CHAPTER FOUR - COMPLIANCE AND THE CASH ECONOMY

CHAPTER FOUR - COMPLIANCE AND THE CASH ECONOMY

4.1 The effectiveness of the Australian tax system in collecting revenue fairly and equitably depends very much upon the extent of compliance with the system. If taxpayers and businesses wish to, and are able to, avoid paying their fair share of taxes, then the system will be distorted into two groups: those who are able to find ways around paying their tax, and those who must pay additional tax to compensate.

4.2 In this chapter, the Committee discusses various issues relating to tax avoidance, including the existence and operation of the illegal 'cash economy.' This chapter is divided into three major sections:

  • the context of compliance
  • tax as a social responsibility;
  • resentment at those not paying their fair share;
  • vehicles for avoidance and barriers to compliance;
  • trusts as a vehicle for tax avoidance;
  • contracting and subcontracting arrangements as a vehicle for tax avoidance;
  • tax system complexity as a barrier to compliance;
  • the cash economy
  • the size of the cash economy;
  • the cash economy and social security fraud;
  • the operation and effectiveness of the Cash Economy Task Force.

The context of compliance

Social responsibility: paying taxes is the right thing to do

4.3 At the heart of the issue of compliance is the simple proposition that paying tax is an important social duty. The Australian Tax Office (ATO) explains to new taxpayers that 'Taxes that are paid to the Commonwealth Government are used to provide services to the community such as health, education, defence, roads and railways, social security and welfare.'[111]

4.4 Sir Nicholas Montagu, head of the UK Board of Inland Revenue, visited Australia and met with the Committee during its deliberations. The UK is currently engaging in a major campaign to emphasise taxpaying as a social obligation or 'badge of citizenship'. During a public lecture, Sir Nicholas stated:

Tax morality is not a new idea, but I think it is one which is often neglected. It is about duties. It's about the link between taxes and the public goods which they provide . I think that the argument on morality starts with the purposes of the tax system, and that is essentially to pay for the spending objectives of the democratically elected government, and to do so in a way that either directly furthers, or at the very least does not impede, their wider aims.[112]

4.5 Oliver Wendell Holmes, a former US Supreme Court Justice, encapsulated this concept neatly in the often-quoted remark that "Taxes are what we pay for a civilised society."

4.6 If it is accepted that payment of taxes is a social responsibility, then it follows that avoiding or evading tax is socially irresponsible. Those avoiding paying their tax claim the benefits of the public goods provided by taxation, without contributing to them in accordance with their means. It also follows that emphasising taxpaying as a social responsibility may be one way of increasing compliance.

4.7 An entire field of research, variously described as 'tax psychology', 'tax morality' and 'tax ethics', has emerged to study the social factors which lead to tax avoidance and tax compliance. In a previous report, this Committee noted that this body of literature:

increasingly recognises that regulatory enforcement is only one, and not necessarily the most effective way of achieving a desired outcome. Or, putting the point differently, it recognises that tax planning and paying behaviours arise out of particular contexts and cultures. Understanding and addressing the political, social and psychological background of those behaviours may assist agencies to promote compliance far more effectively, than an approach which relies purely on the threat of enforcement or punishment.[113]

4.8 The Committee remains committed to that view. A number of submissions to this inquiry, particularly those from private individuals, supported the view that many taxpayers see paying tax as a social duty, and are often quietly proud of the fact that they pay their taxes. Mr Gary Lang, for instance, stated:

Contrary to the views of most Governments, most people realize that taxes are unavoidable and a necessary component of our economy. I personally would not mind paying more taxes provided that I could see direct benefits. Where everyone gets annoyed and frustrated is when we see so many areas within Government both state and Federal where tax money is wasted.[114]

4.9 Mr Jock McIlwain stated:

I am a 76 year old self funded retiree who believes that, despite the current taxation system, I have accumulated sufficient capital, through frugality, rigid savings and careful investment, to see out my own and my wife's remaining years. We will not be a burden on current taxpayers and have not and will not seek or require any assistance from the welfare system. We both pay tax.[115]

4.10 Mrs Helen Booth stated that 'on the whole most fair minded Australians want a fairer more equitable system where we can be assured that the funds are put [to] good use for services that we will all benefit from.'[116]

