Is Tax Evasion a Criminal or Civil Offence?
Tax evasion is not just a problem in Australia but a global problem for revenue authorities. Individuals and businesses use clever ways to defraud and evade tax systems. Tax evasion is a serious criminal charge in Australia subject to penalties and fines.
What is Tax Evasion?
Tax evasion is a tax crime, and it can be described as the intentional and illegal attempt to not pay or underpay taxes due to the Australian Taxation Office (ATO). A taxpayer evades or attempts to evade paying tax by a deliberate act or omission. The taxpayer abuses the system with clever tax evasion strategies and with intentional dishonest behaviour. The main goal of tax evasion is to obtain a financial benefit.
The taxpayer does not pay the taxes owed; they report illegal taxes, or they do not report income accurately. Taxpayers deliberately fail to declare some or all of their personal or business income. They dishonestly overstate their personal or business expenses and make payments or receive payments in cash to avoid an audit trail. Some taxpayers also revert to offshore “tax-havens” or money laundering as a form of tax evasion.
Tax Evasion vs Tax Avoidance
There is a distinct difference between tax evasion and tax avoidance. They have very different definitions with different consequences.
Tax avoidance is a legitimate way for taxpayers to minimise taxes through methods indicated in tax law. Tax evasion is a deliberate attempt to evade paying taxes by omission. Tax evasion can be seen as a crime, and tax avoidance is legal.
Tax avoidance or tax minimisation allows taxpayers to make legal deductions to avoid paying a huge amount of tax. Income can be sheltered from tax payments through employee retirement plans. Taxpayers can also use legitimate means to exploit loopholes or unintended defects in tax law. A taxpayer using tax avoidance strategies has a low chance of being red flagged during tax audits. Blatant misrepresentations due to tax evasion have a bigger chance of attracting scrutiny.
The difference between tax evasion and tax avoidance is lying vs hiding. However, it is very easy for tax avoidance to become tax evasion. The line between tax avoidance and tax evasion can become blurred, and it is important to fully understand the legal ramifications of tax evasion offences.
Main Tax Evasion Offences
The Australian Taxation Office (ATO) determines cases of tax evasion in Australia. ATO investigates the alleged tax evasion cases and determines if a possible offence occurred. The decision to prosecute is then challenged in court under the Criminal Code Act 1995, with penalties imposed for a guilty verdict.
Sections 134.1(1), 134.2(1), and 135.4(3) of the Criminal Code Act 1995 contain the main offences for prosecuting tax evasion in Australia, also known as tax fraud.
Section 134.1(1) “Obtaining property by deception”
This section of the Criminal Code Act 1995 stipulates a person is guilty of this offence if:
“The person, by deception, dishonestly obtained property belonging to another to permanently deprive the other of the property. The property obtained dishonestly belonged to a Commonwealth entity”.
The prosecution has to prove each beyond a reasonable doubt the taxpayer obtained property by deception to establish the offence. The defendant is found not guilty if the prosecution is unable to prove all of those elements. The prosecution has to prove:
- the defendant acted dishonestly
- the defendant was involved in a deceptive act
- this resulted in the taxpayer obtaining property, such as funds or assets
- the property belongs to an entity in the Commonwealth
- it was the defendant’s intent to permanently deprive the owner of the property
Section 134.2(1) “Obtaining financial advantage by deception”
This section stipulates that a person is guilty of this offence if:
“The person, by a deception, dishonestly obtained a financial advantage from another person, and the other person was a Commonwealth entity”.
Section 135.4(3) “Conspiracy to defraud”
It is a criminal offence to conspire with another person to defraud the state. Under Section 135.4(3) the defendant is guilty of this offence when:
“The offender intentionally conspired with another person with the purpose to fraudulently cause a loss to a third person and the third person is a Commonwealth entity”.
This tax law caters to the situation where more than one entity or person conspires to evade paying taxes. Everybody involved in the tax evasion share liability. This section also clearly stipulates the prosecution does not have to prove the defendant knew the third person was a Commonwealth entity.
Section 135.2(1) “Obtaining financial advantage”
Section 135.2(1) is an alternative offence to the above offences.
The prosecution has to prove beyond a reasonable doubt the offender:
- engaged in conduct as a result of which the offender obtained a financial advantage for himself or herself from another person;
- the offender knew or believed he or she was not eligible to receive the financial advantage, and the other person was a Commonwealth entity.
The Penalties for Tax Evasion in Australia
Tax evasion penalties in Australia are set out in the Criminal Code 1995 and the Taxation Administration Act 1953.
Tax evasion and tax fraud is a serious criminal offence in Australia and it is subject to criminal investigation and prosecution. The penalties for tax evasion are severe. Australian tax laws clearly state that abusing the tax system is punishable by law. A taxpayer cannot hinder the collection and distribution of the collected revenue to the community. Australia has extensive procedures for tackling these criminal cases to ensure revenue is collected to fulfil the government’s responsibilities in Australia.
