5. Cash, crime and cards

Introduction

5.1
Although the proceeds of crime may be taxed or assets seized, in practice illgotten income is rarely captured by the tax system. Super-profits are the incentive for illegal trade and as such the business model is to avoid contact with government authorities. Operations are set-up to disengage from formal reporting systems. As such, determining mechanisms to reduce the tax gap from criminal operations is fraught—and it is counter-intuitive to attempt to do this through taxpayer engagement measures.
5.2
Theoretically, social acceptance of cash economy activity could also be counteracted by employing behavioural insights to promote moral and ethical behaviour in the community. These issues are explored by the Government’s Black Economy Taskforce, which provides a background and context for the Committee’s evaluation of revenue loss to the cash economy and the ATO’s programs to address it.
5.3
As the Taskforce noted in its Interim Report: ‘The black economy is not simply a tax phenomenon’. However, a simple definition clarifies the relationship between it, and the impact of cash activity on tax revenue:
…the black economy refers to businesses and individuals who operate outside the tax and regulatory system. Other terms used include: the shadow economy, cash economy and underground economy. Businesses and individuals may entirely avoid reporting activities, or they may deliberately underreport income in order to evade their obligations. The activities themselves would otherwise be legal, but there may be complex linkages with illegal activities (for example, money laundering).1

Definition of the cash economy

5.4
The OECD defines the term tax evasion as ‘illegal arrangements where liability to tax is hidden or ignored’.2 This contrasts with tax avoidance, which is described as an ‘arrangement of a taxpayer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal, it is usually in contradiction with the intent of the law it purports to follow’.3 Hence, tax evasion is illegal, while tax avoidance (strictly speaking) is legal.
5.5
Tax evasion includes the operation, or partial operation of a business in cash transactions which are not declared in the tax system. It is important to emphasise that a cash payment is legal tender and trading in cash is no less authentic or legitimate than electronically generated payments.4 It does, however, (in most cases5) require non-automated recognition of the receipt of such money to be tax compliant. This is where cash-only or cash dominant businesses may fall short of their tax obligations, whether deliberately or unintentionally.
5.6
Cash dominant businesses are vulnerable to tax evasion practices because such a business environment offers greater opportunities for businesses and individuals to avoid tax and superannuation obligations. This can occur through:
Under declaring income or sales;
Failing to provide regulated obligations to employees including—
Underpaying wages or paying wages in cash with employee ‘off the books’,
Failing to withhold tax and failing to meet superannuation obligations.
Individuals receiving social welfare benefits with no entitlement.6
5.7
Businesses trading in legal products and services may not be fully declaring their cash income, and some not at all. This is where the tax administration focus of re-engagement lies.
5.8
As a by-product of such focus, criminal activity may be revealed—especially where ‘front’ or parallel businesses are used to wash or launder money through a legitimate business. The ATO works collaboratively with enforcement bodies and intelligence agencies, such as the Australian Federal Police, Australian Crime Intelligence Commission and the Australian Transaction Reports and Analysis Centre (AUSTRAC), to identify and prosecute this tax evasion. The tax administrator’s primary focus is however is on educating those in legal trade about their obligations and capturing the proceeds of legitimate business activity, including where individuals and businesses partially comply.
5.9
Support for further collaboration, data sharing and advanced analytics between agencies; and undertaking a public awareness campaign about the risks of operating in the black economy and positive social norms were recommended in the Black Economy Taskforce Final Report and announced in the 2018–19 Budget.7
5.10
Criminals have a business model of non-engagement and behavioural insights and penalties are unlikely to induce them to declare income which would implicate them in criminal activity. The ATO has recently stated in a submission to the Committee’s 2016–17 ATO annual report performance review that its focus for addressing the cash and hidden economy is through ‘…protecting honest businesses from unfair competition’.8
5.11
The focus of the Committee’s inquiry on engagement in the cash economy is therefore on tax evasion through undeclared or under-declared cash income in the legal economy. There is also some consideration of evidence which relates to the nexus between undeclared cash or illicit business activity, its impact on compliant businesses, and criminal tax evasion, including the capacity to launder money through the use of global payment technologies.

The size of the problem

5.12
Estimates of revenue loss associated with the cash economy are made as a proportion of the total estimated tax gap, which is in itself a conjectural exercise.
5.13
For example, the Government’s Black Economy Taskforce Interim Report (March 2017) stated that: ‘The Australian Bureau of Statistics (ABS) estimated in 2012 that the black economy had grown to 1.5 per cent of GDP ($25 billion per year in today’s dollars) in Australia’.9 The Taskforce’s final report (May 2018) stated that the 2012 estimate relied on data dating back as far as 2001, and recent ABS estimates suggest the black economy as a proportion of GDP has doubled—to three percent, or approximately $50 billion per year.10
5.14
As for the revenue lost, the Australian National Audit Office (ANAO) reported in 2006:
The ATO does not attempt to estimate the size of the ‘cash economy tax gap’ (the gap attributed to the use of cash and not declaring income). The ATO reasons, having also considered overseas practice in measuring the tax gap, that accurate and defensible measures of the tax gap are impossible to achieve in a practical sense. It considers that the time, cost and the intrusive burden on taxpayers imposed by an exhaustive exercise rule out conducting such an estimate.11
5.15
However, the ATO has more recently made commitments to better understand and evaluate the cash related tax gap as part of its broader tax gap analysis, advising in March 2017, that:
… We do not yet have any new estimate around the cash economy. We anticipate that, by the end of this calendar year or thereabouts, we should have an estimate across all income tax. That should give us a bit of a steer about the cash economy as well. Exactly how much of a steer is yet to be seen as that work unfolds, but we are hopeful of having an initial indication as we complete our work over the course of this calendar year. In the meantime, as you would be aware, there are estimates from the Australian Bureau of Statistics of the overall size of the unobserved economy—as they call it—and that is the best information we have at the moment.12

Measurement in other countries

5.16
The Inspector-General of Taxation’s submission noted that the ATO’s recent tax gap assessment methodology aligns with that adopted by Her Majesty’s Revenue and Customs (HMRC) in the United Kingdom (UK).13
5.17
The HRMC provides an annual estimation of the size of the UK tax gap, which it describes as ‘the difference between the amount of tax that should, in theory, be collected by HMRC, and what is actually collected’.14 The HMRC’s Measuring Tax Gaps 2017 report advised its tax gap estimate for 2015–16 period was £3.5 billion or 6 per cent of the total theoretical tax liabilities, with the caveat that:
We use a range of internal and external data and different analytical techniques to produce annual estimates, which we revise as more accurate data becomes available. These are our best estimates based on the information available, but there are many sources of uncertainty and potential error.15
5.18
These uncertainties are indicative of the HMRC’s data estimates for the hidden economy.16 For the 2015–16 financial year the HMRC estimated that the tax gap attributable to the hidden economy was £1.7 billion.17 In 2017, the HRMC was able to report that, due to refinements in its survey and assessment methods:18
The hidden economy tax gap has been revised down by £2.7 billion due to more accurate data being available. Fewer people are operating in the hidden economy than we estimated previously and their average incomes are lower.19

Where is cash activity concentrated?

5.19
The ATO uses risk-based approaches to identify taxpayers or transactions which it considers represent a higher risk of non-compliance. It currently publishes material about specific industries in which it is seeing disproportionate numbers of businesses that:
indicate unrealistic income relative to the assets and lifestyle of the business and owner;
fail to register for GST or lodge activity statements or tax returns;
underreport transactions and income according to third-party data;
fail to meet super or employer obligations;
operate outside the normal small business benchmarks for their industry; or
are reported to the ATO by the community for potential tax evasion.20
5.20
Commensurate with the focus of the current inquiry, it is important to note that small business is a longstanding focus of ATO activities in combatting the black or cash economy.21
5.21
The Committee asked Second Commissioner Neil Olesen for clarification of the distinction between criminal tax evasion and the ATO’s work on undeclared income or cash:
Whilst clearly there is criminal activity in Australia that is funded by cash, I would not pretend that most of the hidden economy in Australia is because of that. There is a lot of cash economy activity where people that run coffee shops, hairdressers or beauty salons are not paying tax on their cash. Generally they are relatively small amounts, but in other parts of the economy the picture is different.22
5.22
The ATO’s Ms Emma Rosenzweig, Acting Deputy Commissioner, Small Business, advised that there are approximately 1.6 million businesses at high risk for cash economy behaviour, with the three highest risk industries being building and construction; restaurants, cafes, takeaways and personal services, and hair and beauty operations. However, she qualified this advice, saying: ‘We do not think 1.6 million businesses are operating in the cash economy; we think there are 1.6 million businesses in those industries that are of highest risk of cash economy like behaviours’.23
5.23
As the Black Economy Taskforce has noted, the impacts and drivers of black economy activity are multiple, and include policy, regulatory settings— such as small business regulatory frameworks; welfare and immigration policy settings; the role of cash in the payment system; the verification of business and individual identities; as well as the links with illegal activities, such as money laundering.24
5.24
Activities associated with the black economy are thus not just associated with projected revenue loss, as damaging as this is, but also with the broader destabilisation of economic activity and perceptions of the fairness or unfairness of the tax system in the taxpaying community, which may in turn drive cash economy activity.
5.25
The Black Economy Task Force interim report explained:
Black economy activities undermine the community’s trust in the tax system; create an unfair commercial environment which penalises businesses and individuals doing the right thing; enable and entrench the exploitation of vulnerable workers; undermine tax revenue; and enable abuse of the welfare system. If unchecked, increasing black economy participation can lead to a dangerous dynamic. It can foster a culture which legitimises and supports this participation, spurring its further growth. As revenues fall, those remaining in the formal economy may ultimately be faced with higher tax burdens, giving them a greater incentive to move into the shadows.25

