Putting an end to the black economy

By Kate Stanton

Australia’s ‘black’ or ‘hidden’ economy amounts to nearly $50 billion a year, according to a Federal Government taskforce estimate. MLS News sought expert insights into the practical and legal implications of this vast and expanding problem.

Many Australians wouldn’t realise that working off the books, paying a nanny in cash or misrepresenting their income on a tax return are not only tax offences but also criminal offences.

These are examples of what the Australian Government calls the black economy, a vast and nebulous world fuelled mostly by cash transactions outside the auspices of the Australian Tax Office (ATO).

Also known as the hidden economy, it spans a range of financial practices including underreporting of income, cash-in-hand work, ‘black market’ sales, GST fraud, identity theft and money laundering.

All those illegal transactions amount to about $50 billion, or three per cent of gross domestic product, according to recent estimates by the Government’s Black Economy Taskforce.

“I was shocked by the size and scale of it; I had no idea how endemic it was,” says MLS alumnus Dr Michael Andrew AO (BCom 1977, LLB 1978), who led the Taskforce and chairs the Board of Taxation, an independent body advising the Government on tax law.

“The black economy affects everything,” Andrew says.

It impacts industry policy, education, the health department, immigration, border security and law and order.

The Taskforce was formed in 2016 following conversations Andrew had with frustrated regulators and small business owners. Some businesses, for example, said they were losing contracts to competitors who were underpaying their workers and thus able to charge less for their services. News reports detailed instances of student visa holders being exploited while working off the books.

“The more I looked into it, the more I realised the problem was vast and expanding,” he says.

“It actually needed a new approach.”

In October 2017, the Taskforce released its final report, recommending a range of measures to crack down on the black economy, saying it handicaps honest taxpayers and undermines the country’s welfare system. The report called for reforms including an end to cash-in-hand payments, greater scrutiny of contractors and better data-sharing between government agencies.

This year’s federal budget provided for some of the recommendations, including funding for ATO enforcement and a ban on cash payments above $10,000. Andrew is now chair of the advisory board counselling government on the practical and legal implications of the Taskforce’s recommendations.

Melbourne Law School Professor Miranda Stewart, who was on the stakeholder reference group that advised the Taskforce, says the black economy is increasingly complicated due to modern forces such as globalisation, the ‘gig economy’ and technology.

“Economic transactions are becoming more global and more complex generally,” she says.

“The challenge with the black economy is that it’s really hard to measure because it avoids identification and registration systems.

Policing these things is not always easy, but the more we use and encourage digital platforms, the easier it should get.

But even the move towards a cashless economy has drawbacks. Although Australians have a high take-up rate of online banking, mandating digital transactions can exclude poor and vulnerable people.

“Poor people and people in remote areas may not have a bank account or easy access to digital communications,” Stewart says.

“So you have to be careful on that front.”

There are other lingering questions. How does the Government make sure the ATO can share and analyse data while balancing personal privacy and confidentiality? How does it enforce tax regulations without placing an undue burden on individuals and small businesses?

For example, the Government is looking at curbing abuse of the Australian Business Number (ABN) registration system by charging renewal fees in an effort to indirectly address fraudulent behaviour by prompting closer engagement with the ABN system. The Taskforce’s final report noted that the ABN system was being used by some to create a false sense of legitimacy to their business.

“A recommendation to strengthen the ABN system – the reporting of it, the data protection, the verification and the central access – that is a really good idea,” says Stewart.

“But like any IT system, it’s not as straightforward to fix as you think it should be.”

There are public concerns, however, that the ATO has been overzealous in cancelling ABNs of legitimate businesses, as detailed in a recent Fairfax Media/ABC Four Corners investigation.

Andrew says that beefing up the ATO’s analysis of digital transactions, and encouraging different authorities and departments to share data and information, would help track tax evaders.

“Where I’m critical of the ATO is that I don’t think they do enough with data – using sophisticated artificial intelligence and analytics, which is a much more efficient way to actually administer the tax system,” he says.

“On the other hand, there are privacy and confidentiality issues that you have to respect. It’s a question of getting the balance right.”

The way the ATO enforces tax law is also an important part of curbing the black economy. Andrew says dispute resolution over tax evasion is slow, expensive and cumbersome in a way that can disadvantage taxpayers.

“It’s like wrestling a gorilla,” he says.

“Move this stuff out of the criminal jurisdiction into the civil jurisdiction and treat it almost like drink driving.

“You pay cash or a fine or lose your ABN licence for a few months. It’s a more cost-efficient regime, independently arbitrated from the ATO, which allows justice but gives balance to the taxpayers.”

The report also credited public perceptions of the tax system for driving some black economic activity. It found that many individual Australians and small businesses believed they should be able to avoid tax obligations because wealthy people and corporations did.

“The report paid a lot of attention to social norms, and trying to build a sense that people feel that society and government is fair,” says Stewart.

If everybody believes that somebody else is avoiding their obligations, there is that sense that the law in general comes into disrepute or the system in general is unfair.

Stewart says the report’s recommendation of better and more public enforcement of tax evasion would help.

“I’m a pretty strong advocate of actually just enforcing the law better and more visibly taking prosecutions,” she says

“The problem with this sort of recommendation is that it costs money to carry out really active enforcement.”

The Taskforce also outlined the damage the black economy does to the success of government programs.

“If everyone’s transparent and everyone pays their fair share of tax, tax rates will come down or more services will be provided,” Andrew says.

“You have people who are able to fund our education system, to fund the National Disability Insurance Scheme and to fund climate change initiatives. To me, if everyone contributes, there’s going to be a better outcome for everyone.”

Banner image: Also known as the hidden economy, the black economy spans a range of financial practices including underreporting of income and cash-in-hand work. Image credit: Pixabay.

This article originally appeared in MLS News, Issue 20, November 2018