Four-year gap in ATO small business fraud risk assessments exposed in Auditor-General report

External fraud risk reporting went incomplete in the Australian Taxation Office’s small business wing between 2019 and 2023, at the same time a GST fraud epidemic kicked off $2 billion in dodgy refunds, according to the Auditor-General.

In the aftermath of a GST tax fraud craze that spread through social media videos, the Australian National Audit Office (ANAO) on Monday released a report on the tax office’s ability to detect and prevent fraudulent GST events.

The ATO had “partly effective” strategies to ward off GST fraudsters, the report found, but lacked the ability to combat large-scale fraud events like the recent GST scam wave.

The report said Operation Protego, which was tasked with cracking down on the fraud, only launched after “the amount of potential GST refund fraud exceeded the ATO’s business-as-usual capacity to treat”.

In its report, the ANAO took particular note of how the ATO assessed and internally highlighted fraud risk.

Ultimately, the ATO’s framework for managing and assessing GST fraud risk was “not fit for purpose”, the ANAO found.

GST fraud risk assessments under question

Internal reports are meant to inform the ATO’s annual fraud and corruption control plan.

But the ANAO report found:

“The ATO has not completed external fraud risk assessments within the two-year timeframe required by its external fraud governance framework. No ATO business line has completed a business line level fraud risk assessment relevant to GST fraud since 2020.”

In particular, the report highlighted fraud reporting from the ATO’s small business line as an area for improvement, saying its reporting was “incomplete and not timely”.

In June 2023, the small business line reported in an internal questionnaire that “it had not documented an assessment of its external fraud risks, including GST fraud risks, since April 2019”.

That documentation gap coincided with the emergence of the COVID-19 pandemic, when the ATO focused on assisting small businesses through potentially devastating economic circumstances.

But over that period, the ANAO said outside help was needed to catch the rising fraud wave:

“From December 2021, the ATO began to receive an increasing number of referrals from financial institutions relating to suspicious income tax and GST refunds, with numbers escalating in early 2022.”

Operation Protego, the headline effort to crack down on the GST fraud wave, launched in mid-2022.

ATO pledges improvements

In its response to the ANAO report, the ATO said it has “recognised the need to examine our response to heightened GST fraud risks” in the wake of Operation Protego.

The report levelled five reform recommendations, all of which have been accepted by the tax office.

It has also “undertaken action to strengthen and enhance our management of GST fraud, including the establishment of the Fraud and Criminal Behaviours business line to focus on further protecting the system and clients against fraud”, and has “implemented a range of additional fraud defences”.

While cracking down on GST fraud is vital, the ATO said it remains committed to ensuring the GST system works efficiently for genuine users, including small businesses.

“The ATO’s fraud detection controls are strong, and there is the need to balance making the systems easy to access for the majority of taxpayers, while preventing those who deliberately attempt to commit fraud,” the ATO said.

“It is important that legitimate start-up small businesses that need cashflow get their GST refunds quickly.

“We take all fraud attempts seriously, and with continued investment in the Serious Financial Crime Taskforce, the ATO, along with our partner agencies, is equipped to take strong action against individuals suspected of being involved in tax fraud.”

Beyond an analysis of the ATO’s fraud detection processes, the report also revealed 150 tax office officials have been investigated for ties to Operation Protego activities.

Some officials have faced sacking or criminal investigation as a result of their suspected links to the GST scam wave.

The ATO said the majority of officials to come under investigation “were former contractors or ex-employees and were not working with the ATO at the time they are suspected of committing Operation Protego fraud”.

Additionally, some were found to have had their identities stolen by bad actors, and were not perpetrators of GST fraud.

“We have taken action against the small number (12) of those who were substantiated as having committed the fraud while working at the ATO. This includes termination of contract, administrative action, and criminal prosecutions,” the tax office said.

“As a result of our actions, we are not aware of anyone currently working at the ATO who is suspected of committing the fraud.”