO assistant commissioner Justin Dearness said the court’s decision should act as a strong warning to “anyone considering promoting unlawful tax schemes and to those who knowingly lodge incorrect tax returns”.
“Mr Bakarich and Ms Nguyen took advantage of clients who trusted them and now, as a result, these individuals have had to face significant penalties,” Dearness said.
“The high penalties show not only the scale and abusive nature of their schemes but how seriously we take unlawful promoter conduct. It serves as a clear warning to anyone tempted to promote or participate in tax schemes – you will be caught and held to account.”
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