Screw the Taxpayer: ATO Compels GST on Bullion

Iceblue's (pseudonym) face screwed up as he read the letter in front of him. It was early March and the Australian Tax Office (ATO) had just written advising of an upcoming audit they intended to conduct on his business, South Gippsland Bullion (SGB). They noted their intent to inspect transactions covering the last several years of trading. He was probably thinking "Why me?" (wouldn't we all under such circumstances), but he may also have been aware that many other bullion dealers have faced similar scrutiny over the past 12-18 months with an industry wide series of audits being performed.

When the audit results arrived in mid May, advising that goods and services tax (GST) should be applied to the bullion products SGB sold, it would leave Iceblue with no choice but to close his doors (figuratively speaking given it was primarily run as an online business). The wording of the letter is ambiguous to say the least. It throws into question an assumed understanding in the bullion industry of what products should have GST applied, as industry veteran Bron Suchecki put it "..the arguments that the ATO now seem to be putting forward do not adhere to the understanding the industry had about what was bullion vs collectible."

GST is not applicable to bullion when sold in investment grade form. "What does that mean?" I hear you ask. Well, it's complicated and the results of this audit make the answers even less clear. You can read the Goods and Services Tax Ruling (GSTR) 2003/10 on what constitutes 'precious metal' for the purposes of sections 38-385 and 40-100 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). In the letter sent to Iceblue finalising the audit the ATO highlighted the following passages of the above ruling:

In paragraph 8 of GSTR 2003/10 (The Ruling) the definition for precious metal identifies the metals and fineness that is set down in section 195-1 of the GST Act. Namely, 'precious metal' means:

(a) gold (in an investment form) of at least 99.5% fineness; or

(b) silver (in an investment form) of at least 99.9% fineness; or

(c) platinum (in an investment form) of at least 99% fineness.

The tradeable form is identified in paragraph 22: Bars, wafers and bullion coins are the physical forms in which the metals gold, silver and platinum are traded on the international bullion market for those metals. These are therefore forms of those metals that are capable of being traded on the international bullion market.

The term 'investment form' is considered in several paragraphs of the Ruling. In paragraph 29 a summary is provided:

- To summarise the above, for gold, silver or platinum to be in an investment form for the purposes of the GST Act, it must be in a form that:

- is capable of being traded on the international bullion market, that is, it must be a bar, wafer or coin;

- bears a mark or characteristic accepted as identifying and guaranteeing its fineness and quality; and

- is usually traded at a price that is determined by reference to the spot price of the metal it contains.

Paragraph 12 of the Ruling refers to items where: 'The price is not determined solely by the metal value of the coin. The price is determined by reference to the spot price and by reference to the quality of the physical characteristics of the coin. The latter indicates that proof coins are not traded for the metal value only and therefore 'indicates that they do not have the character of the metal, but rather the character of manufactured articles, that is, coins made from the metal. This means that proof coins are not precious metal.'

Paragraph 42 of the Ruling differentiates between the retail market and bullion markets: There are coins, such as some commemorative coins, that are marketed in the retail market as 'bullion' coins because they are made from bullion. Such coins are not bullion coins for the purposes of this Ruling. Whether a coin is precious metal does not depend on whether the coin is called a bullion coin or a proof or numismatic coin. The relevant test is not what the coin is called but whether it has the character of the metal. This will be determined, as noted above, by whether it is traded for its metal content or for other reasons.

The ATO's primary focus was on the 'Series of Dissent' (SoD) silver rounds of which SGB had several issues minted through manufacturer SBA Amalgamated. They zeroed in on the marketing used by SGB to sell these rounds, specifically referencing the wording around a strict mintage limit, that they won't be reproduced (with dies destroyed once the mintage was complete) and professionally commissioned artwork which adorned the pieces (among other characteristics).

The ATO also quoted something Iceblue had written on the forum Silver Stackers, pointing out he had called the round a 'collectible piece', however this was done so in the context of explaining that Aussie made rounds can't really compete with bullion pricing (i.e. with bullion products manufactured overseas or in larger quantities).

