R v Leonie Mary Elvin and Thomas Clyde Elvin [1997] ACTSC 1 (10 January 1997)

SUPREME COURT OF THE ACT

THE QUEEN v. LEONIE MARY ELVIN and THOMAS CLYDE ELVIN
No. SCC124 & 125 of 1996
Number of pages - 11
Criminal Law

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY HIGGINS J

CATCHWORDS

Criminal Law - sentence - taxation - defrauding the commonwealth - understating assessable income - principles applied to and the approach to the sentencing of offenders who have defrauded the Commonwealth by means of false claims in respect of tax liability, social security or other benefits - imposition of monetary penalties by ATO - custodial penalty - culpability of offenders - remorse, cooperation and reparation.

Crimes Act 1914 (Cth), ss4K(4) 29D

R v Whitnall [1993] FCA 271; (1993) 68 A Crim R 119 R v Chaplin, unreported, Supreme Court, Australian Capital Territory, Higgins J, 24 January 1992 R v Habda (1994) 94 ATC 4854 R v Wright (1994) 74 A Crim R 152 R v Tacey, unreported, CA Queensland, Davies JA, Pincus JA and White J, 2 March 1994 R v Mai, unreported, CA Queensland, McPherson JA, Thomas and Moynihan JJ, 25 August 1995 R v Nguyan & Phan, unreported, CA Victoria, Winneke P, Brooking and Callaway JJA, 21 May 1996 R v O'Donoghue, unreported, District Court New South Wales, Maguire J, 22 April 1996 R v Bibaoui (1996) 139 ALR 746

HEARING

CANBERRA, 13 December 1996 10:1:1997

Counsel for the Crown: Mr J White

Instructing solicitors: Director of Public Prosecutions (Cth)

Counsel for the Offenders: Mr G James QC with Mr R Refshauge

Instructing solicitors: Deacons Graham & James

ORDER

THE COURT ORDERS THAT:
1. On the first count, convictions be recorded. Each offender be released forthwith upon entering into a recognisance, self in the sum of $1,000.00 to be of good behaviour for a period of 12 months from today. 2. On the second count, convictions be recorded. Each offender be released forthwith upon entering into a recognisance, self in the sum of $2,000.00 to be of good behaviour for a period of two years from today. 3. On the third count, convictions be recorded. Each offender be sentenced to imprisonment for a period of 12 months. The Court directs that they be released forthwith upon entering into a recognisance, self in the sum of $4,000.00 to be of good behaviour for a period of four years from today.

DECISION

HIGGINS J
1. Leonie Mary Elvin and Thomas Clyde Elvin are husband and wife. They are directors of Tom Elvin Pty Ltd. That company has for a number of years, since the 1980s, conducted the business of manufacture and supply of concrete. The company itself was formed in 1970.

2. The business expanded rapidly from the middle of the 1980s. The company purchased a former Pioneer Concrete site in Mitchell. Starting with four sub-contractors, the company now employs about 20 employees.

3. In 1993, the Australian Tax Office (ATO) conducted an audit of the financial affairs of the company and found apparent discrepancies in the actual as opposed to the reported assessable income for the financial years ending 30 June 1987 through to 30 June 1991.

4. As a result of the audit, additional tax and penalties were assessed by the ATO. However, they seem to have been applied only to the years 1989, 1990 and 1991. The company paid $34,000.06 and the offenders paid $2,179.00 and $2,159.00 respectively.

5. The understated income arose from a failure to include in the company's returns cash sales made in the relevant financial years. The total assessed as understated was $241,778.00.

6. Had that income merely been diverted to the personal use of the offenders, their culpability would, prima facie, be considerable.

7. However that was not the case. The cash receipts were, at least substantially, if not entirely, used to pay business related expenses. However, there was a difficulty in that only an incomplete record was kept of those expenses. Nevertheless, the ATO acknowledges that all but $13,997.00 of the cash income could legitimately have been written off as tax deductible expenditure. Thus, only a small amount of taxable income ended up as understated. Hence, the company did not avoid a substantial amount of tax.