The ATO’s cash economy measures

5.26
The ATO has a suite of measures to combat the undeclared cash economy. These range at the front end from community education and awareness to data matching, industry yardsticks and supporting the community to report tax cheats, to back end enforcement including penalties and prosecution for serious tax evasion cases.26
5.27
As discussed in Chapter 2, revenue agencies and governments around the world have also focused on digitisation of their taxation systems along with other strategies to monitor and minimise domestic cash activity and to educate the community about the impacts of such activity. They have also endorsed information sharing agreements, such as the Common Reporting Standard (CRS) and global tax initiatives such as the Base Erosion and Profit Shifting (BEPS) project to close gaps in revenue associated with serious tax avoidance.
5.28
The ANAO’s review of the ATO’s strategies and activities to address the cash and hidden economy (2015–16), concluded that its methods were on par with international approaches and guidelines provided by the OECD. It also considered the ATO’s planning, liaison and reporting arrangements had been sound, and its risk management activities cost effective.27
5.29
The review referred to ATO advice that, over 2015–16, the revenue agency had committed approximately 400 staff and a budget of $39.5 million to combat the risk posed by the cash economy. The report also noted that in the four previous years from 2011–12 to 2014–15, the average annual liabilities raised by the ATO from compliance activities with small business taxpayers to address the cash economy was $192.6 million, and an average annual of $114 million cash was collected.28
5.30
The submission from the ATO further advised the Committee, that:
In 2015–2016 the ATO contacted over 127 000 businesses exposed to the cash and hidden economy. Approximately 13 500 compliance activities were conducted, resulting in more than $208 million in tax and penalties raised from businesses engaged in unfair competition. In the first six months of 20162017, the ATO has undertaken over 17 000 activities and raised more than $107 million in tax and penalties.29

Role of data analytics

5.31
As discussed previously in this report, advanced data analysis is being conducted in a number of jurisdictions to better identify areas of high risk for cash economy activity and revenues evasion, including where this intersects with criminal activity. Jurisdictions have also adopted a range of methodologies to assess the size of the tax gap associated with cash activity, with some attempting an estimate of losses associated with tax-related illicit activity, such as through money laundering.
5.32
Over the last decade advances in data collection, analysis and dispersal at revenue and partner agency level has become the norm in most comparable jurisdictions. Huge improvements in data storage and management capacity have enabled sophisticated algorithms to assess and crossmatch information recorded in large data sets to detect anomalies.30
5.33
In recent years, the ATO has deployed computerised risk models and specific data matching capacities using information from other agencies to target its compliance activities.31 The ATO’s submission reports that it now collects information from a wide range of third-party sources, both public and private, with more than 600 million transactions reported to it annually.32 These data sources include investment income information from banks, financial institutions and investment bodies, employment information and on welfare payments. The supply of this data is authorised by law. The data is matched with ATO gathered information to detect those who may not be correctly disclosing all of their income.33
5.34
AUSTRAC advised of its role in data collation and matching as a key data source for monitoring of tax evasion. As noted in Chapter 2, AUSTRAC leads in sharing information online to all its partner agencies, compared with similar agencies in other countries around the world. Mr David Hawkins, Acting National Manager, Strategic Intelligence and Policy, advised that:
There are some 3 000 to 4 000 government officers, state and federal government, that have online access to the database. They are doing their own investigations and are drawing on the intelligence. It is not just AUSTRAC pushing this out. There is a lot of intelligence being gathered directly from the database, from the partner agencies.34
5.35
It was speculated that sophisticated data-matching capability and data analytics by the ATO, particularly with access to taxpayers’ banking records, and, potentially, their payments transactions through the New Payments Platform (NPP), may contribute to tackling the cash economy.35
5.36
Dr Anthony Richards, Head of the Payments Policy Department, Reserve Bank of Australia (RBA) highlighted the progress that has been made towards real-time processing in the banking sector:
Well, it was not that long ago that if I wanted to make you a payment, I could go on to mybank’s app. The payment message from my bank to your bank would not be exchanged today [Friday]. I think it would have been exchanged on early Monday morning. Then your bank would at some point subsequently post that money to your account. You might see it sometime on Monday. More recently, we have got what is called same day settlement in the payments system, which means that if I send you some money now, you will probably see it in about three hours in your account. There is now a new set of rails that will enable banks to make those payment instructions in real time. They just have not had that set of rails that enable real-time payment instructions to go between them. That is the real innovation.36
5.37
However, the ATO’s Chief Digital Officer and Deputy Commissioner John Dardo cautioned that there are currently limitations that would curtail tracking of such personal information, even if there was the technological facility to do so. Commenting on the NNP, he observed:
We see that the NPP will be able to facilitate interactions. The overlay services that sit over the top of that and/or the identity requirements that sit in it are something for government and/or industry to really work through. I imagine that there will be a range of discussions about what may or may not sit in the NPP. Certainly if a bank chose to use the NPP to create an overlay service for that bank or that bank’s customers allowed them to do a whole bunch of really interesting stuff, such as codifying at point of sale the gross versus GST and offering that as a service so that bank could say, ‘Well, if you use this type of account with us, you actually do not need to run a separate reporting or recording system and we will import that straight in’, that is cool. But I do not think we are at the point where things are being mandated for the NPP either on an identity front or on the reporting front.37

Supporting Honest Business Program

5.38
The ATO released its new targeted cash economy initiative, the Supporting Honest Business Program (SHBP), part-way through the Committee’s inquiry in June 2017.38 The model demonstrates the utility of data analysis to design and co-ordinate integrated strategies, from provision of information through to targeted enforcement to improve compliance.
5.39
Sophisticated data analysis is first used to pinpoint regional anomalies (giving economies of scale in field visits and aiming to influence a wider group of small business). The information is used to locate sessions with both traders and the tax professionals in the targeted region, and then follow up on-site compliance visits, for further education and opportunities for voluntary disclosure. These visits also provided a catalyst for reporting on local competitors known to be habitually dodging their tax and employer obligations.39
5.40
The precursor to this program was the ATO’s ‘Working with Industry’ campaign which focused on specific cash dominant service sectors, such as hair and beauty, and restaurants and cafes. The ‘Working with Industry’ campaign led to a five per cent increase in on-time tax lodgements for businesses visited. Importantly, there was also a three per cent compliance flow-on effect in other businesses in the sector. The ATO advised that the follow-up education campaign flushed out a 34 per cent increase in reports to the Tax Evasion Reporting Centre for the hair and beauty industry.40
5.41
The model has synergies with those currently deployed in a number of other jurisdictions. The Inspector-General of Taxation cited developments in New Zealand and the United Kingdom:
In New Zealand, the Inland Revenue Department (IRD) had indicated in 2011 that it had adopted a range of strategies to target different industries in which higher risk had been identified. These strategies included raising awareness of obligations, enforcing penalties, prosecuting serious offenders, increasing data matching and partnering with industry associations and other government agencies on education, information sharing and investigations.
In 2016, the HMRC published a number of consultation papers in relation to proposals to assist in tackling the cash economy…The current proposed strategies are three-pronged and include extending the data-gathering powers to ‘money service businesses’, the need for new penalties and sanctions as well as conditional registration. The latter point requires ‘tax registration as a condition of access to some essential business services or licences’. As part of its strategy the HMRC is also seeking to identify points at which businesses tend to enter the cash economy by failing to register for certain taxes (such as Value Added Tax when certain thresholds are met) and making it as easy as possible for taxpayers to register.41

