If it's really illegal then they should put some controls around it
Um, it is, and they do... they tell you what the laws are, and impose huge penalties if you're found to have lied. You sign your tax return stating that all the information is correct. Surely everybody knows that fraud is a crime, don't they?
I can also drive my car 120 km/h down suburban streets with a blood alcohol level of 0.32; nobody will physically STOP me from doing it. That doesn't make it legal.
I do, however, agree with jackula that my understanding is that scenario 2
can be quite legitimate. If you're recouping expenses from fellow occupants of your PPOR, and don't claim any expenses, then there's no need to declare the "rent" (technically their "contribution to household expenses", even if they contribute generously) as income, and you retain CGT exemption, unless you're deemed to be in the accommodation business.
If this weren't the case, then every person in a share house would have to account for every cent spent on household expenses, because if you gave your housemate $20 for groceries and it turns out they only spent $17, then the housemate would have to pay tax on $3 as "profit". Of course that's not what the ATO wants or intends, so when people are sharing a home
with a view to sharing expenses, the ATO stays out of it.
If, however, it looks like you're running an
accommodation business, then it becomes taxable. There's no black-and-white distinction; a number of factors would be taken into account. If the income greatly exceeds the cost associated with that person's share of household expenses, you provide other services at a cost (eg laundry, meals, etc), and the "profits" constitute a substantial portion of your overall income, then it's likely that you're in an accommodation business. But if one friend or adult child lives with you and gives you $150 a week when it only costs $100 per week for them to be there (doubt it; most of them get too good a deal anyway
), then the ATO isn't interested in the $50 "extra"; it's a private arrangement.
There's absolutely no scenario, however, in which it's legal to lie to the ATO with an aim of receiving a tax advantage to which you're not entitled.