8. Nevertheless, the practice had other deleterious consequences for the revenue. Apart from the difficulty of assessing whether an expense so paid was truly deductible or exposed a liability to Fringe Benefits Tax, cash wages were also paid to employees and sub-contractors without appropriate deductions being made. Whilst, no doubt, there was an obligation on those persons nevertheless to declare such income, there was no opportunity offered to the ATO to cross-check their declarations of income with the records kept by the offenders. Further, as no tax instalments were deducted and paid to the ATO, there was, at least, a loss of revenue in the meantime. It would be unrealistic, however, to assume that any recipient of the "cash in hand" payment was expected to declare that income. Nor did they.

9. The offenders were arraigned before me on 13 December 1996 on three counts alleging that each of them, was, ... on or about 9 May 1990 ... knowingly concerned in the commission of an offence against section 29D of the Crimes Act 1914 by Tom Elvin Pty Ltd, in that Tom Elvin Pty Ltd did defraud the Commonwealth by making a return of its income for the year ending 30 June 1989, which falsely understated such income. ... on or about 14 December 1990 ... knowingly concerned in the commission of an offence against section 29D of the Crimes Act 1914 by Tom Elvin Pty Ltd, in that Tom Elvin Pty Ltd did defraud the Commonwealth by making a return of its income for the year ending 30 June 1990, which falsely understated such income. ... on or about 13 March 1992 ... knowingly concerned in the commission of an offence against section 29D of the Crimes Act 1914 by Tom Elvin Pty Ltd, in that Tom Elvin Pty Ltd did defraud the Commonwealth by making a return of its income for the year ending 30 June 1991, which falsely understated such income.

10. It is not alleged, nor is it admitted, that the offenders intended to gain an income tax advantage for the company. Indeed, the evidence supports the view, and I accept, that the offenders did not intend to defraud the Commonwealth in that sense.

11. Indeed, I was so concerned about this aspect of the matter that I was minded to reject the offenders' pleas of guilty. I was conscious of the fact that the DPP was of the view that a trial would, for reasons not clear to me, if the basic facts were agreed as they now seem to be, take several weeks. The costs of such a trial to the offenders would be ruinous not only to them but also to their company and its employees.

12. However, the offenders have, by their counsel, admitted, and the DPP accepts that admission, that they realised that employees and others to whom cash payments were made, probably would not declare those payments as assessable income.

13. It does not appear that the offenders made the cash payments in order to deprive the ATO of tax collections. Rather, it seems, it was a practice deemed necessary to keep the workers happy. However, they engaged in the practice aware of its consequences to the ATO.

14. The background of the offenders is relevant to an assessment of their personal culpability.

15. Leonie Elvin was born on 5 September 1943. She obtained her Leaving Certificate. She met her co-offender, Thomas Elvin, in 1964 in Alice Springs. They were married in 1965. Although Mrs Elvin was in that year employed in the Auditor General's office, it does not appear that she had any accountancy qualifications.

16. Thomas Elvin was born on 15 April 1945. He left school at 13 years of age. He has no relevant educational qualifications.

17. Mrs Elvin was, until 1967, engaged in home duties. The offenders have two children born in 1967 and 1972. Mrs Elvin's business involvement commenced when Mr Elvin, with his brother, formed a sand and gravel haulage company. It was a small business and Mrs Elvin kept the books.

18. There were various small businesses, gradually expanding. By 1986, a considerable increase in the business activity occurred as already noted. Mrs Elvin continued to do the books as well as running the house and looking after the children.

19. The offenders agree that in about 1989 they lost control of the business of record-keeping.

20. Since the audit, they have employed a qualified full-time accountant.

21. Contributing to the lack of proper control was the failure of Mr Elvin's health.

22. At no time does it appear that the offenders intended to achieve personal financial gain at the expense of the ATO.

23. They agreed to the assessments of tax and penalties referred to. I accept that, in substance, the "culpability penalties", though formally levied against the company, are in substance taken out of profits which otherwise would belong to the offenders.

24. It seems to me likely that the assessment of tax and penalties is far more generous to the ATO than would have been the case had the offenders at least kept an accurate record of their cash transactions.

25. They at no time denied the facts alleged against them. They cooperated fully with the ATO and the Federal Police.

26. Federal Agent Killmier recorded in his antecedents report, Neither Mr or Mrs Elvin are adversely recorded on Police Criminal Record indices. From my personal contact with persons having long term connections with the Canberra Building Industry, the Elvin's have a reputation of being a hard working family committed to their business. My inquiries with certain persons in the industry indicate that their lifestyle has not been lavish and all members of the family continue to work towards the betterment of the family business.

