Secretive history: Why the alleged $165 million tax fraud means the ATO will never be the same again

The Australian Tax Office’s long history of secrecy, privacy and insularity makes this week’s allegations of impropriety by one of its most powerful deeply cathartic.

Federal police allegations that deputy tax commissioner Mike Cranston abused his public office have rocked the top of the Australian Public Service.

His son and daughter were last week charged after a high profile AFP sting against a corporate tax scheme that police allege defrauded the Commonwealth of up to $165 million.

The size of the alleged fraud stunned many agency senior executives. But it was the allegation against Cranston senior that has the federal bureaucracy talking.

Cranston, a 35-year veteran of the ATO, is well respected, both inside and outside, as a highly intelligent and skilled tax professional. Until yesterday he ran the very division that targets large-scale white collar evasion schemes — indeed his name was reportedly on documentation demanding repayments from the scam.

Two of Cranston’s underlings have also been suspended without pay, pending code of conduct reviews. Police said last week Cranston was not part of the actual criminal syndicate, but it is hard to overstate how huge this whole affair is for federal bureaucracy and the ATO in particular.

Outside Defence, nothing much happens in Canberra unless the ATO agrees, with the possible exception of the sprawling Human Services department. To have three of the ATO’s big guns allegedly implicated in this massive fraud is akin to senior Vatican City papal advisers being caught allegedly aiding and abetting criminality.

For decades the ATO was very much a closed shop, along with Customs seen as very much a “Catholic” organisation, a reference to the time where its head office in Melbourne was dominated by workers from that city’s powerful catholic school alumni. Secrecy and privacy were legendary and modern notions of stakeholder engagement and industry collaboration were anathema for an organisation that saw its role as police-like, zealous defenders of the revenue. Contemporary notions of taxpayers being “consumers” of agency services were nowhere to be seen, with community attitudes driven by deep anxiety about a visit from “the tax man”.

This fuelled a famous insularity where tax office workers played, dated and often married each other, with officials warned not to be seen mixing with the outside world. Indeed, in Stasi-like fashion officials that broke the code of silence were dealt with summarily.

Witness this extract from the “official” history of the ATO dubbed a A salutary lesson:

“Bruce Jones muses on a lesson learned about the importance of secrecy and privacy. In those assessing schools there was probably one bad egg, one in a hundred. Halfway through our school two very tall and wide gentlemen arrived and walked over to stand beside someone, he stands up and the three of them leave. Nothing is said, but now 100 people are frozen, staring at what’s just happened. One of the men returns with a large cardboard box, collects everything on the desk and just tips the contents of the drawers into the box, folds it closed and just walks out. Nothing is said, and you think, ‘what was that, what just happened here?’ Over the next day the story unfolds that he’d been doing some dodgy things and the Federal Police have arrived and taken him away.”

Hugely hierarchical, commissioners and the deputies were given emperor-like status. This description of the seating arrangements when the commissioner and deputy commissioners convened for a conference in Perth in 1966 tells all:

 “They sat at a specially constructed round table, which signalled their joint stewardship of the ATO, but the Commissioner sat on a large chair on a raised dais with his executives at his right and left hands, above the Deputy Commissioners. Tax officers who were invited to attend a session were told they were not to turn their backs on the Commissioner and to bow slightly in his direction as they left the room.”

This command and control culture began to break down after head office was moved to the now-Treasury building in the seventies. Technically a branch of Treasury, in 1973 it became its own entity, named the Australian Tax Office.

In the late 1970s and early 80s the ATO was led by the legendary Bill O’Reilly, who famously lived at the Rex Hotel in Canberra’s inner north. In this period head office happy hours in the Treasury building were memorable events that extended out into the car park and late into the evening, with the gregarious O’Reilly prominent amongst the revellers.

Revenue is king in government and while tax policy is now part of the Treasury Department, the ATO has over the years used its control over tax records and data, its significant discretion to act (or not) and knowledge of where revenue could be found to rule the Canberra bureaucracy and polity.

In more recent times the ATO has become an exemplar of an agency reforming itself for the modern world, with commissioner Chris Jordan driving a major cultural and operational makeover that has seen the ATO emerge as arguably the most progressive of the big Commonwealth agencies. Notably Jordan, a former KPMG executive, is the first outsider ever to to be appointed tax commissioner.

But old habits die hard and you don’t have to scratch hard to find an organisation where your rank and office size mean everything. That one of the “gods” — a deputy commissioner — has somehow been allegedly caught up in a $165 million fraud case has sent tremors through the ATO.

And Canberra. While successive state governments have been forced to establish independent corruption commissions after serious bouts of malignant corruption, the federal government had until now pushed away similar calls.

This reluctance to establish a corruption watchdog stemmed partly from a long-held belief that the strong professional culture that sits at the top of the Canberra system made the APS largely immune from the grubby behaviour of some state officials and politicians.

If culture is the ultimate antidote to corruption, I have to confess to being sympathetic to the observation that the deeply embedded, squeaky clean, white collar professional diaspora that rules most federal agencies, means there is limited chance of serious fraud.

Agencies like Customs, and occasionally Human Services, still struggle with claims of corruption, but in the main the strong operational controls, a robust financial accounting system, and a steely determination to count the pennies, seems to have resulted in minimal internal fraud.

Indeed a recent census report by the Australian Institute of Criminology revealed that over the period 2010-14, a total of 9467 incidents of internal fraud, worth over $12.7 million, were reported by 181 Commonwealth entities. That is $13 million in a revenue and spending budget of around $1.6 trillion over that period.

A review of the largest reported frauds showed the biggest internal fraud in the APS was $370,000, but that in the main the bulk of the internal fraud was committed by junior officials and were about relatively petty entitlements and small scale financial betterment. According to the report there was little evidence of collaboration.

But while the reported numbers may be immaterial — and Cranston’s exact role will be determined through the courts — the sheer size of the alleged payroll fraud has already seen renewed calls for a federal corruption commission, with key independents in the Senate and Labor jockeying to use the revelations to establish a permanent integrity agency.

Whatever the result of the judicial and parliamentary activities, the ATO will not be the same again.

This article was first published by The Mandarin.