SGB sold the rounds on an individual basis for around $14 over spot, with a $9 manufacturing cost. The $5 profit was reduced to $1 per round when a buyer purchased in quantities of 100 or greater. The price of the rounds was adjusted in reference to the prevailing spot price. The rounds were priced as bullion, not a proof or collectors coin even if the characteristics or marketing made it attractive to collectors. They just had a higher premium due to the local manufacturing costs.

In my view the SoD rounds met the three criteria required to be considered investment form (and exempt from GST). They were capable of being traded on the international market (once you take the size of the transaction into consideration it's likely many small bullion dealers would purchase the round), they were marked with fineness and quality and traded at a price that was referenced to the spot price.

Perhaps the most worrying aspect of the letter was not even the initial focus on the SoD rounds, but what reads like an afterthought highlighting other products which the ATO does not consider to be GST exempt (explicitly quoted below):

"Coins and bars produced by different mints which also have added characteristics and are in the retail market would not satisfy the definition of 'precious metal'.

Likewise other items sold by [SGB] are sold in a retail market and are differentiated by mint brand and various characteristics including themed year of productions, animals, religious periods, lunar year characters, country."

The ATO goes on to highlight a particular lunar product which is typically sold on the retail market for twice the prevailing spot price, but their wording seems to suggest that any product with 'added characteristics' such as a themed coin may in fact not satisfy the definition of 'precious metal' and be exempt from GST.

Long term readers of my articles would know that I specifically highlight many of the Perth Mint bullion coins as worthwhile investments due to their pleasing designs, low mintage and being individually capsuled. These are many of the same characteristics that the SGB SoD series had. It appears to be these and other characteristics which the ATO is now suggesting should result in GST being applied to bullion products.

In my mind it would make much more sense for the ATO to simplify these rules and remove all ambiguity. Reducing the test to purity of the metal (which should be lowered or exceptions made for 22k gold coins and government issued silver coins) and a maximum premium that can be charged (e.g. less than 100% markup over spot), along with the basic form being a wafer, round/coin or bar. Though my fear is they go the other way and increase the scope of GST on bullion.

There's a good chance this industry crack down and audits stem from the GST gold fraud which has been rife through Australia for some years. I am told (on good authority by industry insiders) that this practice is not only ongoing, but likely the number of people taking advantage of the loophole has increased.

Instead of seeing tangible results from the ATO on the investigation into real fraud costing the country hundreds of millions in lost revenue at a time of focus on fiscal responsibility, we see them putting a small, legitimate and innovative business under the microscope and then crushing them under their proverbial boot. Really the message from the ATO can be summarised from a slogan which was coincidentally minted on one of the SoD rounds... screw the taxpayer (well at least those who are investing in or selling physical bullion).

----------------------------------------------------

Subscribe to New Posts By Email / Follow Bullion Baron on Twitter

 

Australia's Bullion GST Fraud Still Under Wraps

More than two years after the Australian Federal Police initially reported serious fraud was occurring in Australia's bullion industry we are yet to see any publicised progress on the investigation or action that has been taken.

In July 2014 there was an article from Chris Vedelago which provided details from two civil lawsuits in Queensland's Supreme Court containing allegations involving a number of businesses in Australia’s precious metals market.

The AFP Annual Report for 2013/2014 briefly mentions the operation (Operation Nosean, no follow up is made in the 2014/2015 Annual Report):

An estimated loss to the Commonwealth of $300 million and growing, which I assume suggests the value of Gold funneled through this type of fraud to be in excess of $3 billion (figures likely higher now we're a couple of years along).

A recent Judgment in the Federal Court of Australia highlights another possible case of this fraud, with GST input tax credits of over $40 million claimed (relating to acquisitions of gold from suppliers who were not registered for GST purposes):

The problem with the lack of publicity around this industry fraud is that eventually a large number of private bullion investors/consumers could get caught in the crossfire should one of the companies involved be a retailer who gets shutdown by the ATO.