27. Not only have the offenders paid the tax they and the company are assessed as having avoided, plus penalties, they have also paid all tax and penalties resulting from undeclared income paid to employees and sub-contractors.

28. The total in payments are, For the company $269,803.39 For employees 34,000.06 For Mr Elvin 2,159.00 For Mrs Elvin 2,179.00 Total $308,141.45

29. How that total can properly be levied in respect of a net under- declaration of taxable income totalling $13,997.00 over the three years in question is not satisfactorily explained even after allowance for the tax avoided on payments to employees and sub-contractors.

30. The DPP acknowledges that over $200,000.00 of the above figure is by way of penalties rather than arrears of tax liabilities and interest for late payment.

31. Thus, not only has full reparation been made, but also an extremely large fine has been levied.

32. Dr Hurwitz, thoracic physician, has reported that Mr Elvin suffers from a quite severe form of pulmonary sarcoidosis. It is a life- threatening and progressive disease requiring skilled and constant management.

33. Dr Knox, a psychiatrist, has reported on Mrs Elvin. He reports that she attributes the offences to a combination of poor book-keeping which, through reprehensible, would not be fraudulent, and to the payment of "black money". That latter practice is, as I have accepted, dishonest and, in the present case, fraudulent.

34. She reported to Dr Knox that the ATO had advised that if they cooperated then "the matter would be over and done with". Nevertheless, criminal charges have been laid, dashing the expectations the offenders had entertained.

35. Mrs Elvin suffers from hypertension but otherwise does not seem to have suffered any psychological disorder.

36. Whilst as directors, the offenders should have been more aware of their obligations to keep accurate records and to report both income and expenditure, their real responsibility was in knowingly conforming to a prevailing practice of paying "black money" to workers. They knew that was wrong.

37. They have and will endure the public humiliation of and arising out of these proceedings.

38. The principles to be applied to and the approach to the sentencing of offenders who have defrauded the Commonwealth by means of false claims whether in respect of tax liability or social security or other benefits were reviewed in R v Whitnall [1993] FCA 271; (1993) 68 A Crim R 119.

39. An appeal alleging inadequacy of suspended sentences of three years imprisonment and 208 hours community service on eight counts of defrauding the Commonwealth over four years, both personally and through a company, was dismissed. Those sentences were not regarded as inadequate.

40. In that case, the respondent had engaged in deliberate and systematic concealment of income and the assertion of false deductions. The benefits from those activities were taken directly or indirectly by the respondent.

41. As in this case, the ATO had levied monetary penalties, in that case $42,000.00 plus interest on the tax avoided at penalty rates. The financial arrangements made to pay to the ATO the tax foregone and penalties had imposed serious hardship on the respondent. As in the present case, the respondent in Whitnall was of previous good character, pleaded guilty and was remorseful.

42. In the present case, however, the tax avoided is less, the administrative penalties imposed far greater and the culpability of the offenders much less. They wrongfully omitted information rather than supplying information which was positively false with a view to gaining a tax advantage for themselves.

43. Although I cannot assess the degree of hardship which these offenders have suffered because of the need to pay the ATO the tax and penalties demanded, it must have been considerable.

44. Whilst those who set out to defraud the revenue of substantial sums of money can ordinarily expect a custodial penalty, it is not necessarily the case that substantial remorse, cooperation and reparation will not so mitigate the proper penalty that the custodial term cannot be wholly suspended, particularly if the level of culpability is less than that usually found.

45. Remorse, cooperation and reparation, particularly if the fraud is voluntarily disclosed and implicates other offenders, may lead to total suspension of a custodial term even though the original offending conduct was gravely criminal, see R v Chaplin, unreported, Supreme Court, Australian Capital Territory, Higgins J, 24 January 1992.

46. Subsequently, in R v Habda (1994) 94 ATC 4854, a full Federal Court declined to increase sentences I had imposed on a husband and wife who had failed to include substantial sums as income in their tax returns. They had each avoided $69,000.00 tax. Penalties of $118,000.00 had been imposed administratively. The husband, being primarily responsible for the fraud, was sentenced to 18 months imprisonment, suspended after three months on entering into a recognisance in the sum of $2,000.00 to be of good behaviour for two years. The wife's sentence of nine months was wholly suspended upon her entering into a recognisance in the sum of $2,000.00 to be of good behaviour for 12 months.

