ATO Audits low doc loans

Here is an interesting article from the media.

I hope the ATO cracks down hard on the tax dodgers. Some of the people facing $200K to $300K tax fines and penalties might have to sell properties to pay the tax bills. Probably thousands of people in due course.

The sting that keeps on stinging
Terry McCrann
26jul05

HAS this developed into the mother of all stings? Or at least as the greatest since, well, the Paul Newman-Robert Redford movie?

It’s almost as if our local tax fiend Michael Carmody borrowed the idea from one of the great FBI stings.

Run a big advertising campaign that the First National Bank for Idiots is now lending on low-doc loans. Anyone wanting to borrow a few hundred grand, but is unable or unwilling to show they have any income to actually service the loan, please apply now.

Then wait for them to troop in the door, and hit ’em with a tax audit. And watch the millions — billions? — roll in.

But wait, I forgot. The Tax Office didn’t have to do a thing. The so-called mainstream financial institutions have been falling over themselves to ‘run’ the sting themselves, ‘for’ the Tax Office.

The banks and the non-banks have all embraced so-called low-doc loans. But to varying degrees, some have ’embraced’ more than others.

In its March Financial Stability Review, the Reserve Bank noted that while the major banks had only recently entered the low-doc market, a “number of regional banks” had been “more active”.

“In the case of one regional bank, low-doc loans account for nearly 30 per cent of its outstanding (my emphasis) housing loans,” the RBA added drily.

Simply put, low-doc loans are made on limited formal financial information from the borrower, including, especially, on income. And so, ability to service the loan.

The RBA wrote they were designed mainly for the self-employed. But added, again with dry understatement, they “may also be sought by borrowers who have understated their income for tax purposes”.

So picture this: banks and other lenders — albeit to varying degree — happily pumping out low-doc loans, in the middle of a property boom and strong economy where hardly anyone ever seems to default.

It’s almost as if they were running big ads: Tax Avoiders and Evaders, do we have the home loan for you.

Whoops! The Tax Office has said thank you very much and pounced. Comparing low-doc borrowers with the incomes disclosed on their tax returns.

If they have them. Carmody’s just disclosed that of about 350 taxpayers, selected randomly from eight lenders, around 50 per cent — yes, half — had not lodged returns, and the average was three years outstanding.

The Tax Office swung into action; borrowing that dryness from the RBA, it noted that “most of this (my emphasis) group” were now “up to date”.

More than (only?) $1.3 million in tax had been raised. But Carmody added that the Tax Office was reviewing the “accuracy of the returns that have been lodged”.

That $1.3 million might not seem a big return. But consider two things: numbers and the powers of the Tax Office. And that it has really only started ‘harvesting’ its (the banks?) great sting.

Not many borrowers would probably have realised the Tax Office could effectively ask financial institutions for the names of low-doc borrowers; and then simply compare them with its own database.

They might now — so the ‘sting’ might have run its course. Except that perhaps anywhere up to 100,000 low-doc borrowers are effectively already locked in.

Locked in historically, and so those borrowers’ names are now ‘on’, so to speak, the Tax Office books.

Even if they’ve long repaid the loans and departed the specific bank’s books. The Tax Office can take its time processing them.

Here’s another — rather chillingly — dry quote from Carmody’s statement. That random selection data “was obtained using the access powers in the tax law”.

The Tax Office also has a second front — “a risk-based approach” — targeting “certain” low-doc borrowers where concealment of income was a significant concern.

These high-risk cases were identified using a range of information which led the Tax Office to zero in on clients of “certain mortgage brokers”.

A field of about 400 high-risk clients were identified, and 140 were selected for the “first round” of audit activity.

Note carefully: these cases were chosen because the broker involved was also a tax agent who had been identified as high risk from “our profiling of tax agents”.

Then, chilled and dry: “The broker/tax agent was also subject to audit.” Bottom line: $23 million in tax and penalties.

Now let’s be naughty. Let’s say — without any basis at all — that 10,000 low-doc loans prove ‘tax fruitful’. That could generate $1.5 billion to $2 billion in tax.

And this sting, unintended as it was, and with a use-by date now that it’s been made public, will nevertheless be the gift that keeps on giving.

Those pinged now will be ‘watched’ in the future. While the Tax Office has built up some very useful intelligence and profiling.