The ATO reported in a mid year performance report (2014/2015), h/t SilverPete:

GST litigation casework continues to flow from project work relating to cash economy matters and refund integrity issues. Also, there are a steady number of new cases involving inappropriate input tax credit claims made between associates, often in the context of phoenix activity.

Seven new significant cases were received during December 2014. Six of these cases involve similar issues concerning the purported purchase of gold jewellery and subsequent dealings in gold bullion. The Commissioner’s view is that these cases involve sham transactions. These cases will be progressed in the early part of 2015.

It was announced that the ATO would be provided additional resources in the 2015/2016 budget to tackle GST fraud:

The Government will provide $265.5 million to the Australian Taxation Office (ATO) over three years to extend the GST compliance programme. 

While the Government recognises that most taxpayers do the right thing, the ATO will continue a series of compliance actions to make sure honest businesses have a level playing field. This programme will allow the ATO to continue to identify fraudulent GST refunds, under reporting of GST liabilities, failure to lodge GST returns and outstanding GST debts.

Here's hoping the additional funds are used wisely, with those responsible held to account and in the meantime I would recommend if you are buying psychical bullion, you continue to keep your orders to a sensible level in case justice is served while you are mid-transaction:

"Limit the size of any single order with an individual or dealer to an amount you’d be prepared to lose if the deal goes sour." - Bullion Baron

[Addendum]

I found this transcript from an Economics Legislation Committee on the 26/02/2015 which shows Senator John Williams questioned Mr Chris Jordan, Commissioner of Taxation, on the investigation:

I don't know how much detail would normally be shared in this type of committee meeting, but the answers appear evasive to me.

If you can provide any additional information on these investigations, you can email me: bullionbaron@gmail.com

 ----------------------------------------------------

Subscribe to New Posts By Email / Follow Bullion Baron on Twitter

 

How About Fair GST Treatment For Bullion?

In an article I was reading yesterday about the GST-free threshold for imported goods, which postured support for a lowering the cap from $1000 to $20, there was a video containing this message from Craig James (CommSec's Chief Economist):

"Certainly we believe this is a fair tax because if it is the case that people are traveling overseas and over the net to buy goods, bypassing Australian goods. Well really the same goods should be charged the same price whether you're buying overseas or getting it domestically."

There has also been recent talk of raising the GST in Australia from 10 to 15%.

As a proponent for small(er) government and less taxes I'm not particularly fond of the latter suggestion, but I do concur with James' view that a fair tax should see comparable goods charged the same amount of tax. Not only for consumer goods, but also for investment assets. This is one area that bullion (as an investment asset) is short changed.

A guide I wrote on buying Gold and Silver in Australia describes when bullion is GST free:

GST (Goods & Services Tax): Investment grade Gold (99.5%+ fine) and Silver (99.9%+ fine) bullion is not subject to GST. Bullion products of a lesser grade (for example 22k Gold coins like Sovereigns & Krugerrands or 92.5% sterling Silver coins) do attract GST when sold by a bullion dealer.

That results in some of the most commonly purchased bullion investment coins being burdened with GST as they don't meet the minimum finesse (Gold sovereigns and the 1966 Australian fifty-cent piece are just two examples).

1966 Australian fifty-cent pieces, only have 80% Silver content

This unfair addition of GST to an investment asset is something I would like to see changed as I wrote  2 years ago:

Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.

I was also recently made aware (thanks Bron!) that there are other limitations to the GST free status of bullion (that I wasn't familiar with), such as a requirement for the metal to have been refined by a refiner:

"To have this GST-free status one of the requirements is that the metal has been refined by a refiner of precious metal. To be a refiner of precious metal, an entity has to satisfy the Commissioner that the entity regularly converts or refines precious metal in carrying on its enterprise." ATO (What is 'precious metal' for the purposes of GST?)

That means despite the hallmarking of these hand poured Silver bars I recently purchased, if they'd been sold in Australia by a dealer they may have needed GST applied (I bought them direct from the overseas producer in a package that was lower than the current $1000 GST-free threshold).

