CHAPTER FOUR - COMPLIANCE AND THE CASH ECONOMY
The effectiveness of the Australian tax system in
collecting revenue fairly and equitably depends very much upon the extent of
compliance with the system. If taxpayers
and businesses wish to, and are able to, avoid paying their fair share of
taxes, then the system will be distorted into two groups: those who are able to
find ways around paying their tax, and those who must pay additional tax to
In this chapter, the Committee discusses various issues
relating to tax avoidance, including the existence and operation of the illegal
'cash economy.' This chapter is divided into three major sections:
the context of compliance
tax as a social responsibility;
resentment at those not paying their fair share;
vehicles for avoidance and barriers to
trusts as a vehicle for tax avoidance;
contracting and subcontracting arrangements as a
vehicle for tax avoidance;
tax system complexity as a barrier to
the size of the cash economy;
the cash economy and social security fraud;
the operation and effectiveness of the Cash
Economy Task Force.
The context of compliance
Social responsibility: paying taxes is the right thing to do
At the heart of the issue of compliance is the simple proposition
that paying tax is an important social duty.
The Australian Tax Office (ATO) explains to new taxpayers that 'Taxes
that are paid to the Commonwealth Government are used to provide services to
the community such as health, education, defence, roads and railways, social
security and welfare.'
Montagu, head of the UK Board of Inland
Revenue, visited Australia
and met with the Committee during its deliberations. The UK
is currently engaging in a major campaign to emphasise taxpaying as a social
obligation or 'badge of citizenship'.
During a public lecture, Sir Nicholas
Tax morality is not a new idea, but I think it is one which is
often neglected. It is about
duties. It's about the link between
taxes and the public goods which they provide . I think that the argument on
morality starts with the purposes of the tax system, and that is essentially to
pay for the spending objectives of the democratically elected government, and
to do so in a way that either directly furthers, or at the very least does not
impede, their wider aims.
Holmes, a former US Supreme Court Justice,
encapsulated this concept neatly in the often-quoted remark that "Taxes
are what we pay for a civilised society."
If it is accepted that payment of taxes is a social
responsibility, then it follows that avoiding or evading tax is socially
irresponsible. Those avoiding paying their
tax claim the benefits of the public goods provided by taxation, without
contributing to them in accordance with their means. It also follows that emphasising taxpaying as
a social responsibility may be one way of increasing compliance.
An entire field of research, variously described as
'tax psychology', 'tax morality' and 'tax ethics', has emerged to study the
social factors which lead to tax avoidance and tax compliance. In a previous report, this Committee noted
that this body of literature:
increasingly recognises that regulatory enforcement is only
one, and not necessarily the most effective way of achieving a desired
outcome. Or, putting the point
differently, it recognises that tax planning and paying behaviours arise out of
particular contexts and cultures.
Understanding and addressing the political, social and psychological
background of those behaviours may assist agencies to promote compliance far
more effectively, than an approach which relies purely on the threat of
enforcement or punishment.
The Committee remains committed to that view. A number of submissions to this inquiry,
particularly those from private individuals, supported the view that many
taxpayers see paying tax as a social duty, and are often quietly proud of the
fact that they pay their taxes. Mr
for instance, stated:
Contrary to the views of most Governments, most people realize
that taxes are unavoidable and a necessary component of our economy. I personally would not mind paying more taxes
provided that I could see direct benefits.
Where everyone gets annoyed and frustrated is when we see so many areas
within Government both state and Federal where tax money is wasted.
I am a 76 year old self funded retiree who believes that,
despite the current taxation system, I have accumulated sufficient capital,
through frugality, rigid savings and careful investment, to see out my own and
my wife's remaining years. We will not
be a burden on current taxpayers and have not and will not seek or require any
assistance from the welfare system. We
both pay tax.
Mrs Helen Booth stated that 'on the whole most fair
minded Australians want a fairer more equitable system where we can be assured
that the funds are put [to] good use for services that we will all benefit
Smith stated that 'I have been a PAYE taxpayer
all my working life' but noted that 'I have always known that the tax system
has never been a fair and equitable form of taxation. The rich get richer and the poor get poorer.'
