Joseph Ayoub
The Black Economy Taskforce
The
Black Economy Taskforce (the Taskforce) is chaired by Michael Andrew AO (the
current Chair of the Board of Taxation) and was established in December 2016 to
develop a multi–pronged policy response to combat the black economy in
Australia.[1]
The Taskforce provided the Black Economy
Taskforce: final report—October 2017 (Final Report) to the Government
in October 2017, which was publicly released with this year’s budget.[2]
The release was also accompanied by the Government’s response Tackling
the Black Economy: Government Response to the Black Economy Taskforce Final
Report (Government Response).[3] The Final Report contains
80 recommendations which span the whole economy.[4]
| Examples of black economy activities |
- Not reporting or under-reporting income
- Paying for work cash-in-hand
- Underpayment of wages
- Sham contracting
- Phoenixing — when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts
- Bypassing visa restrictions and visa fraud
- Identity fraud
- Australian Business Number (ABN) fraud
- GST fraud
- Origin of goods and duty fraud
- Duty evasion and illicit tobacco
- Tobacco excise evasion
- Money laundering
- Unregulated gambling
- Illegal and criminal activities
- Counterfeit goods
- Motor vehicle fraud
- Illegal drugs1
|
What is the black economy?
There is no internationally agreed definition of the black economy
and definitions vary within Australia. According to the Taskforce it generally
covers activities which take place outside the tax and regulatory systems
involving both legal and illegal activities.[5] Examples of black economy
activity are listed in the adjacent box.[6]
What is the size of the black
economy?
In 2012, the Australian Bureau of Statistics (ABS) estimated
that ‘underground production’ or the ‘cash economy’ accounted for 1.5% of
Australia’s Gross Domestic Product (GDP).[7] According to the
Taskforce, this amounted to approximately $25 billion. Earlier this year KPMG
estimated that the total, annual, aggregate tax gap including losses to Pay As
You Go (PAYG) income tax, GST and self-assessed personal income tax to be $5.8
billion.[8]
In its Final Report the Taskforce stated that the black
economy is larger than estimated by the ABS in 2012 and could be as large as 3%
of GDP—in 2015–16 this equated to $50 billion.[9] It is also likely that
certain elements of the black economy are continuing to grow as a result of a
combination of ‘strong incentives, poor transparency and limited enforcement’.[10]
Figure 1 shows the Taskforce’s estimation of the breakdown of black economy
activity.
Figure 1: Partial indicators
of black economy related activity (citations excluded)[11]
International experience
In the Taskforce’s Black Economy
Taskforce: interim report–March 2017 to Government, it estimates
Australia’s black economy may be at the lower end of the range, close to
the UK and Canada.[12] However, this was based
on the above ABS 2012 data which estimated that ‘underground production’ accounted
for 1.5% of Australia’s GDP and on data collected by the Organisation for
Economic Co-operation and Development (OECD) on the black economy in various
countries (excluding Australia).
Based on the latest available OECD data and the Taskforce’s
revised estimate of the black economy, the Parliamentary Library has produced
Figure 2 which is an estimate of the size of Australia’s black economy compared
to other OECD countries for 2015–16.
Figure 2: OECD comparison of
Australia’s black economy
Note: this comparison is based on a 2011–12
survey by the OECD of participating countries. Australia was not included in
the survey. The 2012 figure for Australia is based on the 2012 estimate by the
ABS. This estimate was provided by the Taskforce in its Interim Report. The
2015–16 figure for Australia is based on the Taskforce’s estimate in its Final
Report. Figure 2 should be interpreted with significant caution.
Source: OECD and ABS statistics[13]
What drives the black economy?
The Taskforce found that there are a range of drivers that
interact with one another and ultimately lead to the decision to participate in
the black economy.[14] These drivers range from
high tax and regulatory burdens through to changing business and technological
landscapes. Other examples of drivers include:
- economic conditions and commercial pressures
- social norms which legitimise participation in the black economy
- availability, use and cost of cash
- inadequate knowledge about the system.[15]
The Taskforce found that drivers can ‘offset or
counter-balance each other’ and can either work to dissuade or encourage black
economy participation.[16] However, where the
drivers encourage participation in the black economy, the Taskforce has
observed the emergence of a ‘disturbing pattern’ in areas of public policy as
outlined in the adjacent box.[17]
| Development of black economy activity |
| Phase 1: there is an inherited policy, regulatory, and enforcement architecture which does not keep pace with economic, social or technological change. |
| Phase 2: some people exploit the regulatory gaps which have failed to keep pace with the above changes—when others see them ‘getting away with it’ they also move into the black economy. |
| Phase 3: as more people move into the black economy there is an economic and social race to the bottom. |
What are the consequences?