Home Made Redwood Poured Silver Bars

I think it would be fair to see GST removed from all bullion that is bought for the purpose of investment and where it trades as a function of spot price as I wrote last year:

Perhaps the exemption could be expanded to cover any precious metal which trades as a function of spot price, so that tax fraud is no longer as simple as defacing investment grade bullion, changing it into a form which can suddenly benefit from input tax credits.

That would put the precious metal asset class on a level playing field with others (such as shares), surely that's something that even Craig James could get behind!

----------------------------------------------------

 

How Safe Are Unallocated Bullion Accounts?

Imagine you owned a small business. It’s a retail store and you sell a physical product which lines the shelves. You need to keep a variety of different products to ensure that customers who enter your store have plenty of choice. Not only do you have to stock a range of goods, but you have to keep a lot of each on hand as customers often purchase in bulk, due to fluctuating prices (they may buy large quantities when they believe it is well priced). As the store owner you have to hedge your exposure to the fluctuating price of the product you keep on hand to reduce the chance of getting caught on the wrong side of a price swing, this adds further complexity to managing your inventory.

The products you sell are expensive, this is no $2 store where your entire inventory only totals a few thousand dollars, almost all of your products cost over $20 each and up to $44,000 or more, remembering that you have to keep multiple of each in stock for those customers who want to purchase in bulk. The worst of it is you can only charge a small mark-up on the products (over cost price), otherwise your customers will go elsewhere. Obviously the capital you need for running this store will be substantial. Likely to be in the millions of dollars.

Now imagine there was a way to offer such a wide selection of expensive products, but have your customers fund the capital costs to do so… sounds too good to be true?! They will essentially pre-purchase your stock (allowing them to lock in the price they want), which provides substantial capital for putting product on your shelves. The customer can come in and use their store credit to make a purchase from your product range and take delivery at a time of their choosing. All you have to do as the store owner is promise your customers that you won’t take more funds from them than you have product on your shelves.

…you’ve probably worked out by now that I’m talking about the challenges faced by a bullion dealer. I have a lot of respect for those in the industry, it’s a cut-throat business with small margins and high volumes, lots of regulations to abide by and is littered with risks. However, as a consumer of their services, I have to think about the safety of my own capital first.

The solution I talk about above, where the customer can provide capital for stocking a larger product range, is unallocated bullion accounts. Unallocated accounts have become a popular offering from bullion dealers in Australia over the last few years, I suspect this is partially a result of an increase in the number of bullion dealers trading and also boosted by the closure of new funds to Perth Mint’s Unallocated Silver Accounts (as of March 2011, Unallocated Gold remains open at this time). The advance in functionality of bullion dealers online stores means the process to buy unallocated metal today is very easy, sign up an account, hit the buy button and transfer the money to the dealers bank account.

There are some benefits for a customer purchasing unallocated metal (as opposed to taking delivery of physical). There’s generally no cost charged for storage, the premium (over spot) charged will be lower allowing exposure to a larger number of ounces (e.g. $5000 buys 192 1 ounce silver coins at $26/oz, but buys 208 ounces of unallocated Silver at $24/oz), you don’t have to pay for delivery and it’s easier to trade (for example a dealer may offer Gold:Silver Ratio swaps or to buy it back at the click of a button). I have used unallocated accounts from two Australian bullion dealers in the past and may do so in the future, but I manage the risk by limiting my exposure to an amount I'd feel comfortable losing (the same amount that I'd risk placing any single order with a dealer).

This brings me to the problem I have with unallocated accounts. One of the reasons I own precious metals is that they have a lower level of counter-party risk compared with traditional assets such as shares. Buying precious metals in unallocated form potentially exposes the client to the solvency of the company offering the service, which is counterproductive to the reasons I hold precious metals.

