ATO found pub empire made ‘fictitious’ GST refund claims
Virtical Group made false claims for millions in GST refunds based on invoices for construction that did not happen on property it did not own, the tax office has found.
Embattled hospitality empire Virtical Group deliberately made false claims for millions of dollars in GST refunds based on invoices for construction that did not happen on property it did not own, the tax office has found.
The Australian Taxation Office fined a Virtical group company $1.8 million for “intentional disregard” of the law over GST refund claims that it made for purportedly developing a block of land in Tasmania it did not own, according to a damning audit obtained by The Australian Financial Review.
Virtical Group managing director John Palasty has denied any wrongdoing. Dion Georgopoulos
The fine is potentially the tip of the iceberg for the property investor that exploded onto the hospitality scene last year buying up trophy venues like Melbourne’s the Adelphi Hotel and Sydney CBD pub The Republic Hotel.
Earlier this month, the Financial Review revealed the ATO is investigating more than a dozen Virtical companies over more than $100 million in GST refund claims – a sum that required it to spend $1 billion on development.
The completed audit, the first to be revealed from the ATO investigation, flies in the face of Virtical managing director John Palasty’s denials that the group was under an audit or ATO investigation.
While only covering November 2023 and just one company, the false refund claims could quickly grow to be some of the biggest of their kind if the ATO makes similar findings against other Virtical companies or for other months.
The audit already flagged questions over $164 million that six Virtical trusts claimed they spent late last year to claim GST refunds of $14 million. Some of the construction spend related to costs for iconic Sydney venues Kinselas and The Courthouse – pubs that Virtical never ended up buying.
‘It was intentional’
Virtical Group also relied on invoices issued by a related construction firm known as Top Class Constructions, which was controlled by the group’s former managing director Mark Toma until October last year, the audit says.
The ATO’s audit was sent anonymously to theFinancial Review but verified by sources familiar with the ATO’s investigation.
According to the audit documents, the Tax Office ratcheted up its $1.5 million fine by 20 per cent because the company and its director Mr Palasty “tried to make it difficult for us or stop us from finding out about the shortfall”.
“The significant amounts involved also demonstrate this is not simply a mistake or carelessness, it was intentional,” the ATO found.
“When requested to substantiate the claim, you failed to because you knew at the time of lodgement that the claim was fictitious, and you made a deliberate choice to ignore the law.”
Virtical Group has been building up a hospitality empire since last year after spending $125 million on iconic pubs and hotels in Sydney and Melbourne in just four months.
However, that empire is now crumbling. In the past week, the group’s main financier has forced its two biggest assets, Sydney CBD pub The Republic Hotel and Melbourne venue The Adelphi Hotel, into administration after issuing default notices on $90 million of debt.
The Financial Review can also reveal that on Tuesday Bond Finance put Virtical’s Hotel Australasia, a boutique hotel and bar in Eden on the NSW South Coast, into administration.
Virtical is also fighting in the Supreme Court of NSW to back out of its $61 million acquisition of Sydney’s Kinselas and Courthouse pubs in Taylor Square.
Despite never paying for the two iconic pubs, the ATO audit reveals Virtical’s trusts set up to buy the venues claimed $73 million in “capital acquisitions” from September to December 2023 for $6.8 million in GST refunds.
Repeated denials
Another trust that owned the Adelphi Hotel claimed $26 million in expenses for a $2 million GST refund. Searches of council records reveal no development applications for the hotel since 2022 – more than a year before Virtical bought it. Virtical claims its refurbishments did not need a new DA.
When companies purchase goods and services needed to run their business, they can claim refunds for the GST paid if their expenses surpass their income in the period.
Mr Palasty, who took over the group in November, has repeatedly denied the group is under audit for its GST refunds and has threatened to sue this masthead.
However, the June audit of Cedar Grove Tas Unit Trust was not only addressed to Mr Palasty but goes into detail about the ATO’s conversations with him about it since January, including sending a formal notice to his family home to produce documents.
Mr Palasty denied he had misrepresented the situation in his statements, saying the audit had “concluded” at the time he denied the group was under investigation or audit. He denied any wrongdoing and said Virtical was “in dispute” with the ATO.
Cedar Grove was set up to buy vacant land in rural Tasmania covering some 152,000 square metres. The property’s only structure was a house with no bedroom, according to the ATO.
Mr Palasty was the sole director of the Cedar Grove trustee at the time the tax returns were lodged on December 19. He also authorised the business activity statements for its November GST claim, according to comments by the trustee’s tax agent cited in the audit.
Despite not buying the land at the time, Cedar Grove sought $2 million in GST refunds for $20 million in construction spend on the property in November. The trustee made the claim after the ATO granted it $3.2 million in GST refunds the previous month based on $35 million construction costs.
However, the ATO said the company had not provided it with any contracts to undertake large development works, sources of funding or financial documents to back up the costs claim.
Mr Palasty denied he had authorised the BAS or tax claims and alleged the company’s tax agent filed them without his knowledge.
He also claimed that Mr Toma was director of Cedar Grove and in control of the company’s finances and BAS before November 28. Mr Toma did not respond to requests for comment. ASIC filings show Mr Toma resigned on November 28 but backdated his resignation to October 7.
Porsches and BMWs
Mr Palasty also claimed that the ATO had made a “number of incorrect assumptions” including that the property had only one house when it was “a 300 dwelling development under way”.
He claimed the contract exchanged in October for the property allowed for building works to start during the settlement period – and that he had provided a development agreement to the ATO.
Three months after the ATO started making inquiries, Mr Palasty withdrew the GST refund claim for Cedar Grove as well as for four other trusts as he “admitted” that they were not entitled to those claims, the audit said.
The ATO found Cedar Grove’s registration for GST and lodgement of its BAS was “purely driven to claim GST credits you knew you were not entitled to”.
The invoices’ due date for payment three months later was “to create the illusion of a legitimate transaction”, the audit found.
“John Palasty would have been aware that no supply had occurred at the time of lodgement but chose to ignore this fact and lodged the claim anyway,” the audit said.
The fine follows the ATO fining a separate company run by ex-Virtical boss Mr Toma but not ostensibly linked to Virtical, over $380,000 in false GST refund claims. The company was the registered owner of 14 cars, including two Porsches and five BMWs.