Cash, crime and corporate fraud

5.42
It has been considered that the difference between tax planning and tax avoidance largely comes down to intent. Tax planning is organising your clients’ tax affairs in the most tax effective way within the intent of the law. In contrast, tax avoidance schemes involve the deliberate exploitation of the tax system.42
5.43
Tax crime advances by degrees to culminate in the individual or business involved deliberately abusing the tax and super systems for financial benefit. Crimes range from hiding cash income or wages to avoid payment or tax obligations, to using complex offshore secrecy arrangements to falsely claim refunds and benefits one is not entitled to.43
5.44
As already noted in this chapter, revenue agencies in different nations take different positions on whether or not illicit or illegal activities contributing to, or associated with, tax avoidance or fraud are included in estimates of a nation’s revenue gap.
5.45
The ATO’s Mr Olesen indicated that this is understandably a very difficult area for assessment. However, he undertook to investigate what had been done in the area, advising of the expected release of work, referred to above, being done on tax gap analysis more broadly.44
5.46
Mr Olesen also explained how the ATO’s cash economy audits had identified key sectors of concern for cash activity, and the nexus between the ATO’s work on under reportage and its surveillance of criminal tax evasion with partner agencies:
Those conclusions that we have given you now are not drawn from the gap analysis, because we do not have a final gap analysis. We are in the process of doing some of the random activity that we need to do to get the datasets that allow us to make the estimates. Instead, what I am drawing on is all the work we have done in the field, year after year, doing audits and reviews of cafes and restaurants, and the work that we do at the criminal end of things as well, where we also work closely with our colleagues in the Federal Police and the Crime Commission.45

Cash under the counter

5.47
As noted above, the ATO has recently stepped up surveillance of identified businesses for the risk of cash activity under its Supporting Honest Business Program (SHBP).46
5.48
According to its most recent advice, the ATO’s increased visibility in the community—with over 1 200 business visits—resulted in $6.6 million in tax and penalties raised.47 As a result of this success, the program was expanded across all industries. The SHBP comprises:
Data analysis using industry norms and cross-matching with third-party data to identify regions with high levels of cash-dominant businesses;48
Writing to identified businesses and tax practitioners in that region and inviting them to an information session (correspondence available in a variety of languages); and
Follow-up site visits to vulnerable businesses (known as the ‘cash only visits’) to provide tailored education and assistance.49
5.49
The business visits in the SHBP have revealed that many businesses are not meeting record keeping obligations—some due to deliberate tax evasion and others from record processing ignorance.50 There are also businesses not appropriately recording (or not recording all) their sales and some without a current Australian Business Number (ABN) and/or GST business registrations. In addition, there was an across-the-board misunderstanding of employer obligations which included not paying superannuation or registering for Pay As You Go (PAYG) withholding tax and reports of cash wages.
5.50
The Committee heard evidence of the impact of deliberate evasion activity on legitimate businesses in the grocery and tobacco retail sector, and its projected nexus with the illegal tobacco trade.
5.51
Mr Jos de Bruin, Chief Executive Officer of the Master Grocers Australia (MGA) spoke of the prevalence of under-the-counter sales of tobacco and online sales of illicit tobacco, and its impact on compliant small businesses:
It does have that knock-on effect, for sure. You know this but when we are running legitimate businesses, complying with everything that we need to comply with, and there are illegitimate sales outside of our shops then there is going to be an economic effect of some kind because you gear your business up to a certain level of business and if that business is not coming in you have to readjust.51
5.52
Mr de Bruin further reported on the impact of criminal activities associated with this illicit trade, including robberies of grocery stores, which indicated a need for increased powers for enforcement against this illicit trading at the local level.52 While his evidence in part reflected industry concerns about the high taxes imposed in Australia on tobacco and the imputed knock on effects, Mr Rohan Pike, Illicit Trade Adviser of the Australian Retailers Association (ARA) also highlighted broader problems for customs and border protection officials in vetting legitimate imports of products, and for the Tax Office in monitoring and collecting excise on tobacco.53
5.53
Dr Craig Latham, Deputy Australian Small Business and Family Enterprise Ombudsman, brought the focus back to fairness in tax law and administration for any small businesses which may be tempted to engage in cash-based trade:
Certainly having a healthy small business sector that’s not under pressure would be fundamental to improving the cash economy, in any case. Alongside that, I mentioned before that a good tax system includes good policy plus administration, so it’s again crafting regulation that has small business in mind. When we do changes, the person who runs the small business is the person who’s on the floor, who does the compliance activities, so having that person in mind whenever you do a change around policy or administration is critically important.54

Associations with money laundering

5.54
During the course of the inquiry there was discussion of the relationship between cash activity conducted by a business and the potential for this money to be laundered to avoid detection. These moneys might support a personal lifestyle, such as in purchasing high value goods or enable criminal, or even terrorist, activity in Australia or overseas.
5.55
While these concerns may appear at the periphery of the Committee’s focus on tax engagement with the individual and small business sectors, evidence suggested otherwise. The Attorney-General’s submission advised, for example, of Australian Criminal Intelligence Commission findings that:
…the construction industry provides considerable scope to launder money, for example, via paying tradespeople in unrecorded cash for part of their work or paying for part of the cost of materials in unrecorded cash. This in turn causes the cost of construction and renovations to be understated so that an artificially large profit will be created.55
5.56
Moreover, the Attorney-General’s submission advised that commonly used corporate organisation structures can facilitate large scale money laundering by criminals in Australia:
Organised criminals also exploit the Australian taxation system by using increasingly complex and sophisticated organisational structures – making these entities less recognisable and harder to detect. ACIC intelligence suggests that organised criminals are commonly using one of Australia’s most common forms of business structure, the sole trader (which makes up the highest proportion of registered businesses in the country), to facilitate illicit activity. This type of structure is predominantly used to operate businesses in cash-intensive industries, and these industries are attractive to organised crime because of the relatively untraceable nature of cash transactions and the opportunities to commingle illicit and legitimate funds. Organised crime groups can create multiple sole trader entities in order to facilitate tax evasion or money laundering activities.56
5.57
The recommendation of the Black Economy Taskforce to outlaw cash payments in excess of $10 000 was designed to ameliorate the channelling of cash proceeds into money laundering activity or the purchase of high value goods with undeclared cash income.57
5.58
Another potential avenue for money launderers was the transferal of moneys undetected using electronic payment platforms in the global payments market. Ms Jasmine Koh, General Counsel to Airwallex, a global payment fintech, emphasised the importance of her firm’s strict observance of Australia’s Anti-Money Laundering and Counter-Terrorism Financing AML/CTF framework for security and compliance.58
5.59
While approving Australia’s regime, Ms Koh noted that in some other countries, such as Singapore, the legal frameworks are still evolving.59 This poses as a challenge for payment platforms in vetting transactions and complying with all overseas AML regimes as real-time transactions are facilitated by the NNP:
In terms of the new payments platform, the attraction of the NPP is that it is going to be in real time or near real time. Because of that shortage of time, what happens is that we don’t have as much time to conduct the necessary KYC [Know Your Client] checks that are required by the AML legislation. Yes, the benefit is that your beneficiary gets payments pretty quickly, but, at the same time, if there were a red flag—for example, if there were a company that had politically exposed persons employed or sitting on their board of directors—usually what would happen is we would do a further check into the company to see if there were going to be any risks. In certain countries where you have politically exposed persons there might be a higher risk of laundered money going through the system, or there might be funds which are the proceeds of tax avoidance. The NPP, while good in terms of real-time settlements, won’t give us that necessary time to figure out if the funds that are being channelled into Australia, for example, would be dirty money, for want of a better term. So it is that balance.60
5.60
In an interview, Ms Koh emphasised that compliance with the AML is ‘not a singular operation’ but ‘a joint effort’ between all partners involved to ‘apportionment of duties and responsibilities for compliance with AML’.61
5.61
During the period of this review, the Government introduced the AntiMoney Laundering and Counter-Terrorism Financing Amendment Bill 2017 (the Bill).62 The Bill aimed to address 19 of the review recommendations with the objective, among other things, of establishing a more flexible and effective framework for sharing AUSTRAC information, improving identity credentials, including with the private sector, and expanding the powers available for investigations and enforcement related to the regulatory regime.63 The Bill was passed and assented to in late December 2017.64

Corporate regulation

5.62
As noted above, corporate regulatory structures and rules have the capacity to open up loop holes which support tax avoidance, with negative effects for whole industry sectors and deep impacts on the ATO’s revenue collection. The Inspector-General of Taxation’s submission advised of strategies proposed in 1998 by the then government, based on the finding that ‘taxes and collection systems allow too much scope for taxpayers to participate in the cash economy’. These included the introduction of the Australian Business Number (ABN) as a single business identifier, simplifying payment and reporting systems (the PAYG system) as well as other law and administrative changes to promote certainty and make compliance simpler and fairer.65
5.63
Evidence to the inquiry discussed the limitations of the business registration systems in the context of their potential to contribute to non-complaint behaviours and tax avoidance.