The ownership (title) of the bullion in an unallocated account is a grey area and will likely differ depending on the specific setup for each dealer. I've had it explained that some bullion dealers in Australia have structured their unallocated products so that the client retains ownership of the metal in the event of bankruptcy, but I'm not an accountant or lawyer, so even if I was shown 'proof' of these claims I'd not trust myself to be confident that was definitely the case. I haven't seen any bullion dealer with a Product Disclosure Statement on their website outlining the offer, ownership structure, how the metal is treated and risks, most of them provide little more than a few sentences describing their unallocated products.

After reading the above you may be wondering how likely is the collapse of a well established bullion dealer offering an unallocated product?

It's not something that has occurred very often, the last recorded instance that I've been made aware of was back in 1996 with the collapse of "Perth Bullion Exchange" (of Sydney, not to be confused with any current trading entities with similar names). This particular case was highlighted in a Sunday Mail article where a couple had written to "The Fixer". They had purchased 20 bars of silver bullion totaling $12,900 (in 1993-1994) for which they had certificates showing ownership and when they went to redeem their metal in 1998 the business had vanished. The Fixer managed to track down the bankruptcy proceedings and the couple supposedly got around half their money back following the sale of the companies assets:

 

Perth Bullion Exchange had been trading for some 18 years at the time of their bankruptcy (via records of the bankruptcy proceedings). Over those years they had offered various services that would be comparable to some unallocated accounts today (keeping in mind that all dealers do things a little differently). Early on their certificates of ownership stated that "THE ABOVE INGOT IS BEING STORED BY THIS EXCHANGE - FULLY COVERED BY INSURANCE AND FREE OF STORAGE CHARGE UNTIL REQUIRED", other customers had received notification that "The Perth Bullion Exchange agrees to store these ingots free of charge under the best security available on the condition that we may use the physical bullion in the normal course of our business". As prices for bullion fell and the bankrupt's business deteriorated, the owner progressively sold all his stock of bullion. At the date of the sequestration order, the bankrupt was in possession of various giftware, jewellery, fixtures and fittings (but no bullion).

There was little warning of Perth Bullion Exchange's demise, in fact just several months prior the Sydney Morning Herald ran a positive article (read in full here) on the company describing a proprietor who was interested in floating the company publicly:



Another example, this time in New Zealand, was that of Goldcorp Exchange Ltd, Wikipedia summarises:

Goldcorp Exchange Ltd had a business of holding gold reserves in coins and ingots for customers wishing to invest in gold. Some gold was held for customers, but the levels varied from time to time. The company's employees also told customers that the company would maintain a separate and sufficient stock of each type of bullion to meet their demands, but in fact it did not. The Bank of New Zealand on 11 July 1988, being owed money by Goldcorp Exchange Ltd, petitioned for the business to be wound up. It transpired that Goldcorp had not held anywhere near enough money for the members of the public, around 1000 people, who had supposedly bought gold with it, even though in their contracts they were entitled to delivery of the gold (in 7 days, for a fee) if they wished. The company also lacked enough assets to satisfy the debts to the bank. The members of the public alleged that the gold that remained in stock was entrusted to them. The bank argued that because the gold stocks had never been isolated, it did not, that all the gold customers were unsecured creditors and that its security interest (a floating charge) took priority.

In this case, there was Gold remaining in stock at the time of their bankruptcy but the title of the metal hadn't been structured to verify ownership by the clients holding unallocated accounts. An early brochure read "Basically you agree to buy metal at the prevailing market rate and a paper transaction takes place. [The company] is responsible for storing and insuring your metal free of charge and you are given a 'Non-Allocated invoice' which verifies your ownership of the metal. In the case of gold or silver, physical delivery can be taken upon seven days notice and payment of nominal delivery charges." (via records of the bankruptcy proceeding), but the judgement was made:

The Privy Council advised that the customers had no property interest in the gold, and therefore the bank could use it to satisfy its debts. The customers' purchase contracts did not transfer title, because which gold specifically was to be sold was not yet certain. Although Goldcorp's brochures had promised title, a trust did not arise because there was no declaration of it. It was contrary to policy to imply a fiduciary duty simply because there was a breach of contract. It was also rejected that equity required any restitution of the purchase money.