Participation in the black economy produces both direct and
indirect costs.[18] The most immediate and
obvious direct cost is the loss of taxation revenue and abuse of the welfare
system — underreporting income enables a person to claim a benefit that they
would otherwise not be entitled to. However, there are also a range of indirect
costs including:
- harm suffered by individuals who are not within the relevant
regulatory systems (such as workplace relations, immigration, occupational
health and safety) because they are, for example, ‘off the books’
- by offering goods and services below the market value because,
for example, payment is made in cash, the tax and regulatory costs are avoided.
This provides the individual or business with a competitive advantage which penalises
businesses and individuals who comply with their obligations
- if the community has a perception that the system is unfair or
they lack confidence in the administration of system, this may result in their
own participation in the black economy.[19]
The Taskforce considered that it is not realistic or cost
effective to try to limit the costs entirely because ‘a number of black economy
initiatives stem from basic design features of our tax and other systems’. An
example given is the ‘tightly means-tested transfer systems’.[20]
However, ‘well-designed measures to counter the black economy can be expected
to yield meaningful budgetary dividends over time’.[21]
Government response
The Government has already begun to implement measures that
arose out of recommendations in the Taskforce’s Interim Report – for example,
the Treasury
Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018
criminalises the production, supply, use or possession of sales suppression
technology and also extends the taxable payments reporting system to cleaning
and courier businesses that have an ABN. The Fair
Work Amendment (Protecting Vulnerable Workers) Bill 2017, among other
things, introduced higher penalties for contravention of workplace laws.
Many of the Taskforce’s 80 recommendations addressed by the
Government in its Response will be considered in the context of the
Government’s existing policy review or processes.[22]
That said, the Government has expressed agreement or agreement in principle,
with a number of measures. The measures that the Government disagreed with
include:
- Recommendation 7.3—offer a time–limited amnesty for small
businesses followed by an ‘enforcement blitz’.[23]
- Recommendation 10.2—change the alienation of personal services
income rules and strengthen enforcement.[24] Alienation of personal services
income occurs when the services of an individual are provided through an
interposed entity such as a company, trust or partnership, the profits of which
are retained by that entity or diverted to associates in order to take
advantage of a lower tax rate. It can also involve structuring in a particular
way in order to take advantage of deductions which wouldn’t be available to an
individual providing the same services as an employee.[25]
- Recommendation 13.3—examine the feasibility of introducing
technology which marks cigarette packs and cases to show when excise has been
correctly paid.[26]
Consistent with the Final Report, the Government acknowledges
that it will need to address the root causes and drivers, while the current
focus must be on the most urgent and costly problems.[27]
2018–19 Budget announcements
The 2018—19 Budget builds on these measures and implements
some of the Taskforce’s recommendations contained in the final report,
including:
- an economy-wide limit of $10,000 for cash payments made to
businesses for goods and services from 1 July 2019. (see separate Parliamentary
Library brief: Black economy measures: limits on cash payments)
- a range of measures aimed at combatting the sale and production of
illicit tobacco and to improve the collection of excise and customs duty on
tobacco (see Parliamentary Library brief: Tobacco)
- expansion of the Taxable Payment Reporting System (TPRS) to:
- security
providers and investigation services
- road
freight transport
- computer
system design and related services
- providing Treasury with $12.3 million over five years (with $1.7
million in 2022–23) to manage a whole of Government response to the Taskforce’s
Final Report
- providing the ATO with $3.4 million over four years to lead a
multi-agency Black Economy Standing Taskforce (the BEST). (see separate
Parliamentary Library brief: Black economy standing taskforce)
- providing $318.5 million over four years to implement strategies
including:
- establishing
ATO ‘mobile strike teams’ and increasing the ATO ‘audit presence’
- establishing
a black economy hotline which the public can use to report black economy
activity including phoenix activities
-
providing the ATO with $9.2 million to develop a ‘Procurement
Connected Policy’, initially requiring businesses seeking to tender for
Australian Government procurement contracts over $4 million to provide a
statement from the ATO that they are tax compliant
- removing certain deductions for those taxpayers who fail to
comply with their Pay As You Go (PAYG) withholding obligations
- designing a new regulatory framework for the Australian Business
Numbers (ABN) system
- a range of measures aimed at combating illegal phoenixing.