Business registration and PAYG

5.64
The introduction of ABNs was expected to disadvantage unregistered businesses that would have a significant proportion of their payment withheld by trade partners and remitted to the ATO.66 However, the Committee heard the regime has a number of deficiencies.
5.65
The Institute of Public Accounts (IPA) maintained:
When the Australian Business Number (ABN) was introduced, it was intended to make significant inroads into the cash economy. Unfortunately the ABN system has not been an effective mechanism for dealing with this sector. There are a significant number of ABNs against where there has been no business activity recorded. There is also widespread practice of quoting invalid or some other entities’ ABN details. ABN holders are excluded from the PAYG withholding system unlike employees earning salary and wages. The system requires the paying entity to check the ABN details of the service provider. If this is not done properly, it is relatively easy for an entity to use an invalid ABN or use someone else’s ABN details so the veracity of the existing system relies very much on this process. The current system requires businesses to self-assess their PAYG income tax instalments on the basis that they are going to declare all their income in their tax returns. There is only one industry sector that requires reporting of payments made to contractors to enable the ATO to perform a data cross check. Apart from this there is no data matching mechanism to ensure that all invoices have been included in the taxpayer’s income tax return.67
5.66
Mr Peter Strong, CEO of the Council of Small Business Australia, agreed that more needed to be done to verify businesses registering for an ABN, considering that the current approach has ‘made it too easy to get an ABN’. Nevertheless, he cautioned Government not to make the bar too high, referring to deliberations in the Black Economy Taskforce’s interim report on the potential to introduce an Australian Business Licence qualification for all entrepreneurs wanting to register a business.68

Phoenix activity—director identification

5.67
Phoenix activity is the creation of a new business to continue the activities of another business that was deliberately shut down leaving debts, which could include tax, creditors and employee entitlements. While this activity goes beyond strict tax compliance, these activities have heavily impacted compliance with tax laws.
5.68
The submission from Professor Helen Anderson of Melbourne Law School, University of Melbourne, made the distinction between legal and illegal phoenix activity:
Legal phoenix activity occurs when the previous controllers of a usually failed business, start another similar business, using a new company usually in order to rescue its business. Illegal phoenix activity on the other hand involves similar activities, but the intention of the phoenixing is to exploit the corporate form such that unsecured creditors, including the tax administrator and employees are never paid. The illegality rests with a breach of directors’ duties in failing to act properly in respect of the failed company and its creditors.69
5.69
Professor Anderson maintained that phoenix activity, if left unchecked, ‘has the capacity to undermine Australia’s revenue base and the competitive ‘level playing field’.70 She recommended introducing a director identification number such that:
All existing and new directors should be required to have a director identification number (‘DIN’), issued for a small charge that would allow ASIC and other regulators to accurately track repeat players.
This would eliminate fictitious directors, or directors incorporating companies with their own name misspelt or a false date of birth, or naming unconnected people as directors without their consent.71
5.70
The Government is currently considering introduction of legislation to require registration of Directors Identification Numbers (DIN), a measure strongly supported by Professor Anderson’s research. The ATO outlined the progress on the DIN regime in its supplementary submission:
On 28 September 2017, the Treasury released a consultation paper on reforms to Address Illegal Phoenix Activity, with comments closing on 27 October 2017. The Treasury discussion paper was informed by input from the Serious Financial Crime Taskforce, the Phoenix Taskforce and the Black Economy Taskforce. The ATO is a member of each of these taskforces and believe that the various proposals in the Treasury discussion paper could contribute to the reduction in illegal phoenix activity.
The ATO has consulted with the Australian Securities and Investment Commission (ASIC), the DTA and other agencies, including the Department of Employment in relation to the Fair Entitlement Guarantee about how a DIN, if implemented, could deter illegal phoenix activity and provide better outcomes for the community.72
5.71
In November 2017, the ATO noted that there was no enabling legislation or further public detail at that stage. This remained the status at May 2018.73

Other reporting regimes

5.72
To address on-going cash activity and non-compliance in the building and construction sector a reporting regime was introduced in 2012 requiring certain businesses to report the total payments they make to each contractor for building and construction services each year.74
5.73
The ATO website states that, to be compliant:
Businesses in the building and construction industry have to report to us the total amount they’ve paid you each year for building and construction services on the taxable payments annual report. This information allows us to identify those contractors who have:
not included all their income on their tax return;
not lodged tax returns or activity statements;
not registered for GST where they are required to do so; and
quoted the wrong ABN on their invoices.75
5.74
There is no requirement for businesses to provide their contractors with details of the information reported but contractors may request the information.
5.75
Evidence to the Committee from Chartered Accountants Australia and New Zealand (CAANZ) suggested this reporting system may be deficient compared with a withholding at source tax regime to certain businesses sectors in New Zealand.76 This is discussed in Chapter 6.

From cash to card

5.76
Significant and rapid changes affecting the global business environment over the last few years have also led to a reduction in the opportunity to commit cash-associated tax crime. For example, ‘tap-and-go’ payments,77 as discussed below, have increased significantly. The primary change, over and above the acceleration of on-line transactions and the digitisation of government information, communication and services, has been the expansion and rapid adoption of cashless transactions for small and large sums.
5.77
While monetary policy is not within the jurisdiction of the ATO, the cash economy and responses to the cash economy may be influenced by the shift away from cash transactions. The Government, by enabling a technology that enables this shift, could be seen to be having an impact on those businesses which are operating legally, but under-report some cash income.

The potential of the cashless economy

5.78
As indicated above, there is acceleration away from cash transactions; even for low-value transactions with the use of contactless tap-and-go payment cards an increasingly popular form of payment. This reflects the widespread adoption of contactless functionality by merchants and consumer readiness to utilise such technologies. Indeed, a recent RBA survey reported that 85 per cent of survey respondents now hold a contactless card, compared to two-thirds back in 2013.78 It is notable, however, that the Black Economy Taskforce has concluded that the risks of fraud through increasing tapand-go limits outweighed any benefit for the consumer transaction experience.79
5.79
Mr Richard Highfield, a former Tax Commissioner and tax expert, suggested:
I think there are already clear signs in Australia that we are moving towards a non-cash society. There is regular monitoring of the value of transactions that are effected electronically to make sales and purchases, and that clearly shows upward trends. Equally there is some fairly significant growth in numbers of particular denomination notes like the $100 note and I think the $50 note, et cetera. But I think in an aggregate sense you are seeing more and more transactions effected electronically. That includes business-to-business transactions and it also includes consumer-to-business transactions. I think these things are inevitable as technology becomes more ubiquitous.80
5.80
Mr Timothy Reed, Chief Executive Officer, MYOB Australia, considered the shift to electronic transactions and the cashless economy would be more efficient and reduce the costs of doing business:
I believe that Australia would be well served by moving away from cash. That is only going to happen through regulation. I believe the cost of running a small business across the board would be lower if we moved to a cashless economy. The transactions that are captured electronically can flow in to this ecosystem that we are talking about. They can be captured by accounting platforms such as the MYOB platform and can flow right through to the tax system.81
5.81
However, the Committee also heard from representatives of the Master Grocers Australia that, although its members are adopting standard business tools (ie Xero and MYOB) and the transition from cash to card for vendors is well advanced, this is not without stresses for small business.82 CEO Mr De Bruin maintained that the shift from cash disproportionately disadvantages small businesses compared with large:
We have no choice. It is a service. It is something the customer expects. We cannot reflect any costs back into margin, because margins are razor thin. Coles and Woolworths are what we call acquirers. They are banks in their own right. Their transaction costs are far less than ours. Our acquirers are the banks. We just absorb it.83

