Tax Fraud: When is Tax Avoidance a Criminal Offence?

By Craig Elliffe

2 July 2010

Tax Avoidance and Criminal Acts

“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”

Denis Healey, former UK Chancellor of the Exchequer

Observations

Unfamiliar Area of law

Recent Changes

Cases

•Tax Advisors• Tax Payers•Crown/ SFO

•Hayes (2008)•Changes to

statutes

•Misdirected Focus on investors

Tax Avoidance and Criminal Acts

• Company director jailed for tax evasionThursday, 01 July 2010 13:55 • Evading tax of more than $700,000 has led to four years jail for

a Bay of Plenty labour hire company director.• Harbhajan Singh Kahlon had been found guilty on 23 charges of

GST-related tax fraud and later admitted a further 46 charges of tax evasion involving PAYE. He was sentenced last Friday in the Tauranga District Court.

• Inland Revenue Assurance manager investigations Jonathan Matthews says this sentence makes it crystal clear to others considering tax fraud and evasion, that they'd better think again.

• "We will catch them and there will be very serious consequences," he says.

Clever Schemes and Criminality

Criminal Offences

Section 143B Tax Administration Act“Knowingly providing false, incomplete or

misleading information”

Intending to evade the assessment of tax

Obtaining a refund in the knowledge of no lawful

entitlement

Section 228Crimes Act

“intent to obtain any... pecuniary advantage..

Dishonestly and without claim of right uses any

document

Section 228 Crimes Act 1961

Use of a document (tax return)•To obtain a pecuniary advantage

With the intention to obtain property•Through the dishonest use of the document

That the accused had no claim of right

Dishonestly, without claim of right

Hayes v R (Supreme Court 2008)

“belief” assessed without reference

to reasonableness (Robin Hood) or honesty

Reasonableness If belief was qualified by the word “honestly”- two problems

• Reasonableness: Genuine belief in lawfulness even if unreasonable is not caught by section 228

Overcomes the problem of someone framing their own moral code

• Will impact on the evidentiary credibility

Application of section 228

Tax return used

To obtain a refund

(pecuniary advantage) Did not

believe entitled to a

refund

Assessment of the facts to see if the

taxpayer genuinely believed they were entitled to the claim (reasonable doubt

that they had a mistaken belief)

Features of tax avoidance

Non-commerciality

Concealment

Artificiality

Difference between legal and economic

effects

Australian decision R v Pearce

Investors$10000

Servcom

$39000(deducted)

MAGICA/Allied Securities

$29000Loan (NR)

Advisors and accountants

Common Features of tax avoidance and criminal offences

Artifice

Lack of Commercial Rationale

Common Features of tax avoidance and criminal offences

Role of the Advisor

Fees and Remuneration

Conclusion

Risk associated with aggressive transactions

Cloaking the real transaction, artifice and dishonesty (may be consistent with both tax

avoidance and criminal activities)

Lack of belief in legality (from a section BG 1 perspective) could be sufficient establish

requisite criminal mens rea (intent)

This could be evidenced by clear statement that the transaction was for the sole purpose of tax