4.11 Mr Colin Smith stated that 'I have been a PAYE[117] taxpayer all my working life' but noted that 'I have always known that the tax system has never been a fair and equitable form of taxation. The rich get richer and the poor get poorer.'[118]

4.12 Recent evidence seems to indicate that a growing number of Australians are happy to pay tax, and would in fact forego tax cuts, or even support tax increases, in order to facilitate government spending in areas important to them:

One longstanding and legitimate criticism of public opinion research that finds support for higher public spending is that such research rarely asks the voter to consider the fiscal costs usually tax rises of such spending. Our findings here deal with this criticism directly by asking respondents to indicate their willingness to pay more tax for more spending for a range of public services. Our results show quite overwhelming support for a tax increase if it is modest and spent on Medicare and/or public education. And we find the proportion of Australians who unconditionally oppose a tax increase to improve services in the three social service areas of health, schools and welfare benefits is actually small 19 percent of the electorate our findings do indicate that the public is more likely to consider tax increases to pay for improved services than it has in the recent past. For policies to remain focussed only on cutting taxes appears to misread the public mood.[119]

4.13 While the Committee recognises that some of the respondents to the survey discussed in this quotation may have been tax avoiders or those with smaller tax responsibilities (who therefore have little to gain from tax cuts), it remains the case that support for social spending exceeded support for tax cuts even in the groups most likely to be paying PAYG taxes:[120]

Social Spending

Depends

Reduce Taxes

Working full time (n=1608)

46

22

32

Working part time (n=539)

49

24

27

Household duties (n=384)

41

30

29

Retired from paid work (n=811)

56

22

22

Full time student (n=115)

60

21

19

4.14 The view that tax should be complied with as a matter of social responsibility also extends to compliance by the business community. The Ralph Review of Business Taxation discussed tax avoidance by businesses in the following terms:

Tax avoidance may be characterised as a mis-use or abuse of the law rather than a disregard for it. It is often driven by the exploitation of structural loopholes in the law to achieve tax outcomes that were not intended by the Parliament but also includes manipulation of the law and a focus on form and legal effect rather than substance. The way things are done in order to take advantage of structural loopholes, or dress up or characterise something to satisfy form but not substance can also stamp an arrangement as avoidance. Tax avoidance represents a serious threat to the integrity of the tax system and to the revenue. It is also a form of subsidy from those paying their fair share of tax according to the intention of the law to those shirking their similar obligations.[121]

Resentment at those not paying their fair share

4.15 Some of the witnesses cited in the previous section, and the excerpt from the Ralph Review of Business Taxation, canvassed the issue of fairness in the system. When a taxpayer evades their tax responsibilities, the need for taxation does not disappear it is redistributed among those who do pay their taxes appropriately. This results in substantial resentment among those paying their fair share. Such resentment was clearly evident from submissions before this Committee. The Southside Chamber of Commerce, for instance, stated:

Some people are altruistic, high minded, ethical, disciplined, conscientious and generous citizens. Others are self-obsessed, cynical, amoral, malcontent, cunning and predatory opportunists. Most people are somewhere in between, most respect the law, a few think they'll get caught if they don't, and a few more again defiantly flouting it.

[] it is human nature to resent it when other people are undeservedly given preferential treatment.

The obvious tax minimisation activities of the affluent are an affront to the hard working people who must endure the inequities of a patently inequitable tax system without such recourse to relief.

Their silent resentment is building and building.[122]

4.16 A number of submissions suggested that this resentment increased the likelihood that a taxpayer would also seek unfairly to avoid their tax responsibilities. The St Vincent de Paul society noted that 'when people can see patently that wealth is not being taxed and is not paying its fair share, you will never get compliance from the majority of the population who regard tax evasion as fair game.'[123]

4.17 Mr Paul Kenny, Senior Lecturer in Taxation Law at Flinders University, stated:

If the tax system and its administration are seen to press heavily on some but lightly on other taxpayers in essentially the same circumstances, with essentially the same tax paying capability, then the confidence of the citizenry in the fairness and justness of the system, of their government, erodes. Cynicism grows apace and a race not to be left out of the tax minimisation derby, by hook or by crook, infects the body politic.[124]

4.18 Sir Nicholas Montagu from the UK Board of Inland Revenue indicated that this phenomenon is not unique to Australia. He stated that tax avoidance:

undermines the integrity of the tax system by being perceived to be unfair by taxpayers who want to pay their fair share. Eventually it becomes corrosive by persuading those people that they too should pay less.[125]

4.19 As a result, it appears that increasing compliance, and so increasing the perceived fairness of the tax system, pays a double dividend: additional tax revenue from those evading or avoiding their tax obligations, and a decreased likelihood that other taxpayers will seek to avoid their tax obligations.