Point-of-sale technologies and apps

5.82
While Australia is at the forefront of electronic card payments and contactless card use, some jurisdictions are more advanced in implementing fintech developments which support the shift away from cash.
5.83
As well as the proliferation of mobile payment apps, which are evolving more slowly in Australia, a number of other countries have progressed technologies which both register sales and convey transaction information directly to the revenue agency. These include early adopters like Sweden, and more recent developments in Russia and Italy.84
5.84
At hearings, the ATO made it clear that facilitation of point-of-sale monitoring and the gathering of real-time tax information is not a priority. However, it is making progress in other areas, in particular through facilitation of real-time lodgement products and services for individuals and business. Mr Prouse of Xero Australia approved this approach, saying that real-time reportage is not a priority for small business either; they favour efficiency in the products being delivered by the ATO:
I think there is an advantage for the tax office, particularly if it comes with real-time payments [but]… The reality is that real-time reporting for small business is more about timely reporting and making that reporting simple. So we have had initiatives from the government for things like implementing a simpler BAS, which removes three fields from the business activity statement. But the business activity statement is still a two-page form.85
5.85
Airwallex’s Mr Joe McGuire, a former state manager for transaction banking with the Commonwealth Bank, however, proposed an innovative solution should government contemplate promoting a point-of-sale system, as have nations overseas:
The other opportunity that I would point out and which I think is a really exciting one for government is I have a bit of an idea of how you could dramatically increase your taxable revenue. Is everyone in the room aware of what a point-of-sales system would be for a merchant? I think there is a huge opportunity for government to build an API that all point of sales are mandated to plug into—to provide an API and attach with it a corporate card, which goes out to every customer. What this would do is: per transaction at a cafe, the 10 per cent GST would be paid out immediately to the government via the corporate card per transaction.86
5.86
Mr McGuire elaborated the model, noting that the combination of the pointof-sale system and the issuing of the card would allow for both recording of cash transactions and modulating any cash liquidity issues that may result from immediate tax reconciliation:
…One of the biggest problems for collecting money at the moment for cafes is they take all of the cash transactions off the point-of-sale system and only pay tax on the credit cards. I think the other biggest challenge that you have for time-poor businesses is the BAS statements that come out every quarter as well. A way that you could do away with BAS statements and ensure that you collect all of the money is by—
…the ATO [issuing] to every business a card which is interest-free for 90 days and needs to be paid in full at the end of 90 days. So that is plugged in via API to every point-of-sale system in Australia. For every transaction that goes through, the money is sent to the ATO. The ATO has a record of every financial transaction, so there is no requirement for a BAS statement. And just like a business does today, they just pay off their ATO or GST bill at the end of every 90 days.87

Payment platforms, blockchain and identity verification

5.87
In the course of the inquiry, the Committee explored the potential of digital payment platforms and products to both introduce and reduce the risks of illicit activity, including tax crime associated with money laundering.
5.88
Evidence suggested that digital transfers and electronic platforms offer, overall, greater security for regulators than otherwise, however it is very important that regulatory frameworks and standards are consistent and robust, and information channels are free between partners. Both Airwallex and PayPal strongly emphasised this need for partnerships and information sharing between governments, third party businesses and agencies to support integrity in the burgeoning industry.
5.89
PayPal, for example, is the largest reporter to AUSTRAC of International Funds Transfer Instructions (IFTIs) in Australia, and works very closely with AUSTRAC as part of the Fintel Alliance.88 However, PayPal’s Director Mr Simon Edwards advised, that information sharing remains an issue:
We have been encouraging AUSTRAC for some time to have a response loops. One of the problems for us is that for a long time we have been putting information into the system and not hearing anything back. That makes it difficult for us to improve our systems to know what to look for. Through the Fintel Alliance, AUSTRAC are now looking to try and provide that type of feedback loop. It’s just part of our core business. If we facilitate activity that is illegal, we’re not happy with it. It’s very bad for our brand and very bad for our business. So we spend a lot of time and money trying to stop it.89
5.90
As noted above the AML/CFT legislation aims to facilitate information sharing between agencies and the private sector. The Committee heard from the Digital Transformation Agency (DTA) about the importance of identity verification in support of this approach, noting work being done by the RBA in this area.90
5.91
The Attorney-General’s Department also advised that it has been working closely with the ATO on a number of initiatives that fall under the National Identity Security Strategy; which include the implementation of the National Identity Proofing Guidelines (NIPGs) and using the Document Verification Service (DVS). These NIPGs provide a set of transparent recommended processes and requirements for identity verification for organisations which issue identity documents, and have been adopted by the ATO.91
5.92
Mr McGuire of Airwallex alerted the Committee to the further advantages of blockchain technology which is based on a disaggregated storage of information in multiple locations to ensure security of the client information shared, noting: ‘Blockchain is, effectively, just a record held in multiple locations as opposed to at the RBA—a single source’.92
5.93
Dr Chris Berg, of the RMIT Blockchain Innovation Hub, also advised of the utility of the technology for real time engagement with the ATO, to address the downstream effects on Australia’s taxation system of the globalisation and networking of firms and of the gig economy. He recommended:
The ATO, in our view, should develop guidelines for real-time blockchain reporting that it would consider to be reasonably compliant. The ATO should also rethink its internal systems to facilitate voluntary real-time reporting. Real-time tax reporting raises different issues for individual taxpayers, however. Privacy is an overriding problem. There are new technologies that have been developed with the blockchain, such as zero knowledge proofs, that provide opportunities for privacy, protecting public services in the future.93

The emergent risks of digital currencies

5.94
National governments are in the process of grappling with the policy and regulatory challenges associated with digital currencies as their use increases. In the context of money laundering and terrorism financing, the Attorney-General’s Department has summarised the key risks associated with digital currencies as:
greater anonymity (or pseudonymity) compared with traditional noncash payment methods;
transactions are made on a peer-to-peer basis, generally outside the regulated financial systems; and
different components of a digital currency system may be located in many countries and subject to varying degrees of AML/CTF oversight.94
5.95
At hearings, the Department’s Director, Financial Crime Section, Mr Daniel Mossop elaborated on these risks, and the challenges posed:
In terms of GDP it is a very small percentage, at the moment, but it is growing and the technology is quite new so it is evolving. Part of the problem with that is there is no intermediary point. It is as akin to cash as you can get and it is anonymous, by and large; it can be transferred peer to peer across great distances. Unlike cash you do not need to meet up to pass it over. It can travel to the other side of the country or the world almost instantaneously with no regulated industry in the middle. That is a particular challenge. You can start to imagine the sort of appeal it would have for people who are interested in criminal activity.95
5.96
In addition, Airwallex’s Ms Koh outlined some possible tax implications:
…it actually makes it a more pressing concern, purely because crypto currencies are relatively under-regulated and there are conceptual difficulties in trying to determine whether crypto currency is currency to begin with. So, for example, even the definition of crypto currency as money has attracted tax implications.96
5.97
The Attorney-General’s Department also highlighted the risk that cryptocurrencies could be used for money laundering of the proceeds of crime, however there are also protective factors:
There are a range of vulnerabilities around cryptocurrencies. They have this kind of pseudo-anonymity in peer-to-peer transfers, but there are also a range of factors that count against them in terms of being a good model for people to use to launder money on a large scale. Part of that is the volatility that they have. Moving money through digital currency means you can wipe off 50 per cent of the value overnight because the market moves, and, as I said earlier, as some stage you still have to cash in and cash out because, to be able to purchase goods in digital currencies, the market is still not enormous. It is, certainly, nowhere near akin to cash at the moment, so for most people they are still at a cash-in and cash-out point in being able to use that money. You lose a little bit of money at each end. You run the risk of the volatility in the middle.97
5.98
Digital currencies will be discussed further under future challenges and solutions in Chapter 6.

Monetary measures and education

5.99
There was some discussion in the evidence about other measures to prompt a further shift away from cash use, including through illicit cash activity. In addition to the technology development discussed above, demonetisation and education approaches adopted overseas were reviewed.

Limiting cash circulation—demonetisation

5.100
Evidence provided that some countries have introduced cash regulatory measures to directly limit the use of cash for transactions, for example:
Capping the value of cash transactions was introduced in France with limit set at €1,000 from September 2016. This limit applies to transactions between consumers and businesses and business to business transactions but does not apply to transactions between individuals. It is of interest to note that the introduction of the limit was staged with the limit set at €3,000 prior to September 2016.98
5.101
Other approaches to demonetarisation of specific notes were briefly broached. It was noted, for example, that the Indian government in 2016 removed 500 and 1 000 rupee notes, requiring the old notes to be deposited or exchanged for new banknotes, with the stated aim of addressing counterfeit and black money activity.99
5.102
Commissioner Jordan advised that there is a committee being formed to make recommendations to government on money control mechanisms, saying ‘I think we have got to think a bit out of the box here. What are other countries doing that has been of use?’100
5.103
However, the Tax Institute’s Tax Counsel Ms Stephanie Caredes was cautious about cash control measures being introduced in Australia:
Looking at that point, it might cause some unnecessary or adverse impacts on people who are not actually participating in the black economy. So it might be unnecessary to require all wages to be paid electronically for everybody just because there are some people operating in the black economy.101
5.104
The Committee has noted the Black Economy Taskforce recommendation to outlaw cash payments in excess of $10 000, above,102 and anticipates further outcomes of the committee of review, mentioned by the Tax Commissioner, and the research work recommended by the Taskforce to be undertaken by the RBA in the use and role of high denomination bank notes.103

