Extra scrutiny of GST claims will fail to unmask fraudsters, experts say

Security experts say the ATO will fail to solve its GST fraud problem with more reviews and simply make trouble for legitimate businesses.

A former police detective and now fraud specialist and forensic services partner at BDO, Stan Gallo, said additional scrutiny of the GST refund process would be a hindrance rather than a help. 

He said the most recent GST fraud incident, which involved billions and caught the tax office off guard last year due to the viral way it spread through social media, would probably have eluded additional checks.

“It’s a little more complicated than it sounds, particularly if it was a couple of people that had taken $1.7 billion you go, oh well they’ll pick that up, but you have to remember this is something like 20,000 or 40,000 people involved in this,” said Mr Gallo. 

Details about how to conduct the fraud - by having businesses fraudulently claim back unpaid GST - rapidly spread across the internet, he said. 

“It was somewhat unexpected that it went so viral. 

“If the ATO took a hard line and cracked down on everybody and put in an additional review for example on all of them they would capture an awful lot of small businesses who legitimately lodged those same sorts of claims.” 

Mazars’ indirect tax specialist Stephen Baxter agreed and said the ATO should focus on reviewing initial applications for GST refunds.

“The problem is where the ATO pays refunds for the first few BAS lodged by a new GST registered entity without doing a review then,” said Mr Baxter. 

“The fraud does not relate to genuine GST registered businesses overclaiming for private expenses, or for employees incorrectly obtaining GST registration and then claiming GST credits for work related expenses that they should really only claim income tax deductions for.” 

“Given the billions of overclaimed credits, our understanding is that they are largely claiming for fictitious expenses which in many cases have been backed up by falsified invoices issued in respect of non-existent suppliers. It is a fraud that can be easily detected by a diligent request for an examination of supporting tax invoices with the necessary third party checks.” 

Mr Baxter said a lack of funding and resources at the ATO meant fraud had a greater chance of success.

“The ATO’s problem is partly a system issue but mostly a resourcing issue,” he said. 

“During its period in office, the Coalition government trimmed the ATO’s resources and staff and the ATO in turn (probably disproportionately) moved resources away from the indirect taxes like GST.” 

Partner and head of Pitcher Partner’s transaction taxes team Craig Whatman said the method of creating false entities and false invoices to receive a fraudulent GST refund had been around  almost as long as the tax itself.

However, he said the ATO’s use of data matching should be improving and catching out fraudulent actors. 

“They obviously have quite sophisticated data matching and analytical tools that they now use to try and red flag refunds,” said Mr Whatman, and once the alarm was raised they passed the case on to the investigations team.

“For whatever reason, they’ve missed ones … and maybe there’s a systems issue there with the way their analytics is working that should have flagged these particular entities or people that were lodging these refund claims and didn’t for whatever reason.” 

Mr Gallo said the use of social media to spread the fraudulent methodology was a key factor in evading the ATO’s sophisticated analytics.

“We’ve seen the sudden, prolific dissemination of information, here’s how to do this, and then all these people are suddenly getting on board,” said Mr Gallo. 

“So this sudden spike in the sheer volume of the work has caused the ATO to pick up that and there’s a lagging factor, so it happens, then the ATO detects and goes there’s a sudden uptick in this stuff we need to gear up and respond to that which is what we’re seeing now.” 

“Hence, the warrants are starting to come.” 

Mr Whatman agreed and said while the technology in terms of data analytics meant a press of the button could do what used to take a week of manually trawling through items line by line but it has also made it easier for scammers. 

“As the technology gets better, the scammers also get better,” he said. 

“I would say the technology has gotten better to detect it, but also the methods that have been used by the fraudsters have also gotten more sophisticated to try and get around the rules, so it’s a constant thing.” 

“You have to constantly improve your technology to keep up with the methods that are being used on the other side by the scammers.” 

Mr Gallo said the government was not the only victim of the fraudulent GST activity with businesses being impacted as fraudsters were creating false vendors and having a legitimate business claim GST, which unbeknown to them was a fraudulent claim.

“Because the business has unknowingly made a false claim that can then be recovered by the tax office when down the track the fraudulent actor is uncovered with the entity realising they’ve made $200,000 in false claims because an employee had created false invoices,” he said. 

“Businesses then have to declare that and then pay it back which hurts them.” 

“We’ve seen a couple of clients that have almost gone to the wall because of that sort of internal fraud, let alone an external one where a vendor sends an invoice in and they’re not registered for GST but they added on the invoice because it’s a way of getting an extra 10 per cent with no intention of paying it to the government.” 

Mr Gallo said unfortunately small businesses tended to be overrepresented in these internal frauds due to their weaker controls, and once they realised it had occurred and declared it to the tax office they had to repay the funds claimed over a year or 18 months in one hit. 

However, Mr Gallo said with the technology available he believed those who committed the fraud would have it catch up to them. 

“They have the tools and technology to catch them and they will eventually, I wouldn’t think that if you committed the fraud, I’d be sitting back feeling quite safe and comfortable because I’m buried in the millions of people that have done it,” he said. 

“The ATO is pushing out publicly and warning people, they’re telling them to come forward because you will be caught.”