Targeting the black economy

Budget Review 2018–19 Index

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

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