Education campaigns

5.105
Evidence referred to comparable jurisdictions in New Zealand and the United Kingdom that have introduced publicity campaigns to encourage people to report undeclared income:
Her Majesty’s Revenue and Customs (HMRC) has used a variety of publicity campaigns to encourage people to report undeclared income. HMRC also recently gained greater powers to obtain data from payment providers and business intermediaries to identify hidden economic activity.
The New Zealand Inland Revenue (NZIR) is investing in a specific ‘Hidden Economy’ programme, complete with national marketing campaigns (e.g. ‘Declare it all or risk everything’ and ‘Crackdown on Cashies’) targeting specific industries and raising awareness of the consequences of businesses avoiding tax obligations.
The NZIR is also developing and enhancing relationships with local and national participants and stakeholders in specific industries on the importance of paying taxes, recording transactions, providing receipts and requesting invoices.104
5.106
Commissioner Jordan has accepted that to support change in community attitudes to cash and compliance, a ‘significant education campaign’ is needed:
Into the future I can see a number of key strategies that we will need to, or will continue to, pursue and deliver on—very much a service ethic in the ATO, helping to facilitate people through what is a complex system; a focus on prevention rather than correction; greater and more sophisticated use of data for both service and compliance—it is important to use that for a service element as well; increased use of behavioural insights to help us work more constructively and collaboratively with taxpayers to get the right outcomes; increased digital offerings; leverage our relationships with industry; greater collaboration with the tax profession to tackle matters jointly; and to drive significant cultural change in the Australian community to perhaps the way some people approach their obligations, particularly around the cash economy and some of those issues where it might be okay to cheat a bit on our tax returns in our deductions. A significant education campaign is required there.105
5.107
The Inspector-General of Taxation emphasised that both education campaigns and strong enforcement are required, especially for small business-based cash activity:
I do not think an education program on its own will work, but alongside strong enforcement action I think an education program can help. For example, we may move to a culture where, if a handyman comes and does some work for you and they say to you, ‘If you pay me cash it’s this much, but if you want a receipt it’s this much,’ you will always opt for the receipt. So I think we need to look at both of those… If they are not registered for anything at all and they take cash—an education campaign would be useful there. For example, if you do not have a receipt of any kind, or if you did not enter into a contract for certain work that is done, then you may not be able to sue if the work is not done properly. An education campaign could point a lot of that out. The education campaign is, to a large degree, about education but it is also a little bit about deterrence by letting people know what the consequences are. That is why I am saying we need education and strong enforcement—you are letting people know that, if they do not do this, then that is going to happen.106
5.108
An education campaign and promoting and reinforcing positive social norms around tax payment, including the role consumers play, was recommended by the Black Economy Taskforce, particularly in relation to migrant groups and visa holders.107

Committee conclusion: what should Australia do?

5.109
The Australian Bureau of Statistics (ABS) has estimated that the nonobserved economy (or cash and hidden economy) is approximately 1.5 per cent of Gross Domestic Product (GDP). This figure can be projected to be much lower than the real scale of activity— as indicated by the ATO’s preliminary work in targeting this sector at the domestic level; the Black Economy Taskforce’s 2018 estimation; and by extension, in collaboration with enforcement agencies and other nations to address serious tax evasion and profit shifting.108
5.110
The ATO’s submission has noted a 2010 World Bank study found Australia had the 11th smallest ‘shadow economy’ of 120 countries at the time.109 While the problem may remain comparatively small in Australia, evidence would support the Australian National Audit Office (ANAO)’s view that the cash economy is ‘a major tax integrity threat for the ATO, with a high risk rating’.110
5.111
The Committee continues to be concerned about the lack of data that exists on the exact size of the tax gap, including on reported and unreported income, and its sources. The Committee also remains sceptical that otherwise legitimate businesses represent a majority cause of the gap.
5.112
In particular, the Committee questions whether under reported income from coffee shops, beauty salons and hairdressers could be the equivalent of three per cent of GDP, as recently estimated by the ABS.111 Rather the Committee considers it more likely that the majority is the result of illicit activity. Indeed, it is of greater concern that 18 years after this issue was first seen as serious, and now has possibly doubled, that its source remains a matter of debate.
5.113
Therefore, while the Committee accepts the ANAO’s conclusion that the ATO’s strategies to address the cash and hidden economy are on par with other nations and, moreover, are ‘sound and increasingly cost effective’, it urges the ATO to do more. Other countries provide pragmatic approaches which the Committee believes could immediately reduce the circulation of illegal cash funds in the domestic economy.

Cash

5.114
One option would be to require businesses trading in cash to use a certified cash register, as in Sweden. This could be an expensive policy option so, for example, if the register was to cost 1 700 Euros (approximately $2 700112) and two million Australian businesses were required to purchase one, this would result in an upfront compliance cost of $5.6 billion. Such a cost would be unlikely to pass a cost benefit test at present time.
5.115
Similarly, if Australia was to remove $50 and $100 notes in a similar way to the Indian demonetisation this may not be successful in reducing illegal cash activity as those individuals could simply move on to using other Australian notes or potentially the higher value notes of a foreign currency. Given the lack of available information in the Australian sphere the Black economy Taskforce has recommended the Reserve Bank of Australia study the use and prevalence of the higher denomination notes, in particular the $100 note.113
5.116
The French system of limiting cash transactions may make it more difficult for some individuals to make large transactions; however, this would probably have no impact on the businesses that under-report cash income in small value transactions. The prohibition announced by Government on cash payments of greater than $10 000 in the 2018–19 Federal Budget is a significantly larger cash threshold than that of France, and is thus more likely to impact money laundering activity or building industry payments.

Withholding tax changes

5.117
Mr Vial of CAANZ, among some other witnesses, argued for the utility of revising existing policies to mirror reforms in New Zealand in regard to PAYG withholding in relation to high risk industries, such as the Australian building and construction industry.114
5.118
Following New Zealand’s example, this could be extended to other ‘at risk’ industries, with an assessment of whether the additional compliance costs on the industries would be outweighed by the increased revenue. The Committee did not receive specific evidence on the effectiveness of the reporting regime for the building and construction industry, although this was highlighted in ATO publications.
5.119
The Taskforce highlighted the success of the contractor payment reporting scheme operating in Australia (the TPRS) which covers select high-risk industries, initially in the building and construction sector, extended in the 2017–18 Budget to couriers and cleaning services and due to be extended to security providers, road freight transport and IT contractors.
5.120
Further discussion on this is in Chapter 6, following consideration of the implications of the gig and sharing economies. The Committee considers that such a change be considered by the Treasury, taking into account the effectiveness of the current policy.

Social contract policies

5.121
One inquiry participant suggested a tax and social contract response and so that those operating in the black economy ‘should not enjoy all the entitlements and protections afforded to law abiding members of the community, such as:
to deny landlords standing at law unless they have tax compliance certification;
deny consumer protections to complainants without a valid tax invoice from business in dispute;
business licensing and renewal conditional on possession of tax compliance certificate;
contractor compensation and public liability claims would require presentation of a valid tax invoice issued by the injured service provider.115
5.122
The Committee is cautious in supporting these approaches which on face value could encourage compliance with tax laws, given, they may act as an incentive for a certain proportion of individuals to move completely out of the formal system or result in cost shifting to other government organisations, such as an injured service provider denied coverage, seeking medical assistance at a public hospital.

Black Economy Taskforce findings

5.123
This chapter has investigated how under-declaration of funds by some businesses can destabilise those firms who are honouring their obligations to the ATO and other regulators.
5.124
Discussion addressed the potential for fraudulent registration under the Australian Business Number (ABN) system and deficiencies in corporate registration managed by the Australian Securities and Investments Commission (ASIC), and how this facilitates illegal phoenix activity.
5.125
The nexus between tax avoidance and criminal activity was another area of concern, with activities in the retail tobacco sector highlighting a lack of effective regulation and appropriate enforcement powers at local level, an entry point to effect prosecution for these illegal activities. Meanwhile, the potential to contain global money laundering activities was discussed in the context of the evolving international payment market along with the emergence of digital currencies.
5.126
During the course of this inquiry, amendments to Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) framework were passed with the specific intention to improve security and compliance in the evolving digital payment and currency markets. The amended legislation aims to improve information sharing between government regulators and agencies, such as the ATO and ASIC, as well as third party (private) fintech participants.
5.127
The release of the final report of the Government’s Black Economy Taskforce was anticipated by the ATO to be influential on its policy and program settings to address problems associated with the cash economy, and within the broader framework of measures needed that are beyond the jurisdiction of taxation.116
5.128
The publication of the Taskforce’s final report coincided with the release of the 2018–19 Federal Budget on 8 May 2018.117 In the Budget, the Government allocated funds for a number of new measures in response to the final report, including:
increasing the ability of enforcement agencies to detect and disrupt black economy participants.
removing the unfair advantage black economy participation gives businesses by removing deductions for non‑compliant payments and changing the Government’s procurement procedures to incentivise tax compliance in supply chains.
consulting on reforms to the Australian Business Number (ABN) system to improve the confidence the community has in identifying who they are dealing with, including development of rigorous new identification systems for company directors (DINs).
introducing an economy‑wide cash payment limit for large cash transactions of $10 000 to reduce the ability of black economy operators to use cash to avoid their tax and reporting obligations and launder the proceeds of crime.
providing additional funding to the Tax Practitioners Board to take action against tax agents that facilitate activity in the black economy.
expanding the taxable payments reporting system to contractors in industries with higher identified risks of not reporting their income.118
5.129
The Government also announced funding for an Illicit Tobacco Taskforce to disrupt organised crime groups operating in illicit tobacco importation and retail, with the taxing point of tobacco to be made at entry into Australia to choke the illegal tobacco market.119
5.130
These measures satisfy a number of proposals made to address concerns around cash activity raised in this chapter. Some also have bearing on recommendations made for the broader reform of the taxation system to improve its integrity and support taxpayer confidence, as discussed in the final chapter of this report.