Vehicles for avoidance and barriers to compliance

Trusts as a vehicle for tax avoidance

4.20 A substantial number of submissions criticised the use of trusts as a vehicle for tax avoidance. There are a wide range of trusts under Australian law. While some submissions did not specifically identify the form of trust which concerned them, in most cases it can be assumed that they were referring to discretionary trusts. Discretionary trusts are those in which 'trustees choose which beneficiaries will receive distributions of income or capital, and how much each will receive.'[126]

4.21 The most prominent concern expressed about the use of trusts is that taxpayers may use them as a conduit of funds, thereby avoiding a PAYG liability on those earnings.

4.22 The St Vincent de Paul Society expressed this concern in the following terms:

There are many valid reasons for setting up trusts. We do not challenge the concept. Trusts do, however, bring with them certain tax consequences, usually mitigation of tax liability. Those who establish trusts solely for the purpose of tax mitigation do so to avoid carrying their fair share of the burden of society, leaving it to others. We would like to see this practice regulated out of existence.[127]

4.23 Mr Thomas Nilsson expressed the following concerns:

The vast majority of trusts are set up with the primary purpose of avoiding tax that should be paid by high income earners and thereby transferring the burden on to the rest of us. It is these trusts that are typically referred to as 'legitimate family trusts'. In reality, There are almost no trusts in Australia established for legitimate purposes.

[]

The current opportunity for family trusts to be used as a means of tax avoidance should be abolished immediately by the Commonwealth. This step is an absolute must in preserving the integrity of Australias taxation system and ensuring the Commonwealths continuing ability to provide services to the Australian public.[128]

Current tax arrangements for discretionary trusts

4.24 Under current arrangements, a trust is not a taxable entity in its own right. Instead, 'it is the beneficiaries who are ultimately entitled to receive and retain the trust income who are taxable on it. The trustee is generally taxed only on the balance (if any) to which no beneficiary is immediately entitled, or to which a beneficiary is immediately entitled but which the beneficiary cannot immediately receive '[129]

4.25 The beneficiaries of the trust therefore pay PAYG tax on any income from the trust to which they have a present entitlement:

The beneficiary's share of the net income is aggregated with other assessable income of the beneficiary subject to Australian tax and, after taking into account all deductions, the total taxable income is taxed at the rate applicable to the beneficiary.[130]

4.26 Where trust income is not distributed to beneficiaries, the trustee becomes liable for taxation. A number of circumstances (such as the infancy or bankruptcy of the beneficiary) may result in this occurring. If, however, the income is to be retained by the trust because no beneficiary is presently entitled to receive that income (if, for instance, the trustee of a discretionary trust has not determined that such an entitlement exists), then the income is taxed at the top marginal tax rate of 47%.[131] This rate is regarded as a punitive tax rate, and was introduced in order to address the use of trusts as vehicles for tax minimisation.

4.27 Consequently a taxpayer does not obtain a tax benefit by leaving income, to which they have a present entitlement, in the trust (as it will be assessed as part of their income whether actually received or not). Nor do they obtain any benefit if the trustee retains income in the trust rather than distributing it (as it will usually be taxed at the top marginal tax rate).