Financial impact
The above measures include both revenue and expense measures. Figure 3 shows
the total cost of the black economy and related measures announced in the 2018–19
Budget over the forward estimates. Based on the figures available in Budget
Paper No. 2, it appears that the measures will produce a net gain of $4.6
billion over the forward estimates. This includes the measure to bring forward
the payment of excise on all warehoused tobacco to 2019–20, and measures to
combat illicit tobacco, which together is worth about $3.6 billion (see
Parliamentary Library brief: Tobacco).
When this measure is excluded the net gain is reduced to about $950 million
over the forward estimates.[28]
Figure 3: total cost of 2018–19
Budget black economy and related measures
Source: Budget
measures: budget paper no. 2: 2018–19
[1]. The
Treasury, ‘Black
Economy Taskforce’, The Treasury website.
[2].
Black Economy Taskforce (Taskforce), Black Economy
Taskforce: final report–October 2017, The Treasury, Canberra, October
2017.
[3].
Australian Government, Tackling
the black economy: government response to the Black Economy Taskforce final report,
The Treasury, May 2018.
[4].
Ibid., p.1; Taskforce, Black Economy
Taskforce: final report–October 2017, op. cit., pp. vii-xi.
[5].
Taskforce, Black Economy
Taskforce: final report–October 2017, op. cit., p. 12.
[6].
Ibid., pp. 12–18.
[7]. Australian
Bureau of Statistics (ABS), The
non-observed economy and Australia’s GDP, 2012: information paper, cat. no.
5204.0.55.008, ABS, Canberra, 12 September 2013.
[8]. KPMG,
The
last frontier: shining a light on the black economy, KPMG, March 2018,
p. 2.
[9].
Taskforce, Black Economy
Taskforce: final report–October 2017, op. cit., p. 35.
[10].
Ibid.
[11].
Ibid., p. 36. The taskforce notes that the figures presented are not
additive and should be taken as indicative only.
[12].
Taskforce, Black
Economy Taskforce: interim report–March 2017, op. cit., p. 14.
[13].
Estimates based on: OECD Statistics OECD (2014) The
Non-Observed Economy in the System of National Accounts, OECD
Statistics Brief, No. 18; Australian Bureau of Statistics (ABS), The
non-observed economy and Australia’s GDP, 2012: information paper, op.
cit.; Taskforce, Black
Economy Taskforce: final report–October 2017, op. cit., p. 35.
[14].
Taskforce, Black
Economy Taskforce: interim report–March 2017, op. cit., pp. 15–20.
[15].
Ibid.
[16].
Ibid., p. 19.
[17].
Ibid., pp. 18–19.
[18].
Ibid., p 37.
[19]. Ibid.,
p. 37–38; Taskforce, Black Economy
Taskforce: interim report–March 2017, op. cit., pp. 1, 11.
[20].
Taskforce, Black
Economy Taskforce: final report–October 2017, op. cit., p. 37.
[21].
Ibid.
[22].
Australian Government, Tackling
the black economy: government response to the Black Economy Taskforce final report,
op. cit., p. 14.
[23].
Ibid., p. 20.
[24].
Ibid. p. 26.
[25].
Australian Taxation Office (ATO), ‘General
anti-avoidance rules and PSI’, ATO website, last modified 30 March 2017.
[26].
Australian Government, Tackling
the black economy: government response to the Black Economy Taskforce final
report, op. cit., p. 35.
[27].
Ibid., p. 14.
[28].
Australian Government, Budget
measures: budget paper no.2: 2018–19, pp. 1–6, 47–68 and 194–199.
All online articles accessed May 2018
For copyright reasons some linked items are only available to members of Parliament.
© Commonwealth of Australia
Creative Commons
With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.
In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.
To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.
Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.
This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.
Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Enquiry Point for referral.