  • 1
    The Australian Government, The Treasury, Black Economy Taskforce Interim Report, March 2017, p. 11.
  • 2
    Tax ‘Evasion’, OECD, Glossary of Tax Terms, <www.oecd.org/ctp/glossaryoftaxterms.htm> viewed 20 December 2017.
  • 3
    Tax ‘Avoidance’, OECD, Glossary of Tax Terms, and see ATO, ‘Tax Crime Explained’ <www.ato.gov.au/general/the-fight-against-tax-crime/tax-crime-explained/ > viewed 20 December 2017.
  • 4
    Noting, however, that the Government announced in the 2018-19 Federal Budget the implementation of the recommendations detailed in the Black Economy Taskforce Final Report—October 2017 (May 2018) which included outlawing cash payments in excess of $10 000.
  • 5
    Some cash operations are automatically recognised at point-of-sale. For example, cash accepting parking booths.
  • 6
    Australian Taxation Office (ATO), Submission 2, Inquiry into the 2016–17 Annual Report of the ATO, p. 10.
  • 7
    The Australian Government, The Treasury, Black Economy Taskforce Final Report, October 2017 (May 2018), p. 6.
  • 8
    ATO, Submission 2, Inquiry into the 2016–17 Annual Report of the ATO, p. 10.
  • 9
    The Australian Government, The Treasury, Black Economy Taskforce Interim Report, March 2017, p. 11.
  • 10
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 23.
  • 11
    Australian National Audit Office (ANAO), The ATO’s Strategies to Address the Cash Economy, February 2006 <www.anao.gov.au/work/performance-audit/atos-strategies-address-cash-economy> viewed 10 March 2018.
  • 12
    Mr Neil Olesen, Second Commissioner ATO, Committee Hansard, Canberra, 29 March 2017, p. 2.
  • 13
    Inspector-General of Taxation (IGT), Submission 5, p. 6
  • 14
    HM Revenue and Customs (HMRC), Measuring Tax Gaps 2017 Edition, Tax Gap Estimates for 2015–16, Official Statistics released 2017, p. 3. <www.gov.uk/government/uploads/system/uploads/attachment_data/file/655097/HMRC-measuring-tax-gaps-2017.pdf> viewed 10 March 2018.
  • 15
    HMRC, Measuring Tax Gaps 2017 Edition, Tax Gap Estimates for 2015-16, Official Statistics released 2017, p. 3.
  • 16
    The Oxford dictionary defines the hidden economy as ‘the economic sector consisting of transactions that are (illegally) not declared for tax purposes, and which are therefore not taken into account in official statistics’. <en.oxforddictionaries.com/definition/hidden_economy > viewed 7 February 2018.
  • 17
    IGT, Submission 5, p. 6.
  • 18
    In particular, a new distinction was made between two elements: ‘ghosts’ and ‘moonlighters’. The HRMC Report 2017 advises that: ‘Ghosts are individuals whose entire income is unknown to HMRC, while moonlighters are individuals who are employees and pay tax on the earnings from their main job through PAYE, but have other undeclared sources of income’. See HRMC, Measuring Tax Gaps, 2017 edn, pp. 63, 68.
  • 19
    HRMC, Measuring Tax Gaps, 2017 edn, p. 11.
  • 20
    IGT, Submission 5, p. 10.
  • 21
    Black Economy Taskforce Interim Report, March 2017, p. 25.
  • 22
    Mr Olesen, ATO, Committee Hansard, Canberra, 29 March 2017, p. 2.
  • 23
    Ms Emma Rosenzweig, Acting Deputy Commissioner, Small Business, ATO, Committee Hansard, Canberra, 29 March 2017, p. 10.
  • 24
    Black Economy Taskforce Interim Report, March 2017, p. 2.
  • 25
    Black Economy Taskforce Interim Report, March 2017, p. 1.
  • 26
    ATO, Submission 15, pp. 9–10.
  • 27
    ANAO, Strategies and Activities to Address the Cash and Hidden Economy, ATO, Performance Report 2015-16, no. 27, p. 7.
  • 28
    ANAO, Strategies and Activities to Address the Cash and Hidden Economy, ATO, Performance Report 2015–16, no. 27, p. 7.
  • 29
    ATO, Submission 15, p. 18.
  • 30
    OECD, Tax Administration 2017, Summary, p. 1.
  • 31
    Referred to in IGT, Submission 5, p. 10.
  • 32
    ATO, Submission 15, p. 9.
  • 33
    ATO, ‘Tax Crime Explained’, 24 November 2017.
  • 34
    Mr David Hawkins, Acting National Manager, Strategic Intelligence and Policy, Australian Transaction Reports and Analysis Centre (AUSTRAC), Committee Hansard, Canberra, 21 June 2017, p. 5.
  • 35
    Tax and Super Australia, Submission 12, p. 4.
  • 36
    Dr Anthony Richards, Head, Payments Policy Department, Reserve Bank of Australia (RBA), Committee Hansard, Canberra, 27 October 2017, pp. 31–32.
  • 37
    Deputy Commissioner Dardo, ATO, Committee Hansard, Canberra, 27 October 2017, p. 5.
  • 38
    ATO, Commissioner of Taxation Annual Report 2016–17, pp. 29, 30, and see Supporting Honest Business Program (SHBP) in ATO, Inquiry into the ATO Annual Report 2016–17 review, Submission 2, p. 10.
  • 39
    ATO, Inquiry into the ATO Annual Report 2016–17 review, Submission 2, p. 10.
  • 40
    Including from compliant competitor businesses in the industry, ATO, Submission 2, Inquiry into the 2016-17 Annual Report of the ATO, p. 12.
  • 41
    IGT, Submission 5, pp. 8–9.
  • 42
    ATO, Tax Planning vs Tax Avoidance <www.ato.gov.au/General/Tax-planning/Tax-planning-vs-tax-avoidance/> viewed 20 December 2017.
  • 43
    ATO, ‘Tax Crime Explained’, viewed 20 December 2017.
  • 44
    ATO, Committee Hansard, Canberra, 29 March 2017, p. 12.
  • 45
    Mr Olesen, ATO, Committee Hansard, Canberra, 29 March 2017, pp. 9–10.
  • 46
    ATO, Commissioner of Taxation Annual Report 2016–17, pp. 29, 30, and see Supporting Honest Business Program (SHBP) in ATO, Inquiry in to the ATO Annual Report 2016–17 review, Submission 2, p. 10.
  • 47
    ATO, Submission 2, Inquiry into the 2016-17 Annual Report of the ATO, p. 10.
  • 48
    Regions with a high proportion of cash-only businesses included in the 2 600 site visits since June 2017 included Cabramatta and Liverpool in NSW, Werribee and Glen Waverley in Victoria, Sunnybank in Queensland and Glenelg in South Australia. The program will include in 2018 Mandurah in Western Australia, Batemans’ Bay, inner metro Sydney and Chatswood in NSW, metro Melbourne in Victoria, Toowoomba and Cairns in Queensland and Western Adelaide, South Australia.
  • 49
    Around 60 per cent of these businesses are subject to follow-up activity from record keeping workshops, electronic payment options through to voluntary disclosure of errors or omissions before an audit proceeds.
  • 50
    Those exhibiting ignorance are given record-keeping support in the field and through record-keeping workshops. ATO, Submission 2, Inquiry into the 2016-17 Annual Report of the ATO, p. 12.
  • 51
    Mr Jos de Bruin, Chief Executive Officer, Master Grocers Australia (MGA) Committee Hansard, Canberra, 25 October 2017, p. 4.
  • 52
    Mr de Bruin, MGA, Committee Hansard, Canberra, 25 October 2017, pp. 5, 3.
  • 53
    Mr Rohan Pike, Illicit Trade Adviser, Australian Retailers Association (ARA), Committee Hansard, Canberra, 25 October 2017, p. 11.
  • 54
    Dr Craig Latham, Deputy, Australian Small Business and Family Enterprise Ombudsman, Committee Hansard, Canberra, 13 September 2017, p. 6.
  • 55
    AGD, Submission 13, p. 6.
  • 56
    AGD, Submission 13, p. 6.
  • 57
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 51.
  • 58
    Ms Koh, Airwallex, Committee Hansard, Melbourne, 18 July 2017, p. 17.
  • 59