Both of these examples are very dated. One might look at these precedents and think that recurrence is unlikely today. However, my current concern lies with the recent revelation of missing Gold and suspected tax fraud occurring as previously covered on this site in my article 'ATO & AFP Investigate Australian Gold Industry Fraud'.

I don't know what will come of this investigation and those companies named in the exposé by Chris Vedelago, but the potential for some of them to suffer losses (or potentially worse) as a result of these events seems worthy of consideration. As far as I know ATO garnishee notices take priority over other creditors, so unlike the New Zealand case detailed above, you'd want to be sure that the customer ownership of any metal in unallocated accounts was air tight if you have a substantial holding in this form.

This article was not written with the intent to panic those investors with unallocated accounts, but simply to draw attention to the risks associated with having another party store your precious metals. In the case of outright theft of customer metal, which seems to be what occurred in the case of Perth Bullion Exchange, allocated accounts aren't completely safe either. However, even if bullion dealers offering unallocated accounts do everything by the book and are a reputable long-standing business, they may inadvertently expose themselves to external risks that put their company and the unallocated accounts of their clients at risk.

I said in another recent article '7 Ways To Keep Your Gold And Silver Safe' that "there is no completely risk free way to own precious metals, as is the case with any other investment", it's just a matter of assessing the risks of the various options available and judging for yourself which you think is safest.

Every post delivered to your inbox (free), enter your email address:

I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.

 

ATO & AFP Investigate Australian Gold Industry Fraud

You may recall that late last year I wrote about a case of fraud being investigated in the bullion industry by the Australian Tax Office (ATO) and Australian Federal Police (AFP). With suspected fraud of over $65 million dollars (according to official sources, an unnamed industry source suggests the figure is in excess of $200m) and garnishee notices / GST amended assessments issued with liabilities of more than $130 million, the question on everyone's mind was, "Who are they looking at?".

A Bullion Company In Australia Hiding $130M Liability

A court filing by an Australian bullion dealer and the affidavits of the respondents has revealed accusations of companies being investigated (though some deny it) and uncovered a shocking account of how fast and loose some gold trade occurs in Australia.

Chris Vedelago (and Cameron Houston) broke the story publicly in The Age today:

A golden fleecing: the mystery of the missing millions

Normally I would quote a paragraph or two and dissect some of the material, but I think in this case it's important to actually hit the link and read the story in it's entirety (then come back and read the rest of my post).

The investigation is still ongoing, some of the companies and people named may be found guilty of fraud, others may be innocent and just ended up in bed with the wrong Gold trading partners. With the conflicting stories and some denials it's difficult to know who is telling the truth and it may be the case that we will never know it in it's entirety.

Those in the bullion industry who've provided conflicting stories have a lot to lose if found to be acting fraudulently (even confirmation that they are under investigation may be enough to rattle the confidence of their clientele or those they do business with). When considering where the truth sits, I do have to wonder what an ex-employee of one of the respondents would have to gain by lying in her affidavit, given that she faces the risk of harsh punishment if found doing so (although the same goes for all who've submitted them)...

Regardless of who is under investigation or who has been issued with the ATO garnishee notices and GST amended assessments, there are two significant points that I took away from the uncovering of these events...

Fraud can occur in any industry. Investors seeking financial safety in the purchase of precious metals (or those involved with trading of it in scrap or investment form) can expose themselves to risk from the companies who provide it. It's important that, when diversifying your portfolio with physical Gold and Silver, you also diversify exposure to the companies through which it's purchased and stored (especially when doing so in quantity). For the investor that means keeping your order sizes to an amount that you would feel comfortable losing if not taking immediate delivery. It means being wary of product offerings such as unallocated accounts where the buyer don't always hold official title to the metal (I hope to cover this in more detail in another post soon).

The other thing I took away is that we could do with a review of the way tax is applied to precious metals. In the post 'Let Australians Save in Gold Instead of Debt' I argued for the removal of capital gains tax on Gold, to allow for competing currencies / savings vehicles (something Glenn Stevens laughably said we had already). Another suggestion I made was increasing scope of the GST exemption on precious metals to include legal tender coins which trade as a function of spot price:

Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.