47. The culpability of those offenders was significantly greater than the present offenders, though in this case I am not persuaded that either offender is significantly more or less culpable than the other.

48. Reference was also made to R v Wright (1994) 74 A Crim R 152. That respondent had pleaded guilty to making untrue statements in tax returns in respect of two financial years. The statements concealed a deliberate and dishonest attempt to avoid tax by creating a false deduction. A sum of $211,252.00 was concealed. As it happened, little tax was avoided, not for want of trying, but because large errors had been made in the ATO's favour.

49. Whilst the imposition by the ATO of substantial monetary penalties is relevant, it would not, usually, make any difference as to the type of penalty to be imposed, though it may well mitigate the extent of it.

50. I agree with Davies JA and White J in Wright, at 160, ... where a calculated and systematic tax fraud involves a substantial sum of money the offender should usually be required to serve a term of imprisonment particularly where, as in this case, it is not an isolated act but is persisted in for some time.

51. That respondent was required to serve three months of an 18 month head sentence.

52. I also agree with Pincus JA at 165 that, bearing in mind the wide range of options available to the tax and prosecuting authorities to penalise the same conduct, there is a need to focus upon the objective heinousness of the criminal conduct rather than upon the maximum penalty available for the offences charged.

53. In R v Tacey, unreported, CA Queensland, Davies JA, Pincus JA and White J, 2 March 1994, the offender deliberately concealed cash income with a view to avoiding the tax on it. The total tax avoided was $114,615.00. Her serious health problems caused the substitution of a monetary penalty for a term of imprisonment, although, on appeal by the Crown, the monetary penalty was increased.

54. It is fair to observe that the nature and quality of Tacey's criminality far exceeded that of these offenders. Further, the total monetary penalties imposed, even after the increased fine, was less than half the monetary penalty imposed on these offenders by the ATO.

55. There was a similar case, R v Mai, unreported, CA Queensland, McPherson JA, Thomas and Moynihan JJ, 25 August 1995. The understatement of income was $153,000.00. The tax avoided was approximately $64,000.00 with a further $116,000.00 being levied for interest and penalties. A sentence of two and a half years imprisonment was imposed but was wholly suspended. On appeal, there being no compelling personal circumstances, a sentence requiring three months to be served was substituted.

56. I was also referred to a recent decision, R v Nguyan & Phan, unreported, CA Victoria, Winneke P, Brooking and Callaway JJA, 21 May 1996. The offenders paid outworkers in cash so that the latter could avoid taxation and the offenders could pay less to those workers than otherwise would be required. They covered the discrepancy by concealing the level of takings. A sum of $687,000.00 was so concealed in one year alone. The combined total of tax evaded was $911,000.00, although that figure did not make allowance for sums actually paid to workers. Each appellant was sentenced to two and a half years, to be released after serving 18 months. They appealed.

57. Brooking JA, at 7, drew attention to the need for substantial deterrent sentences for those "who systematically defraud the Revenue of a large sum over a substantial period".

58. The prevalence of the offence and lack of reparation, together with concealment and destruction of records, led his Honour to conclude that the sentences were appropriate.

59. I would also note that it seems that the whole of workers' remuneration was paid in cash. They would, therefore, be gravely disadvantaged if injured in work-related circumstances because of the concealment of their employment as well as their income.

60. I was also referred to a more recent decision of R v O'Donoghue, unreported, District Court New South Wales, Maguire J, 22 April 1996. O'Donoghue had fraudulently paid wages without deducting taxation instalments. That conduct is similar to that of the present offenders. Employees were paid sums additional to their normal taxed wages by "cash in hand" payments. However, it was the defendant who instituted that system and insisted that workers accept it on pain of dismissal. Over the four years investigated, approximately $367,000.00 in tax was evaded as a result of tax instalments retained by the offender and his companies. The defendant pleaded guilty only on the first day of trial. It is clear his intention had been to profit from the tax evaded. He was unlikely to be able to make reparation.