    Ms Koh, Airwallex, Committee Hansard, Melbourne, 18 July 2017, p. 17.
  • 60
    Ms Koh, Airwallex, Committee Hansard, Melbourne, 18 July 2017, p. 15.
  • 61
    In background material provide to the Committee, J Hailstone, ‘Talking to Airwallex: Jasmine Koh’, 14 June 2017.
  • 62
    On 17 August 2017, see Federal Legislation <www.legislation.gov.au/Details/C2017B00166 > viewed 5 December 2017.
  • 63
    Which contained the first set of amendments resulting from a statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and related Regulations and rules that was completed by the AGD in 2016. Information on the AML/CTF drawn from the Parliamentary Library Bills Digest no. 47, 2017–18, 25 October 2017, and the AGD, Submission 13, p. 7.
  • 64
    Assented Act no 130, 2017, 13 December 2017, see Parliamentary Business, Australian Parliament House, Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 <www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5952> viewed 19 April 2018.
  • 65
    IGT, Submission 5, p. 9.
  • 66
    IGT, Submission 5, p. 9.
  • 67
    IPA, Submission 2, p. 4
  • 68
    Mr Peter Strong, CEO, Council of Small Business Australia, Committee Hansard, Canberra, 16 August 2017, p. 18.
  • 69
    Prof Helen Anderson, Submission 23, p. 1.
  • 70
    Prof Helen Anderson, Submission 23, p. 1.
  • 71
    Prof Helen Anderson, Submission 23, p. 2.
  • 72
    ATO, Supplementary Submission 15.2, p. 12.
  • 73
  • 74
    CAANZ, Submission 3, p. 5.
  • 75
    ATO, Contractors in the Building and Construction Industry, updated 30 March 2017 <www.ato.gov.au/Business/Reports-and-returns/Taxable-payments-annual-report/Businesses-in-building-and-construction/Contractors-in-the-building-and-construction-industry/> viewed 13 March 2018.
  • 76
    Mr Peter Vial, New Zealand Country Head and Tax Leader, Chartered Accountants Australia and New Zealand( CAANZ), Committee Hansard, Melbourne, 17 July 2017, p. 3.
  • 77
    ‘Tap and Go’ payments do not require the use of a Personal Identification Number (PIN) at point of sale (for payments under $100) and operate by microchip technology automatically transferring transaction information from consumer to vendor with a physical wave of a plastic debit or credit card over a payment terminal.
  • 78
    See RBA, ‘How Australians Pay: Evidence from the 2016 Consumer Payments Survey’, Research Discussion Paper, RDP 2017–04, cited by Mr Simon Edwards, PayPal, Committee Hansard, Canberra, 16 August 2017, p. 2.
  • 79
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 68.
  • 80
    Mr Richard Highfield, Private capacity, Committee Hansard, Canberra, 14 June 2018, p. 3.
  • 81
    Mr Timothy Reed, Chief Executive Officer, MYOB Australia Pty Ltd, Committee Hansard, Canberra 27 October 2017, p. 11.
  • 82
    Mr de Bruin, Chief Executive Officer, Ms Carmel Goldsmith, Member, Master Grocers Australia, Committee Hansard , Canberra, 25 October 2017, p. 8.
  • 83
    Mr de Bruin, Chief Executive Officer, Ms Carmel Goldsmith, Member, Master Grocers Australia, Committee Hansard , Canberra, 25 October 2017, p. 8.
  • 84
    See discussion Chapter 2, and Box 4.4 Use of Certified Cash Registers, OECD, Tax Administration 2017, p. 60.
  • 85
    Mr Matthew Prouse, Partner Solutions Manager, Xero Australia Pty Ltd, Committee Hansard, Canberra, 27 October 2017, p. 3.
  • 86
    Mr Joe McGuire, Global Head of Sales and Partnerships, Airwallex, Committee Hansard, Melbourne, 18 July 2017, p. 16.
  • 87
    Mr McGuire, Airwallex, Committee Hansard, Melbourne, 18 July 2017, p. 16.
  • 88
    The Fintel Alliance, ‘a world-first private-public partnership to combat money laundering and terrorism financing’ was launched by AUSTRAC on 3 March 2017. See < austrac.gov.au/fintel-alliance-launch> viewed 19 April 2018.
  • 89
    Mr Edwards, PayPal, Committee Hansard, Canberra, 16 August 2017, pp. 7–8.
  • 90
    Mr Peter Alexander, Chief Digital Officer, Digital Transformation Agency (DTA), Committee Hansard, Canberra, 27 October 2018, p. 35.
  • 91
    AGD, Submission 13, p. 8.
  • 92
    Mr McGuire, Airwallex, Committee Hansard, Melbourne, 18 July 2017, pp. 15, 16.
  • 93
    Dr Chris Berg, Private Capacity, Committee Hansard, Melbourne, 18 July 2017, p. 1.
  • 94
    AGD, ‘Regulating Digital Currencies under Australia’s Anti Money Laundering/Counter Terrorism Financing Regime: Consultation paper’, AGD, December 2016, p. 3. See further: AGD, Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations, (AML/CTF Review), AGD, Canberra, April 2016, pp. 47–48; and in that report, FATF, ‘Virtual Currencies: Key Definitions and Potential AML/CFT risks’, pp. 912.
  • 95
    Mr Daniel Mossop, Director, Financial Crime Section, AGD, Committee Hansard, 21 June 2017, p. 4.
  • 96
    Ms Koh, Airwallex, Committee Hansard, Melbourne, 18 July 2017, pp. 15, 16.
  • 97
    Mr Daniel Mossop, Director, Financial Crime Section, AGD, Committee Hansard, Canberra, 21 June 2017, p. 8.
  • 98
    Tax and Super Australia, Submission 12, p. 4.
  • 99
    Tax and Superannuation Australia, Submission 12, p. 4.
  • 100
    Mr Jordan, ATO, Committee Hansard, Canberra, 29 March 2017, p. 9.
  • 101
    Ms Stephanie Caredes, Tax Counsel, The Tax Institute, Committee Hansard, Canberra, 6 September 2017, p. 6.
  • 102
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 51.
  • 103
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 73.
  • 104
    Board of Taxation, Submission 17, Annexure A, and reproduced as Appendix D in this report.
  • 105
    ATO, Committee Hansard, Canberra, 29 March 2017, pp. 1-2.
  • 106
    Mr Ali Noroozi, Inspector-General of Taxation, Committee Hansard, Canberra, 10 May 2017, p. 4.
  • 107
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 244.
  • 108
    See ATO, Submission 15, p. 17.
  • 109
    ATO, Submission 15, p. 17.
  • 110
    ANAO, ‘Strategies and Activities to Address the Cash and Hidden Economy’, ANAO Report No.27 2015–16, p. 26.
  • 111
    Recent ABS estimates suggest the black economy as a proportion of GDP has doubled—to three percent, or approximately $50 billion per year. Cited in Black Economy Taskforce Final Report, October 2017 (May 2018), p. 23.
  • 112
    As at 22 March 2018 Euro conversion to Australian dollars.
  • 113
    Black Economy Taskforce Final Report, October 2017 (May 2018), p. 49.
  • 114
    Mr Vial, CAANZ, Committee Hansard, Melbourne 17 July 2017, p. 5.
  • 115
    CAANZ, Submission 3, p. 4.
  • 116
    ATO, Submission 2, Inquiry into the 2016–17 Annual Report of the ATO, p. 13.
  • 117
    The Hon Kelly O’Dwyer, Minister for Revenue and Financial Services, ‘Tackling Illegal Behaviour in the Black Economy’, Media Release, 8 May 2018 <kmo.ministers.treasury.gov.au/media-release/051-2018/ > and see the Black Economy Taskforce Final Report, October 2017, <static.treasury.gov.au/uploads/sites/1/2018/05/Black-Economy-Taskforce_Final-Report.pdf> viewed 9 May 2018.
  • 118
    Budget 2018–19, ‘Protecting the Integrity of the Tax System’, Overview< www.budget.gov.au/2018-19/content/overview.html 19> viewed 9 May 2018.
  • 119
    Budget 2018–19, Overview, viewed 9 May 2018.

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