As Australian governments respond to widespread public concerns that some taxpayers might not be paying their ‘fair share’, tax integrity measures have formed an increasingly significant part of recent Federal Budgets. Following successive Budgets’ emphasis on multinational tax avoidance, tax integrity measures in the 2017-2018 Budget had a new focus: the Black Economy.
Broadly, the ‘Black Economy’ refers to unreported economic activity (and in the context of these measures, only to unreported but otherwise legal activity). Unsurprisingly, tax evasion which arises from misstated activity is a central problem associated with the Black Economy.
Presently, the challenges presented by the Black Economy in Australia are addressed largely on an ‘issue by issue’ basis by separate government agencies. Whilst this has seen the introduction of some important measures to address the Black Economy, like the Taxable Payment Reporting System (“TPRS”), there are limitations to this approach where the underlying issues are more wide-reaching.
The government’s new Black Economy Taskforce (“BET”), established in December 2016, has the opportunity to address the Black Economy more holistically. Whilst the Black Economy has always been a significant challenge for governments, it is thought to be growing, and it presents an increasing range of legal and regulatory concerns.
Typically, tax evasion is closely associated with cash-based transactions and industries where cash use is prevalent. Cash-based transactions provide anonymity, making it administratively difficult to trace transacting parties and the amount of money exchanged (and therefore easier to underreport taxable amounts without detection). Changes in technology and commerce may have significantly expanded the opportunities for people to evade tax (and other forms of regulation). Many suggest that tax evasion is prevalent amongst Sharing Economy participants. Similarly, the anonymity granted by cryptocurrencies like bitcoin may provide an opportunity to evade tax in broadly the same way cash has in the past. The establishment of the BET is therefore timely, and it has an important opportunity to address these developments.
The next step in improving tax integrity
Central objectives to improving tax integrity include improving perceptions that the system is ‘fair’ (that it operates effectively and equitably), and reducing the tax gap. This is the discrepancy between revenues that theoretically should be raised under the tax law, and the amount that is actually raised owing to tax avoidance and evasion (amongst other things).
Whilst precise estimates of the ‘size’ of the Black Economy are problematic, it is estimated to be significant, and a major part of the tax gap. The Interim Report refers to an ABS estimate that the Black Economy exceeds 1.5% of GDP. It also suggests that the revenue cost of the Black Economy is higher than figures suggest, as non-reporting or underreporting is likely to simultaneously reduce tax revenues and increase the outflow of benefits in excess of a recipient’s legal entitlement.
Perceived ‘fairness’ was a key theme of the Budget and is central to ‘tax integrity’ – a tax system is not fair if particular taxpayers ignore or circumvent the law to pay less tax than they ‘should’. After the recent (and ongoing) intense focus on multinational tax avoidance in the 2015-2016 and 2016-2017 Budgets, addressing tax evasion (which is typically more common amongst small and medium businesses) seems an appropriate counterpoint. If a ‘fair’ tax system is strict with large taxpayers and tax avoidance, it must also be strict with small and medium taxpayers and tax evasion.
It can seem more politically palatable for integrity measures to focus on multinationals rather than small and medium entities; the latter typically having a more direct association with voters and ‘mum-and-dad’ businesses. However, from a policy perspective, both types of taxpayers and tax issues are important, and in this respect the Government should be commended for taking a more holistic approach to improving tax integrity.
The Budget measures
The BET has had comparatively little time for its inquiry which is still ongoing, but released its Interim Report in conjunction with the 2017-2018 Budget. Several of the interim recommendations formed part of the Budget’s announced tax integrity measures, including:
- The extension of TPRS to contractors in the courier and cleaning industries;
- A prohibition on sales suppression software; and
- A one year extension of funding for ATO to address Black Economy risks.
The TPRS requires that payments made to contractors are reported to the ATO. It is designed to overcome issues with the anonymity by requiring reporting of transactions, thereby limiting cash recipients’ ability to misstate transaction values in their tax reporting. Currently, it applies to the building and construction industry, where the prevalence of cash (and concerns of evasion) are high. Broadly, sale suppression software restricts the electronic recording of a particular transactions, enabling an entity to under-report its income.
Five further measures were recommended in the Interim Report, but not adopted by the Budget.
These measures are fairly narrow and administrative; designed to address particular aspects or issues within the Black Economy, rather than far-reaching policy reforms. These measures are similar to those developed to date under the existing patchwork approach. However, as the BET has yet to finalise its consultation process and release its Final Report (expected in October 2017), these changes should be followed by more extensive measures, and are hopefully only the beginning of reform.
BET’s Interim Report
The BET’s Interim Report sets out the “guiding principles” for future reform proposals, being:
- Transparency;
- Identification and verification;
- Behavioural focus;
- Addressing underlying causes;
- Joint responsibility;
- Reducing regulatory burden; and
- Utilising technology.
The guiding principles will be achieved through “policy building blocks” of:
- Incentives, deterrents and underlying regulatory burdens;
- Social norms and behavioural economics;
- Modernising the payment system;
- Hard-wiring government; and
- The sharing economy and other special projects.
In considering potential mechanisms for addressing the Black Economy, the Report outlines various overseas measures. Some examples include the UK HMRC’s increased adoption of technology and inter-departmental co-operation; several EU countries’ restrictions on high value cash payments; and the Portuguese ‘receipt lottery’ to encourage customers to demand receipts from businesses.
Where are we heading?
The Interim Report seems to recognise the need for a multifaceted approach to reform. This may range from behavioural economic analysis and changing public perceptions surrounding tax evasion, to introducing and improving technology used in detection. The Interim Report recognises that this will require what it terms a ‘whole of government’ co-ordinated approach.
It is encouraging that the BET recognises the scale of reform that may be necessary, and it will be interesting to see what direction is taken. Three key factors should be borne in mind when the BET develops its final recommendations.
First, reform proposals should recognise the rapid changes that occur in modern commerce and technologies, and try to identify causes, rather than methods or symptoms of tax evasion. The role of cash in facilitating evasion may be assumed by cryptocurrencies, while it is difficult to predict the direction of new Sharing Economy platforms. If measures focus only on specific methods or areas of evasion without identifying the deeper issues, they risk being ineffective or out-dated.
Second, the BET may take this opportunity to examine the role that the design of a tax system has on taxpayers’ behaviour. Common features in tax systems such as thresholds are often associated with increased instances of evasion, and more considered reform proposals should examine how structural or features of our tax law could be redesigned or altered to reduce the likelihood of non-compliance.
Third, in contrast to recent attempts for broad tax reform, the relatively rapid adoption of the Interim Report’s initial recommendations suggests that the political impetus may be there for more extensive reform. The recommendations of the BET’s Final Report may come at a propitious time for law change. We should hope that the final recommendations are future-focused and extensive, as in this political context the BET has an opportunity to make significant, lasting policy changes to tackle the Black Economy in Australia.
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