4.28 The Board of Taxation reviewed the taxation of discretionary trusts in 2002. In particular, it considered whether trusts should be taxed as companies. It concluded that the current arrangements are adequate, though it made some suggestions for technical amendments. The Board paid particular attention to the use of trusts as vehicles for tax avoidance. It noted:

Critics of [the current] tax model argue that flow-through tax treatment allows for the tax-free distribution of amounts that are untaxed due to tax abuse. For example, if the trustee fails to include an amount of income in the trust's tax return, the amount would remain untaxed if distributed to a beneficiary, presuming the beneficiary also fails to include it in a tax return. Consequently, critics suggest that trusts allow for the benefit of such tax abuse to be passed on to individual beneficiaries.[132]

4.29 The Board concluded that rather than amending the tax system to tax trusts in another way, 'tax abuse should be addressed at its source through better enforcement action to limit tax abuse opportunities.'[133]

4.30 The Committee agrees with the Board's view that there does not appear to be a systemic problem with the taxation of trusts. Rather, there may be a problem with individual trustees or beneficiaries seeking to use trusts to avoid tax, and in the Committee's view this conduct should be prosecuted in the normal manner.

Trusts and income splitting

4.31 Another argument raised in evidence before the Committee related to the use of trusts to split income, in order to take advantage of the progressive PAYG tax scale. Catholic Welfare Australia outlined this concern:

A primary mechanism by which high income individuals can reduce their normal taxation liability is through the use of trusts. The basic principle is that income is split between individuals in a family trust and tax paid when the income is distributed to the beneficiary. This can be used to reduce the taxation liability substantially. There are clearly some cases where the nature of the activity involved might justify a trust model. However, there seems little reason why taxpayers who would otherwise face normal income tax rates should be able to avail themselves of this concession.[134]

4.32 ACOSS regarded this form of income splitting as one of its 'seven deadly tax rorts'[135] and claimed that it costs $800 million annually in revenue.[136]

4.33 One option to address this issue may be to adjust the taxation of trusts to prevent income splitting. However, the Committee observed that the concern among witnesses and submissions is not income splitting per se, but the inequity inherent in a situation where income splitting is only available to those who are able to conduct their affairs through a trust. Therefore, another option for dealing with this issue may be to allow income splitting of family unit taxation on a universal basis. This issue was discussed in Chapter 2.

Contracting and subcontracting arrangements

4.34 The Construction, Forestry, Mining and Energy Union (CFMEU) raised the issue of the tax system rewarding self-employment ahead of the more traditional employer/employee relationship. Its submission stated:

At the centre of the problem is the tax advantage inherent in declaring oneself a contractor for the purposes of employment, and thereby obtaining an ABN, as opposed to being an employee, for the purposes of tax. This is so because contractors, subcontractors, own-account workers, etc. are not subject to the PAYG system in the same way as employees []In this way [] contract workers are able to significantly reduce their tax liability, and employers are able to reduce their labour on-costs and various other statutory obligations. This is a growing problem in the building and construction industries.[137]

4.35 The reason for this trend, according to the CFMEU, is that the contractor/subcontractor relationship provides substantial advantages for employers, who are able to cut their own costs, providing lower rewards (typically, lower ancillary or non-wage benefits) to workers on the basis that the tax advantages of self-employment will compensate:

By engaging workers as 'independent' subcontractors, employers create for themselves a comparatively low cost structure in comparison to other employers that engage workers as employees. This is because employing contract labour eliminates the obligation to pay various entitlements under awards, including redundancy and superannuation. Instead, contractors are often paid an all-in rate. Firstly, while all-in rates vary from market to market, they rarely reflect the full value of what the worker should be receiving under industrial awards and legislation. Secondly, as suggested above, employers who use bogus subcontract arrangements avoid other obligations such as Payroll Tax, Fringe Benefits Tax, Workers Compensation premiums and superannuation (although workers compensation and superannuation is occasionally paid on behalf of the worker). Employers using these arrangements also save on administrative costs such as the hiring of payroll staff and book keeping.

Meanwhile, those workers engaged by such employers often accept the situation because of a perceived tax advantage, or the fear of facing unemployment.