Recent evidence seems to indicate that a growing number
of Australians are happy to pay tax, and would in fact forego tax cuts, or even
support tax increases, in order to facilitate government spending in areas important
One longstanding and legitimate criticism of public opinion
research that finds support for higher public spending is that such research
rarely asks the voter to consider the fiscal costs usually tax rises of
such spending. Our findings here deal
with this criticism directly by asking respondents to indicate their
willingness to pay more tax for more spending for a range of public services. Our results show quite overwhelming support
for a tax increase if it is modest and spent on Medicare and/or public
education. And we find the proportion of
Australians who unconditionally oppose a tax increase to improve services in
the three social service areas of health, schools and welfare benefits is
actually small 19 percent of the electorate our findings do indicate that
the public is more likely to consider tax increases to pay for improved
services than it has in the recent past.
For policies to remain focussed only on cutting taxes appears to misread
the public mood.
While the Committee recognises that some of the respondents
to the survey discussed in this quotation may have been tax avoiders or those
with smaller tax responsibilities (who therefore have little to gain from tax
cuts), it remains the case that support for social spending exceeded support
for tax cuts even in the groups most likely to be paying PAYG taxes:
Working full time (n=1608)
Working part time
Household duties (n=384)
Retired from paid work
Full time student
The view that tax should be complied with as a matter
of social responsibility also extends to compliance by the business community. The
of Business Taxation discussed tax avoidance by businesses in the following
Tax avoidance may be characterised as a mis-use or abuse of the
law rather than a disregard for it. It
is often driven by the exploitation of structural loopholes in the law to
achieve tax outcomes that were not intended by the Parliament but also includes
manipulation of the law and a focus on form and legal effect rather than
substance. The way things are done in order
to take advantage of structural loopholes, or dress up or characterise
something to satisfy form but not substance can also stamp an arrangement as
avoidance. Tax avoidance represents a
serious threat to the integrity of the tax system and to the revenue. It is also a form of subsidy from those
paying their fair share of tax according to the intention of the law to those
shirking their similar obligations.
Resentment at those not paying
their fair share
Some of the witnesses cited in the previous section,
and the excerpt from the Ralph Review
of Business Taxation, canvassed the issue of fairness in the system. When a taxpayer evades their tax
responsibilities, the need for taxation does not disappear it is
redistributed among those who do pay
their taxes appropriately. This results
in substantial resentment among those paying their fair share. Such resentment was clearly evident from
submissions before this Committee. The
Southside Chamber of Commerce, for instance, stated:
Some people are altruistic, high minded, ethical, disciplined,
conscientious and generous citizens.
Others are self-obsessed, cynical, amoral, malcontent, cunning and
predatory opportunists. Most people are
somewhere in between, most respect the law, a few think they'll get caught if
they don't, and a few more again defiantly flouting it.
 it is human nature to resent it when other people are
undeservedly given preferential treatment.
The obvious tax minimisation activities of the affluent are an
affront to the hard working people who must endure the inequities of a patently
inequitable tax system without such recourse to relief.
Their silent resentment is building and building.
A number of submissions suggested that this resentment
increased the likelihood that a taxpayer would also seek unfairly to avoid
their tax responsibilities. The St
Vincent de Paul society noted that 'when people can see patently that wealth is
not being taxed and is not paying its fair share, you will never get compliance
from the majority of the population who regard tax evasion as fair game.'
Lecturer in Taxation Law at Flinders
If the tax system and its administration are seen to press
heavily on some but lightly on other taxpayers in essentially the same
circumstances, with essentially the same tax paying capability, then the
confidence of the citizenry in the fairness and justness of the system, of
their government, erodes. Cynicism grows
apace and a race not to be left out of the tax minimisation derby, by hook or
by crook, infects the body politic.
Montagu from the UK Board of Inland Revenue
indicated that this phenomenon is not unique to Australia. He stated that tax avoidance:
undermines the integrity of the tax system by being perceived
to be unfair by taxpayers who want to pay their fair share. Eventually it becomes corrosive by persuading
those people that they too should pay less.
As a result, it appears that increasing compliance, and
so increasing the perceived fairness of the tax system, pays a double
dividend: additional tax revenue from
those evading or avoiding their tax obligations, and a decreased likelihood
that other taxpayers will seek to avoid their tax obligations.