61. The effective sentence imposed was a head sentence of 16 months, to be released after 12 months.

62. It seems to me that some general observations are appropriate.

63. First, tax fraud is not to be regarded as less serious than social security fraud. Indeed, it may, generally, involve greater culpability being more likely to be the result of greed rather than need.

64. Second, the deliberation involved and the intended deleterious result to the revenue are important to the assessment of culpability.

65. Third, there is a need to make it clear that paying "black money" or "cash in hand", though it may be connived at by the recipient, is not to be regarded as other than a seriously dishonest course of conduct.

66. The fourth observation relates to the role of cooperation and reparation. It is true that the perception that those who have profited from tax evasion can buy freedom from incarceration either from the profits of that evasion or their accumulated wealth must be avoided. However, as with a plea of guilty, it is a relevant matter favouring leniency. The weight to be accorded to it depends, as with a plea of guilty, on the implication as to remorse and a desire to make amends which the reparation in the circumstances discloses. The degree of hardship accepted by the offender in making reparation is also material.

67. In the present case, the reparation is complete. Indeed, even allowing for the penalties imposed, the reparation, including interest, is probably overly generous to the ATO. It resulted from cooperation and was, I am satisfied, motivated by a desire to make adequate amends.

68. It is not possible, as the Federal Court decision in Whitnall affirms, to conclude that every substantial tax fraud should result in the incarceration of the offender. It is possible to conclude that deliberate and systematic fraud on the revenue will, in the absence of substantial mitigating factors, lead to incarceration. The tendency is, I think, for the period of incarceration to be greater now than previously was considered appropriate.

69. In my view, the culpable conduct of the present offenders can be categorised as being, in large measure, due to carelessness and incompetence. It was easier for them to pay cash expenses directly from cash receipts rather than keep full records. That observation is not wholly applicable to the cash bonuses and benefits paid or given to workers. I have no doubt the practice commenced without much deliberation. For 1989, cash payments to workers were only 17% of all cash payments. In 1990 it was 22%. However, in 1991 it was 60%.

70. Had the practice of paying "black money" continued, it is possible that the offenders may have turned their minds to the profits they could make from the practice. Indeed, in 1991, they actually did profit to a substantial extent by reference to tax instalments they should have paid to the ATO, assuming the "cash in hand" to have been the after-tax payment. Their culpability for that offence is thus greater than for the previous two.

71. Having regard to the offenders' culpability, it seems to me that, in all the circumstances, these offenders should not be incarcerated. I place great weight on the circumstances giving rise to the offences, the pleas of guilty, remorse, cooperation and reparation. I am also impressed by the steps taken by the offenders to avoid future shortfalls or errors in reporting tax information and payments to the ATO and to enabling an accurate audit of their affairs. That bespeaks a desire not to re-offend. In most of these cases there is prior good character. Little weight therefore is accorded that factor but the state of health of the offenders, as well as their skills and education, is relevant not only to deliberation, but also to the hardship and health risk which may be created, beyond that which is acceptable.

72. I also note that the Victorian Court of Appeal, in R v Bibaoui (1996) 139 ALR 746 expressed the view that s4K(4) of the Crimes Act 1914 (Cth) does not authorise the imposition of a single penalty on separate counts in an indictment, an indictment not being an "information, complaint or summons".

73. As Ormiston JA conceded, that view is contrary to all previously decided full Court decisions elsewhere, albeit that there had, in those cases, been no direct challenge to the procedure.

74. Whilst there is no doubt that, usually, a separate penalty, proportionate to each offence charged, is preferable, it does seem anomalous that for non-Commonwealth counts, a joint penalty may be imposed but not for Commonwealth counts.

75. Nevertheless, there are only three counts in this indictment and I propose to impose a penalty on each.

LEONIE MARY ELVIN and THOMAS CLYDE ELVIN, please stand. 76. On the first count, I record convictions. I order each offender to be released forthwith upon entering into a recognisance, self in the sum of $1,000.00 to be of good behaviour for a period of 12 months from today.

77. On the second count, I record convictions. I order each offender to be released forthwith upon entering into a recognisance, self in the sum of $2,000.00 to be of good behaviour for a period of two years from today.

78. On the third count, I record convictions. I sentence each offender to imprisonment for a period of 12 months but I direct that they be released forthwith upon entering into a recognisance, self in the sum of $4,000.00 to be of good behaviour for a period of four years from today. 1