Taxation Law - Tax Evasion - How Do The Criminal Courts Treat Tax Evaders

Date: October 11, 2006

Authors: Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)

The most serious case in this area was handed down by the New South Wales Court of Criminal Appeal in R. v Ida Ronen, Nitzen Roden and Izhar Ronen on the 19th April 2006.  The message which the courts delivered in this case is that they will treat all cases of serial tax evasion as extremely serious leading to long periods of imprisonment irrespective of the taxpayer’s individual circumstances even where  taxpayers have paid their penalty tax in full.  Details of the Ronen case have largely been extrapolated below from judgement of the New South Wales Court of Criminal Appeal.  Additional comments have been added as appropriate.  The Ronen case is a poignant example of what will happen to serial tax evaders who engage in serious tax evasion when they are detected.  Serious tax evasion means evasion of $100,000 or more in tax for which taxpayers are routinely gaoled for 2-3 years for taxation offences even where they are first offenders and of good character.  This does not necessarily have to be the case where you obtain competent, professional advice which will assist you to deal not only with the Australian Taxation Office but with the Commonwealth Director of Public Prosecutions following referral.  Should anyone wish to explore this opportunity please do not hesitate to contact us, but in the meantime we recommend you read what follows.

The Case

This is one of the most important cases on tax evasion and the types of penalties to be applied.  The matter went on appeal to the NSW Court of Criminal.  The Ronens were convicted of two offences contrary to the Commonwealth Crimes Act arising from a conspiracy between them to defraud the Commonwealth of taxation revenue for which they were sentenced to terms of imprisonment.  Interestingly the Commonwealth Director of Public Prosecutions appealed against what he asserted to be the inadequacies of the sentences imposed and the Ronens sought leave to appeal against the sentences as being harsh as the amount of penalty tax was not properly taken into account. 

There was argument over whether the maximum penalty for each offence was relevantly imprisonment for 10 or 20 years following legislative change.  It is worthy of note that Mrs Ronen pleaded guilty at the commencement of her sentencing proceedings to an offence under section 31 of the Financial Transactions Reports Act 1988 (Cth) concerning 11 cash transactions each less than $10,000 in value which were structured to avoid reporting the requirements under the Act, the maximum penalty being five years.  

The Sentences

Mrs Ronen was sentenced to imprisonment for eight years and six months with a non-parole period of four years and six months.  Each of her sons was sentenced to eight years and six months with non-parole periods of five years and six months each.  There was also an issue as to whether the sentences should be served concurrently rather than cumulatively.

The Circumstances

Basically the offences arose during the course of the operation of a clothing business and involved a number of companies trading in the retail and wholesale clothing industry through a number of factory outlets selling clothing manufactured by the companies to the public at discount prices under the name of Dolina Fashions.  The facts were that the applicants had agreed to defraud the Commonwealth of income tax by concealing a substantial proportion of the cash income generated by these shops.  It was apparent that they had concealed somewhere between $15M and $17M with none of the cash taken by them being declared as income in either their personal or company tax returns.  By various devices they concealed the greater part of their income with no more than 10% of the cash takings being banked. 

What really put the torch under this case was that Mrs Ronen’s former male friend informed on the family’s tax non-compliance. By means of a phone tap further details of the conspiracy came to light and the conversations alerted the authorities as to how much money the applicants were sending overseas which led to a search warrant being executed with the applicants being arrested the same day, 7th February 2001.

Following conviction but before sentence the applicants settled with the Commissioner of Taxation with one of them raising in their grounds of appeal that insufficient weight had been given to the fact that the applicants had paid a considerable amount of penalty tax to the Commissioner.  

The Ronens

The background to the matter is important.  Mrs Ronen was aged 72 at the date of sentencing and was not in good physical health.  She suffered from osteoporosis; lower back pain; osteoarthritis of both knees; conjunctivitis and bilateral cataracts; high blood pressure and was depressed.  She was a successful businesswoman who had worked hard to establish her business and was a good mother to her sons.   The judge accepted that Mrs Ronen would find prison extremely difficult particularly in view of her health.  She presented a large number of references and testimonials attesting to her qualities as a mother, grandmother and friend; her charitable work and her contrition and the responsibility which she felt she owed her two sons.

Nitzen Ronen was 47 years of age, married with four children between the ages of 1 and 6½ years.  He pleaded guilty, regretted his conduct and the effect on his children.    He presented a number of references to the court outlining his philanthropy, being depicted a hard and industrious man with considerable skill and experience of the clothing industry.  As for Izhar Ronen, he was 46 years of age, married with two children aged 17 and 16; he was shamed by the whole experience and he likewise produced testimonials as to his generosity and hard work. 

