Sunday, July 13, 2014

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 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!

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