If workers received in their hand the same level of remuneration under subcontract arrangements as do employees, there would be an absolute uproar from those workers. It is the tax savings which workers receive from this contrived arrangement that keeps them from complaining about loss of employee entitlements. [138]

4.36 According to the CFMEU, the growing number of construction industry workers who are self-employed does not represent a desire to avoid taxation. Rather, the contractor/subcontractor relationship is progressively replacing that of employer/employee:

Employment sections of local newspapers are full of advertisements that require applicants for building and construction employees to have their own ABN, to the extent that it is increasingly impossible to hold a job as a tradesman on award conditions.[139]

4.37 This issue has been considered by various inquiries in recent years. The Ralph report on business taxation, for instance, stated:

It is clearly inequitable that some taxpayers should be reducing their tax liability by using interposed entities to alienate income while other taxpayers also deriving personal services income, including ordinary wage and salary earners, pay the correct amount of tax. In addition to the tax consequences, income alienation can result in highly remunerated individuals being able to reduce their taxable income to a level that entitles them and members of their families to a range of income-tested government payments. Alienation can also enable these individuals to avoid a range of other obligations such as higher education contribution charges, Medicare levy and superannuation surcharges and child support payments.[140]

4.38 Associate Professor Owen Covick gave an outline of how this form of income alienation, combined with abuse of the trust laws, can result in taxpayers avoiding tax and claiming welfare benefits to which they have no genuine entitlement:

When you have that latter category, the self-employment families, you can often arrange your affairs so that personal services income which would be tending to push a particular individual into the higher echelons of the marginal personal income tax scale no longer does so and flows into the hands of other members of the family who are lower down in the marginal income tax scale, therefore averaging down your personal income tax responsibilities.

If you exhaust all the possibilities of low income or otherwise low income members of your family being in the lower echelons, you can then tuck some money away into company structures, pay the company tax on that income and then roll it forward and worry about how you get it out some time later. So I think you will find that among small businesses or families with self-employment as their main source of personal services income in Australia, typically they operate with a structure where there is a family trust, a company which is the trustee of the family trust and a second company, which is one of the beneficiaries of the family trust. The company which is one of the beneficiaries of the family trust therefore acts as a bit of a sump, where any money which might otherwise be attracting unattractively high marginal personal income tax rates or causing you problems with means testing arrangements can go and sit in this company and never appear on anybodys individual personal income tax return or anybodys details they are required to fill out on a means testing form.[141]

4.39 The CFMEU submission requested further inquiry into this issue. That call was supported by the round table discussion convened by the Committee on
2 December 2003. This issue will therefore be discussed further in Chapter 6, as one area in which the Committee proposes a future, more focussed inquiry.

Complexity and Compliance

4.40 The Committee received some evidence that the complexity of the tax system, particularly for individual taxpayers undertaking self-assessment, inhibits compliance. Mr Roy Barber, for instance, stated:

sixty years ago I could fill in my tax form in a matter of thirty minutes.

The present system is beyond me, and I now have to see a taxation consultant.

Over the years my income situation has not changed all that much.

The booklet covering the guidelines is, to me, confusing and I give up.

Couldn't a simple system be introduced whereby a tax payer can fill in a simple form with the basic information [142]

4.41 Mr Colin Smith provided similar views:

The tax system is that complicated that you would have to be a Rhode's Scholar to work out what it means, but to a lay-person it means nothing. No wonder the accountants and tax consultants get it wrong. There are so many different interpretations.[143]

4.42 The submission from Treasury indicated that it considers that the tax system should aim for simplicity, which would reduce compliance costs and increase compliance:

A simple tax system should provide clarity, consistency and stability. While all taxes impose compliance costs on taxpayers, an effort should be made to minimise them. Greater complexity tends to impose higher compliance costs on the community and higher administrative costs on tax authorities, both in terms of monetary costs and the time and effort spent complying with the tax system.

Clarity means that taxation provisions should be sufficiently clear for taxpayers to understand the tax implications of their actions. Taxation policy should be internally consistent as well as being consistent with broader economic policy. Stability requires the direction of policy to be well articulated and understood, so that taxpayers have confidence that the broad direction of policy will be maintained.[144]

4.43 The Committee is aware that the Australian Taxation Office is undertaking an ongoing project relating to compliance with the tax system. This project, which is outlined in the ATO publication Making it Easier to Comply, includes a number of measures designed to assist individuals to deal with the complexity of the tax system. For instance, the ATO has improved its website to provide more accessible information, and tools such as tax calculators, to assist individuals to determine their tax obligations. The ATO has also recognised the importance of simplicity in its correspondence with taxpayers:

We will continue to improve the way we correspond with you. You will notice some changes, such as letters and notices that:

  • are easier to understand and clearly explain calculations and required actions/obligations;
  • are concise and relevant to your circumstances; and
  • notify you of any changes in obligations.[145]

4.44 In a research paper presented as a submission to the Committee, Dr. Margaret McKerchar gave an assessment of the level of complexity within the tax system and its impact on individuals, based on survey data:

Complexity was said to have arisen wherever a personal taxpayer reported any difficulty in completing his or her own tax return for the year. In Australia, the method by which this is normally done is by the use of an instructional booklet provided by the ATO, known as TaxPack (128 pages in length in 2000). [] Almost 50 per cent of the relevant respondents reported that they had not experienced any problems completing their tax return.