The Trial Judge’s Findings

The judge said that their situation was tragic and each offender was a person of previous unblemished good character who each worked very hard to establish and maintain a highly successful business with each being well-respected in the community and who practise philanthropy at a high level.  They were regarded as outstanding family members who were well regarded by friends and acquaintances with each being imprisoned awaiting sentence for the most serious of crimes.  Although the judge was aware of the impact of a sentence of imprisonment on the families of her sons he could find nothing exceptional that would permit him to impose a lesser sentence on that account despite the obvious contrition and remorse demonstrated by them including the settlement of the civil actions with the Commissioner.

Grounds of Appeal

The four grounds of appeal relied upon by the applicants were:

  1. The sentencing judge erred in finding that the maximum penalty for the offences was 20 years imprisonment.
  2. He had failed to have proper regard to
    1. the imposition of penalty tax;
    2. the general and specific deterrents attaching thereto; and
    3. the level of punishment inherent in the imposition of penalty tax.
  3. The judge was in error in partially accumulating the sentences.
  4. The sentences were excessive.

Under section 135.4 of the Criminal Code Amendment (Theft, Fraud, Bribery and Related Offences) Act 1999 the maximum penalty for offences falling within this section is imprisonment for 10 years.

The relevance of Penalty Tax

What is of haunting significance here is the role to be played by the payment of penalty tax to the Commissioner before the sentencing proceedings have commenced.  The judge had evidence before him that the Commissioner imposed penalties under section 226J of the Income Tax Assessment Act 1936 (Cth) of $7,180,508.  That section deals with penalty tax where the shortfall results from intentional disregard of the law and the taxpayer is therefore liable to pay by way of penalty an additional amount of tax equivalent to 75% of the shortfall amount or part thereof.  The question is – what effect should be given to the fact that the applicants had paid a considerable amount of penalty tax.  The judge quoted from a number of authorities but the one which is of most importance is DPP v Hamman (NSW CCA, Unreported, 1 December 1998).  Sheller J.A. stated

“General deterrence is a predominant consideration when sentencing for offences of defrauding the revenue.

Appeal courts have discussed and emphasised the seriousness of frauds committed to the detriment of the public revenue ...

While undoubtedly it is a matter to be taken into account, it is, in my opinion, of small account that when caught out the offender pays the amount due and additional tax by way of penalty for which the offender is liable to a greater or lesser extent, according to the Commissioner’s discretion, whatever the reason for non-disclosure.  Past integrity and good character, devotion of family and work and contributions to the community, impeccable though they have been, carry little weight ... when the respondent was caught out.”

knowing that he had understated his income by very large amounts for his own benefit or advantage.

Apart from penalty tax the applicants were also liable for GIC under section 204(3) of the Income Tax Assessment Act 1936 as it relates to the post-assessment period. 

Essentially where applicants wish the court to take into account the full impact of penalty tax as a matter of mitigation of sentence they have an onus of demonstrating the impact of the penalty upon them.  Unfortunately the Ronens failed to do this. 

Accumulation of Sentences

Generally it is a matter for the sentencing judge as to whether to make sentences concurrent or cumulative.  One circumstance is where the discretion must be exercised in favour of cumulative sentences is where the appropriate sentence for one offence cannot comprehend or reflect the criminality involved in all the offences.  Obviously in this case this was the approach taken as there was not one offence encompassing the whole of the criminality involved in the conspiracy. 

Were the Sentences Excessive?

The applicants’ criminality fitted within the worst category given the length of time over which the conspiracy operated, the amount of money defrauded from the Commonwealth and the manner in which the fraud was carried out.  There is little mitigation to the subjective features of the applicants having regard to the period of the offence and its systematic nature.

The most important aspect of punishment in relation to frauds on the Commonwealth revenue is general deterrence.  Although the payment of penalty tax has some deterrent effect, it is not usually of the same magnitude as imprisonment even though the person is of good character and well respected in the community.  It was particularly important in this case to denounce a decade of persistent, fraudulent conduct and the contempt of the taxation laws motivated by pure greed.   The payment of penalty tax could not sufficiently achieve that purpose.  The court was not persuaded that any lesser sentences were warranted because of the serious nature of the offences committed by the applicants.

Comments

What is particularly sobering is that the Crown was of the view that the total sentence of 8½ years was manifestly inadequate as against the statutory maximum of 20 years under the earlier legislation on which the crown sought to rely.  Obviously it is open to the Crown in appropriate cases to seek to have tax evaders incarcerated for periods of up to 20 years where money laundering is involved.  Tax evasions can be a very serious lesson in tax non-compliance.  Should you be tax non-compliant call LAC Lawyers to obtain competent, professional legal advice.

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