The Australia Tax Office (ATO) has identified more than 100 parents who have paid school fees from overseas accounts and it will follow up on apparent discrepancies with those parents’ tax returns. It is possible that those school fees have been paid out of undeclared offshore assets of the parents. The ATO reports that more than 60 non-government schools around Australia were contacted for this information.

Investigations by the ATO

The ATO announced earlier this year that it would be targeting tax evasion which has occurred through the storing of money in offshore accounts or undisclosed entities. This is the first evidence of the ATO requesting information from private schools as part of its Project DO IT initiative to target offshore assets.

ATO Deputy Commissioner Michael Cranston said that the ATO will be asking the parents to provide documents and attend interviews to answer questions about their arrangements. He stressed that it was not illegal to store money in an overseas account, as long as the account is declared and the appropriate level of tax is paid.

Why schools should pay attention

Although schools are educational facilities, it is important to also remember that they process a large volume of financial transactions, some of which involve significant amounts of money. The Sydney Morning Herald reported that, of the transactions being investigated by the ATO, some involved transactions up to $100,000. Schools should be aware that dealing with large amounts of money can give rise to legal obligations under different laws such as the Criminal Code Act 1995, with serious consequences for breach of those obligations such as fines or imprisonment.

The fact that the ATO is working with private schools to collect data on possible tax evasion highlights the fact that the financial records of schools can be subject to scrutiny by regulatory bodies as part of investigating possible misconduct that is unrelated to the school’s operations. Records must therefore be organised, thorough and contain sufficient detail so that all transactions can be easily understood by outside bodies.

Whilst it is rare that any legal issues relating to the processing of school fees will occur, it is important for schools to be aware of the risks so that they avoid making errors or fail to address their legal obligations. Schools should also remember that it is not just internal fraudulent conduct by employees which can prompt an audit. The school’s conduct in accepting external payments will also be under scrutiny

School fees and legal complications

A key matter that schools should be aware of when accepting money from undisclosed sources is that it is a criminal offence to deal with the proceeds of crime. Importantly, the national Criminal Code Act 1995 (Cth) specifies that anyone who deals with money that is a proceed of crime and is reckless or negligent regarding its origin has also committed an offence. ‘Recklessness’ implies that the person proceeded despite being aware of the likelihood of the money being the proceeds of crime. ‘Negligence’ requires an even lower threshold. If a reasonable person would have believed that the money was the proceeds of a crime, and the individual fails to take reasonable steps to verify the origin of the money, they may be guilty of an offence.

The consequence of these obligations is that if a transaction is processed in spite of the ‘unusual and suspicious circumstances’, the school may be found to have dealt with the proceeds of crime. The penalties for this conduct under the Criminal Code Act become progressively more severe for large transactions such as $10,000, $50,000 and $100,000.

The Privacy Act 1988 (Cth) also has a significant impact on the school’s collection of fees, as schools may be legally considered to be credit providers under that Act. When a school agrees to defer or suspend a payment for greater than 7 days beyond the payment date, this is considered to be the provision of credit. Although this does not mean that schools need to obtain a credit licence, it does give rise to obligations relating to record keeping and information handling in schools. The records relating to the provision of credit are subject to rules to ensure they are kept confidential and secure, as well as ensuring that all records are kept up to date.

Although rules relating to privacy apply, under the Privacy Act a school is permitted to collect or disclose personal information if they believe “unlawful activity, or misconduct of a serious nature, that relates to the entity’s functions or activities has been, is being or may be engaged in” and the information may be necessary to take appropriate action. This action may include keeping notes of suspicious financial transactions if it may be related to serious misconduct.

Common sense approach

The take-away message for schools should be to exercise their common sense when dealing with school fees. The staff member or team in charge of handling financial transactions at the school will be aware if a transaction occurs that is out of the ordinary, and must use their judgement to evaluate whether there is an adequate explanation for the unusual aspects. There is no burden on schools to investigate every financial transaction that takes place, but rather they should generally be aware that when a transaction seems strange or suspicious, they should make further inquiries or, if necessary, report the matter to a regulatory body such as the ATO.