For those respondents who had completed their own return and had encountered problems, questions were asked to determine the most common cause(s) of complexity and of the most difficult problems encountered. []

The most common problem reported was in understanding the instructions in TaxPack. In terms of level of difficulty, the more serious problems were attributed to the rate of change in tax rules, understanding the instructions in TaxPack and other written material provided by the ATO, and the time taken to complete the return form. In terms of respondents' three most difficult problems, TaxPack was ranked the most common major problem by more than double any others. Complexity of rules and understanding other written material from the ATO were ranked as the next two most difficult problems. The time taken to complete the tax return and the rate of change followed. The use of technical language did cause problems, but this was ranked as being a minor concern.

It was concluded that the principal cause of complexity, in this context, was ambiguity. To address this cause, the ATO had included ever increasing amounts of detail in material prepared for the use of personal taxpayers. Due to both the volume of material and its rate of change, taxpayers found that understanding the information provided took up too much time. The most constructive means for addressing ambiguity appeared to be the development of clear and simple rules, with less detail and less exceptions. This should reduce both uncertainty and the time taken for personal taxpayers to complete their returns.[146]

4.45 The Committee approves of the efforts undertaken by the ATO to simplify taxpaying for individuals (and, indeed, for other taxpayers). However, the ATO should note Dr. McKerchar's finding that too much explanatory material can in fact increase, rather than decrease, the complexity of the system.

The cash economy

4.46 The term cash economy refers to economic activity which takes place outside the tax system for the purpose of avoiding tax liabilities. This may include, for instance, cash payments made by consumers which are then not reported as taxable revenue; it may also include cash payments to employees made outside their formal wage structure. The Cash Economy Task Force outlines activity within the cash economy as follows:

For the tax system, the major risk arising from the cash economy is business revenue not being reported. This can occur when entities:

  • are completely outside the taxation system they are not registered and do not report activity;
  • have engaged with the system sufficiently to become registered, but do not report revenue as required they do not lodge activity statements or tax returns; or
  • fulfil basic registration and lodgement requirements, but do not report all their revenue.[147]
Size of the cash economy

4.47 During this inquiry, the Committee held one hearing specifically in relation to the cash economy. The Committee questioned Centrelink, the Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian Tax Office, and none of these agencies was able to indicate the size of the cash economy. In evidence, officers from Treasury stated:

We have observed various academic studies in relation to the cash economy and, as you would know from that discussion, it is anywhere between three and 15 per cent. What we would say is that we have a substantial risk to address in relation to the cash economy regardless of size. The range in the academic studies shows that it is very difficult by its nature to estimate the cash economy. What we can help you with is the impact of activities. Obviously we do monitoring within particular industries where we are having a focus, and we can go into some more detail around that about what we are observing in terms of the effectiveness of our strategies.[148]

4.48 Officers from Centrelink stated:

We have not attempted to extrapolate. [] work on the size of the cash economy or the impact on welfare payments has not been undertaken. I have spoken to academics on this point, and it has not been done anywhere in the world.[149]

4.49 AUSTRAC stated that 'the ability to form an opinion about drivers of the cash economy, the size of the cash economy and the nature of the cash economy is not really something that we would have.'[150]

4.50 The Australian National Audit Office, in a 2002 report on the cash economy, broadly agreed with the view expressed by Treasury:

Estimates from various academic studies show that the cash economy may range from 3.5 to 13.4 per cent of gross domestic product (GDP). Using the 2000-01 GDP figure and assuming an effective tax rate of 23 percent, this gives a potential loss to taxation revenue for the year of between $5.4 billion and $20.7 billion.