Vehicles for avoidance and barriers to compliance
Trusts as a vehicle for tax
A substantial number of submissions criticised the use
of trusts as a vehicle for tax avoidance.
There are a wide range of trusts under Australian law. While some submissions did not specifically
identify the form of trust which concerned them, in most cases it can be
assumed that they were referring to discretionary
trusts. Discretionary trusts are
those in which 'trustees choose which beneficiaries will receive distributions
of income or capital, and how much each will receive.'
The most prominent concern expressed about the use of
trusts is that taxpayers may use them as a conduit of funds, thereby avoiding a
PAYG liability on those earnings.
The St Vincent de Paul Society expressed this concern
in the following terms:
There are many valid reasons for setting up trusts. We do not challenge the concept. Trusts do, however, bring with them certain
tax consequences, usually mitigation of tax liability. Those who establish trusts solely for the
purpose of tax mitigation do so to avoid carrying their fair share of the
burden of society, leaving it to others.
We would like to see this practice regulated out of existence.
Nilsson expressed the following concerns:
The vast majority of trusts are set up with the primary purpose
of avoiding tax that should be paid by high income earners and thereby
transferring the burden on to the rest of us. It is these trusts that are
typically referred to as 'legitimate family trusts'. In reality, There are almost no trusts in Australia
established for legitimate purposes.
The current opportunity for family trusts to be used as a means
of tax avoidance should be abolished immediately by the Commonwealth. This step is an absolute must in preserving
the integrity of Australias
taxation system and ensuring the Commonwealths continuing ability to provide
services to the Australian public.
Current tax arrangements for
Under current arrangements, a trust is not a taxable
entity in its own right. Instead, 'it is
the beneficiaries who are ultimately entitled to receive and retain the trust
income who are taxable on it. The
trustee is generally taxed only on the balance (if any) to which no beneficiary
is immediately entitled, or to which a beneficiary is immediately entitled but which the beneficiary cannot
immediately receive '
The beneficiaries of the trust therefore pay PAYG tax
on any income from the trust to which they have a present entitlement:
The beneficiary's share of the net income is aggregated with
other assessable income of the beneficiary subject to Australian tax and, after
taking into account all deductions, the total taxable income is taxed at the
rate applicable to the beneficiary.
Where trust income is not distributed to beneficiaries,
the trustee becomes liable for taxation.
A number of circumstances (such as the infancy or bankruptcy of the
beneficiary) may result in this occurring.
If, however, the income is to be retained by the trust because no
beneficiary is presently entitled to receive that income (if, for instance, the
trustee of a discretionary trust has not determined that such an entitlement
exists), then the income is taxed at the top marginal tax rate of 47%. This rate is regarded as a punitive tax rate,
and was introduced in order to address the use of trusts as vehicles for tax
Consequently a taxpayer does not obtain a tax benefit
by leaving income, to which they have a present entitlement, in the trust (as
it will be assessed as part of their income whether actually received or
not). Nor do they obtain any benefit if
the trustee retains income in the trust rather than distributing it (as it will
usually be taxed at the top marginal tax rate).
The Board of Taxation reviewed the taxation of
discretionary trusts in 2002. In
particular, it considered whether trusts should be taxed as companies. It concluded that the current arrangements
are adequate, though it made some suggestions for technical amendments. The Board paid particular attention to the use
of trusts as vehicles for tax avoidance.
Critics of [the current] tax model argue that flow-through tax
treatment allows for the tax-free distribution of amounts that are untaxed due
to tax abuse. For example, if the
trustee fails to include an amount of income in the trust's tax return, the
amount would remain untaxed if distributed to a beneficiary, presuming the
beneficiary also fails to include it in a tax return. Consequently, critics suggest that trusts
allow for the benefit of such tax abuse to be passed on to individual
The Board concluded that rather than amending the tax
system to tax trusts in another way, 'tax abuse should be addressed at its
source through better enforcement action to limit tax abuse opportunities.'
The Committee agrees with the Board's view that there
does not appear to be a systemic
problem with the taxation of trusts.