The Australian Federal and State governments have the power to tax and collect taxes from all individuals and businesses. States can only enforce taxes on taxpayers in that particular state. If a taxpayer is charged with a tax evasion offence, it would be against the Federal Government. The maximum penalty for tax evasion is imprisonment.
The prosecution has to prove beyond reasonable doubt that the accused evaded or attempted to evade paying tax and did this by a deliberate act or by omission. The following questions are relevant to conclude whether tax evasion has taken place or not:
- What should a taxpayer be expected to have done if acting honestly and reasonably?
- What are the reasons provided for not doing what would be expected of the taxpayer acting honestly and reasonably?
- To what extent are the taxpayer’s acts or omissions considered blameworthy in light of the reasons provided for tax evasion?
The penalties for tax evasion in Australia are imposed according to the level of the crime, the severity of the offence, and the amount of money. A range of penalties might be:
- good behaviour
- fines
- community correction orders
- intensive correction orders
- prison sentences
The maximum penalty for offences against Sections 134.1(1), 134.2(1), and 135.4(3) of the Criminal Code Act 1995 is 10 years’ imprisonment. Section 135.2(1) carries a lower penalty of 12 months rather than the maximum penalty of 10 years in prison.
Administrative Penalties
Administrative or civil penalties under the Taxation Administration Act can also be imposed on an offender if the tax evasion offences are not serious enough for criminal prosecution. The penalties for misconduct are specified in sub-divisions 284-B to 284-D of the Act. The base penalty amount for each section is 100 penalty units. One penalty unit is equal to $110. Therefore, 100 penalty units equal $11,000.
Possible Defences for Tax Evasion
There are some possible defences when facing a criminal charge for the allegation of tax evasion. Some of the defences could be:
The Lack of Intent
A person is not automatically a tax evader due to a mistake on a tax return. The intent is a big factor. The defence can argue the individual or business did not deliberately or intentionally avoid or attempt to avoid paying tax. However, this can’t be seen as a total defence as some offences can capture conduct where the individual engaged recklessly in tax evasion.
Due Care and Diligence
The defence can argue that the individual was acting in their capacity as employer or director of a corporation or a business. For example, the individual can argue that they have acted with due care and diligence.
Dispute the Facts
The individual disputes the alleged facts presented by the prosecution.
Duress
The defence may argue that the individual was unlawfully coerced into evading tax by a third party.
The Tax Evasion Investigation Process
Tax fraud and tax evasion is a serious crime and the Australian Taxation Office or ATO takes these tax crimes seriously. Every tax discrepancy has to be investigated to determine if the tax evasion was deliberate or just a mistake made by the individual or business.
It is important to focus on the following questions during the investigation process.
- Did the taxpayer intentionally make the false or deceptive statements?
- Did the taxpayer deliberately withhold the information to influence the tax outcome?
- Did the taxpayer fail to keep all information and records to support a tax audit?
- Did the taxpayer intentionally omit income from a tax return?
- Does the taxpayer have a credible explanation for all of the above?
Tax Evasion through Ignorance
Taxpayers might commit tax crimes and are not even aware of it. It is important to understand and abide by the taxation system. It is the responsibility of every taxpayer to be aware of the possibility of committing a tax crime due to the lack of knowledge. Here are some tips to avoid committing accidental tax crimes:
- File taxes and tax returns early
- Add a fraud alert or credit freeze to your credit profile
- Be aware of scams and identity theft
- Protect personal identity and information
- Regularly check your tax account to make sure there are no irregularities
- Appoint honest and efficient accounting consultants
Report Suspected Tax Evasion in Australia
Finally, it is important to report suspected tax evasion in Australia to the relevant authorities. It is unfair for some individuals or businesses to gain financial benefits through tax evasion by intentionally defrauding the tax system. This tax crime has an impact on the country and the individuals who are paying their taxes.
How do you know when somebody is committing a tax crime such as tax evasion? The individual or businesses might leave some clues to suggest tax fraud. For example, they might claim personal expenses on a business account, they might not pay the required employee benefits or their lifestyle does not match a person’s salary.
The Australian Taxation Office relies on tip-offs from the community. A person can report an individual, a business, or their employer if they suspect any tax evasion crimes. This report will remain anonymous and personal information is protected by the Privacy Act 1988.
Contact the Australian Taxation Office via their website or call the hotline. The reporting process will only take a few minutes. A person can also visit a local police station to report any criminal tax evasion offences.
It is always better to provide sufficient information to fast-track the investigation. It is important to provide the following information as clearly and concisely as possible:
- The name of the individual or business
- The address of the offender
- If possible, the contact details or website address of the offender
- Australian business number
- Social media details if available
- A detailed description of suspicious behaviour
To conclude, tax evasion is a serious criminal offence in Australia, and individuals or businesses can face serious consequences. It is important to take the tax evasion charges seriously to avoid a maximum penalty sentence of 10 years in prison. If you are under investigation for tax evasion, seek legal advice from experienced lawyers.