However, the precise size of the cash economy, while warranting much debate, is of lesser importance than the fact that it exists, that it is significant and that there is some broad measurement of an increase or decrease in it. Even at the lowest estimate, it is a very large number.[151]

4.51 A recent study from the Centre for Tax System Integrity (CTSI) noted some of the challenges to estimating the size of the cash economy:

Gathering statistics about who is engaged in underground (or criminal) activities, the frequency with which these activities occur, and the magnitude of such activities, is crucial for making effective and efficient decisions regarding the allocation of a country's resources. Given that the individuals who are engaged in such behaviour do not want to be identified, it is difficult to obtain accurate information about the nature and extent of these underground activities. There is also little understanding about what motivates individuals to work in the shadow economy or to request such work.[152]

4.52 However, the same report gave some general indications of the size of the cash economy in Australia, based on survey data. The data indicated that 6.0% of respondents had received cash in hand payments during the previous 12 months, while 14.4% of respondents had paid cash-in-hand for goods or services over the same period.

4.53 Those who had done cash-in-hand work had made approximately 8.82% of their official income in the cash economy, while those households which purchased cash-in-hands goods or services spent 5.85% of their incomes doing so.[153]

4.54 The CTSI report extrapolated its data to suggest that the size of the cash economy was somewhere between 4.81% and 8.8% of Gross National Income (GNI).[154] However, two caveats should be noted. First, the CTSI itself suggested that these extrapolated results be treated with caution. Second, the results reflected the cash economy prior to the introduction of the New Tax System.

The cash economy and welfare fraud

4.55 The cash economy clearly has implications for the welfare system in addition to its implications for the tax system. Benefit recipients who fail to declare their full income may be able to claim benefits on the basis of their declared or official income, but may not be entitled to those benefits (or may be entitled to a lesser benefit) if their full income, including the undeclared amount, were to be assessed. Officers from Centrelink explained:

the system of paying income support primarily depends on Centrelink being correctly advised of the circumstances of the person applying. One of these circumstances that we ask people about relates to income. Centrelink has a system of data matching to identify cases where there is an anomaly between the information that Centrelink has been given by the person about their income and information we have from external sources. Where we get an anomaly, we investigate it. This can uncover cases where people have not declared all or part of their income. This element of our work is fairly significant in the work that we do for uncovering incorrect payment and fraud.[155]

4.56 As it is very difficult to assess the size of the cash economy, it is also very difficult to assess the cash economy's impact upon the welfare system. However evidence suggests that Centrelink regards cash economy-related welfare fraud as a serious issue. Centrelink informed the Committee that 120 staff have been trained as investigators and placed in units which have the task of detecting and prosecuting welfare cheats in the cash economy.[156] Centrelink is also a participant on the Cash Economy Task Force, discussed below.

Cash Economy Task Force

4.57 The Cash Economy Task Force (CETF) is a key element of the Government's current approach to dealing with the cash economy. The task force is chaired by a senior officer of the ATO, and its membership includes representatives from other agencies including Centrelink and AUSTRAC, from academia, and from the business community (including micro and small business representatives, and a tax practitioner).

4.58 The CETF's principal task is to 'examine the cash economy with a view to determining what it is, what the likely compliance issues are, and to develop a view about what additional steps can be taken by the ATO.'[157] It provides advice directly to the Commissioner of Taxation.

4.59 Its most recent report, The Cash Economy under the New Tax System, was released in September 2003. It contained 38 recommendations for various changes to enhance the ATO's programs to target the cash economy. The ATO either agreed or agreed in principle with all 38 recommendations, and the Committee will observe the ATO's progress in implementing these recommendations.

Conclusions

4.60 The Committee concludes this chapter by returning to its opening assertion: paying tax is the right thing to do. It is necessary in order to fund the activities of government, and should be undertaken by all citizens and companies as a matter of social responsibility.

4.61 The various means of avoidance and evasion discussed in this chapter whether through the use of trusts, the alienation of personal services income, or participation in the cash economy all result in a redistribution of the tax burden away from those avoiding their responsibilities. They consequentially increase the burden on those who do pay their fair share.

4.62 While the ATO has a responsibility to ensure that tax procedures are as simple as possible, in order to assist people to comply with the system, it also has a responsibility to prosecute those who avoid their tax responsibilities.