Rather, there may be a problem with individual trustees or beneficiaries
seeking to use trusts to avoid tax, and in the Committee's view this conduct
should be prosecuted in the normal manner.
Trusts and income splitting
Another argument raised in evidence before the
Committee related to the use of trusts to split income, in order to take
advantage of the progressive PAYG tax scale.
Catholic Welfare Australia
outlined this concern:
A primary mechanism by which high income individuals can reduce
their normal taxation liability is through the use of trusts. The basic principle is that income is split
between individuals in a family trust and tax paid when the income is
distributed to the beneficiary. This can
be used to reduce the taxation liability substantially. There are clearly some
cases where the nature of the activity involved might justify a trust
model. However, there seems little
reason why taxpayers who would otherwise face normal income tax rates should be
able to avail themselves of this concession.
ACOSS regarded this form of income splitting as one of
its 'seven deadly tax rorts' and claimed
that it costs $800 million annually in revenue.
One option to address this issue may be to adjust the
taxation of trusts to prevent income splitting.
However, the Committee observed that the concern among witnesses and
submissions is not income splitting per
se, but the inequity inherent in a situation where income splitting is only
available to those who are able to conduct their affairs through a trust. Therefore, another option for dealing with
this issue may be to allow income splitting of family unit taxation on a
universal basis. This issue was
discussed in Chapter 2.
Contracting and subcontracting
The Construction, Forestry, Mining and Energy Union (CFMEU)
raised the issue of the tax system rewarding self-employment ahead of the more
traditional employer/employee relationship.
Its submission stated:
At the centre of the problem is the tax advantage inherent in
declaring oneself a contractor for the purposes of employment, and thereby
obtaining an ABN, as opposed to being an employee, for the purposes of tax.
This is so because contractors, subcontractors, own-account workers, etc. are
not subject to the PAYG system in the same way as employees In this way 
contract workers are able to significantly reduce their tax liability, and
employers are able to reduce their labour on-costs and various other statutory obligations.
This is a growing problem in the building and construction industries.
The reason for this trend, according to the CFMEU, is
that the contractor/subcontractor relationship provides substantial advantages
for employers, who are able to cut their own costs, providing lower rewards
(typically, lower ancillary or non-wage benefits) to workers on the basis that
the tax advantages of self-employment will compensate:
By engaging workers as 'independent' subcontractors, employers
create for themselves a comparatively low cost structure in comparison to other
employers that engage workers as employees. This is because employing contract
labour eliminates the obligation to pay various entitlements under awards,
including redundancy and superannuation. Instead, contractors are often paid an
all-in rate. Firstly, while all-in rates
vary from market to market, they rarely reflect the full value of what the
worker should be receiving under industrial awards and legislation. Secondly, as suggested above, employers who
use bogus subcontract arrangements avoid other obligations such as Payroll Tax,
Fringe Benefits Tax, Workers Compensation premiums and superannuation (although
workers compensation and superannuation is occasionally paid on behalf of the
worker). Employers using these
arrangements also save on administrative costs such as the hiring of payroll
staff and book keeping.
Meanwhile, those workers engaged by such employers often accept
the situation because of a perceived tax advantage, or the fear of facing
If workers received in their hand the same level of remuneration
under subcontract arrangements as do employees, there would be an absolute
uproar from those workers. It is the tax
savings which workers receive from this contrived arrangement that keeps them
from complaining about loss of employee entitlements. 
According to the CFMEU, the growing number of
construction industry workers who are self-employed does not represent a desire
to avoid taxation. Rather, the
contractor/subcontractor relationship is progressively replacing that of
Employment sections of local newspapers are full of
advertisements that require applicants for building and construction employees
to have their own ABN, to the extent that it is increasingly impossible to hold
a job as a tradesman on award conditions.
This issue has been considered by various inquiries in
recent years. The Ralph
report on business taxation, for instance, stated:
It is clearly inequitable that some taxpayers should be reducing
their tax liability by using interposed entities to alienate income while other
taxpayers also deriving personal services income, including ordinary wage and
salary earners, pay the correct amount of tax.
In addition to the tax consequences, income alienation can result in
highly remunerated individuals being able to reduce their taxable income to a
level that entitles them and members of their families to a range of
income-tested government payments.