Perhaps the exemption could be expanded to cover any precious metal which trades as a function of spot price, so that tax fraud is no longer as simple as defacing investment grade bullion, changing it into a form which can suddenly benefit from input tax credits. Given the simplicity, it's hard to believe that the companies the ATO is investigating now are the only ones doing the wrong thing, but should any companies being investigated now or in the future land a tax bill that is above their capacity to pay, then the secured and unsecured creditors may just be left out in the cold, sitting in line behind the ATO in liquidation proceedings.

Hopefully this story will get you thinking about ways that you can invest in and trade precious metals in a more careful manner.

Safe stacking and trading!

Every post delivered to your inbox (free), enter your email address:

I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.

 

A Bullion Company In Australia Hiding $130M Liability

This story slipped past my radar around a week ago... the Australian Tax Office, Australian Federal Police and Australian Crime Commission recently executed search warrants on premises associated with companies operating in the gold bullion and precious metals industries. The following is an excerpt from the AFP media release:

It is alleged the companies fraudulently claimed GST credits and failed to report GST correctly. They formed syndicates to conceal the true nature of their activities and to avoid detection.

As a result of the investigation the ATO has issued garnishee notices and GST amended assessments with liabilities of more than $130 million.

ATO Deputy Commissioner Greg Williams said the ATO takes GST fraud seriously.

“The majority of businesses do the right thing, however the ATO will pursue those that choose to engage in illegal behaviour.”

“Further audits of industry participants will be undertaken in the near future and we will continue to work closely with other government and law enforcement agencies to pursue those suspected of abusing the system,” Mr Williams said.

Bron Suchecki provided brief comment on his personal blog:

GST is a Australian sales tax of 10% that applies to precious metals that do not meet the definition of investment. It likely that the fraud involves scrap gold or silver where GST is payable. Note that it is being classified as "organised crime" which allows the police to invoke proceeds of crime laws so the people behind it can't hide behind the bankruptcy of the companies involved.

One thing I found interesting about the story is that the media release refers to investigating "companies". The explanation that the companies formed syndicates to conceal the nature of the activities suggests to me they are probably linked through ownership/mutual interest. So while the fraud may involve scrap metal (as Bron points out), the group of companies hiding the activities could very well include bullion dealer/s who provide services to the retail buying public.

There has been a little follow up in mainstream media, the state these companies are from has not been identified (The West), the AFP did not respond to requests for further information (ABC News).

Given that the ATO has issued garnishee notices it's possible they wish the companies to continue operating and have the money owed returned over time:

We can issue a garnishee notice to a person or business that holds money for you, or may hold money for you in the future. The garnishee notice requires them to make payments directly to us to reduce your debt. The payments may be a percentage of your wages or we may issue a notice for a lump sum amount. The notice will also specify when payments are to be made. ATO 

While this might be the best outcome for the ATO who is seeking to recover the funds (what are the chances they receive payment if the companies are publicly disclosed), it leaves bullion buying Australians in a precarious position. I know I wouldn't feel comfortable placing a large (or for that matter any sized) order with a company who has $130,000,000 in outstanding liabilities and what if these companies offer storage facilities for their clients? I'd suspect any customers holding unallocated bullion with these companies (assuming they offered such services), would be behind the ATO when lining up for a payout (in the event they were liquidated).

If the companies involved in the investigation were prepared to defraud the tax office of $65 million, then in my mind they shouldn't be allowed to continue operating, they are a risk to small time investors who are just looking for a safe asset, free of counterparty risk (ironic we often bear such risks in the purchase, delivery and storage of precious metals).

If anyone has any information that could lead to the confirmed identification of a company or companies involved in this investigation, please drop me an email (bullionbaron@gmail.com).

I welcome comments on this post, but in the interest of avoiding any lawsuits please do not speculate on the identity of the companies in question. And until the identity of these companies is revealed, tread carefully when buying or storing precious metals in Australia (care you should be taking anyway!).

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.