Alienation can also enable these individuals to avoid a range of other
obligations such as higher education contribution charges, Medicare levy and
superannuation surcharges and child support payments.
Associate Professor Owen Covick gave an outline of how
this form of income alienation, combined with abuse of the trust laws, can
result in taxpayers avoiding tax and claiming welfare benefits to which they
have no genuine entitlement:
When you have that latter category, the self-employment
families, you can often arrange your affairs so that personal services income
which would be tending to push a particular individual into the higher echelons
of the marginal personal income tax scale no longer does so and flows into the
hands of other members of the family who are lower down in the marginal income
tax scale, therefore averaging down your personal income tax responsibilities.
If you exhaust all the possibilities of low income or otherwise
low income members of your family being in the lower echelons, you can then
tuck some money away into company structures, pay the company tax on that
income and then roll it forward and worry about how you get it out some time
later. So I think you will find that among small businesses or families with
self-employment as their main source of personal services income in Australia,
typically they operate with a structure where there is a family trust, a
company which is the trustee of the family trust and a second company, which is
one of the beneficiaries of the family trust. The company which is one of the
beneficiaries of the family trust therefore acts as a bit of a sump, where any
money which might otherwise be attracting unattractively high marginal personal
income tax rates or causing you problems with means testing arrangements can go
and sit in this company and never appear on anybodys individual personal
income tax return or anybodys details they are required to fill out on a means
The CFMEU submission requested further inquiry into
this issue. That call was supported by
the round table discussion convened by the Committee on
2 December 2003. This issue will therefore be discussed
further in Chapter 6, as one area in which the Committee proposes a future,
more focussed inquiry.
Complexity and Compliance
The Committee received some evidence that the
complexity of the tax system, particularly for individual taxpayers undertaking
self-assessment, inhibits compliance. Mr
for instance, stated:
sixty years ago I could fill in my tax form in a matter of
The present system is beyond me, and I now have to see a
Over the years my income situation has not changed all that
The booklet covering the guidelines is, to me, confusing and I
Couldn't a simple system be introduced whereby a tax payer can
fill in a simple form with the basic information 
Smith provided similar views:
The tax system is that complicated that you would have to be a
Rhode's Scholar to work out what it means, but to a lay-person it means
nothing. No wonder the accountants and
tax consultants get it wrong. There are
so many different interpretations.
The submission from Treasury indicated that it
considers that the tax system should aim for simplicity, which would reduce
compliance costs and increase compliance:
A simple tax system should provide clarity, consistency and
stability. While all taxes impose compliance costs on taxpayers, an effort
should be made to minimise them. Greater complexity tends to impose higher
compliance costs on the community and higher administrative costs on tax
authorities, both in terms of monetary costs and the time and effort spent
complying with the tax system.
Clarity means that taxation provisions should be sufficiently
clear for taxpayers to understand the tax implications of their actions.
Taxation policy should be internally consistent as well as being consistent
with broader economic policy. Stability requires the direction of policy to be
well articulated and understood, so that taxpayers have confidence that the
broad direction of policy will be maintained.
The Committee is aware that the Australian Taxation
Office is undertaking an ongoing project relating to compliance with the tax
system. This project, which is outlined
in the ATO publication Making it Easier
to Comply, includes a number of measures designed to assist individuals to
deal with the complexity of the tax system.
For instance, the ATO has improved its website to provide more
accessible information, and tools such as tax calculators, to assist
individuals to determine their tax obligations.
The ATO has also recognised the importance of simplicity in its
correspondence with taxpayers:
We will continue to improve the way we correspond with you. You will notice some changes, such as letters
and notices that:
are easier to understand and clearly explain
calculations and required actions/obligations;
are concise and relevant to your circumstances;
notify you of any changes in obligations.
In a research paper presented as a submission to the
Committee, Dr. Margaret
McKerchar gave an assessment of the level of
complexity within the tax system and its impact on individuals, based on survey
Complexity was said to have arisen wherever a personal taxpayer
reported any difficulty in completing his or her own tax return for the
year. In Australia,
the method by which this is normally done is by the use of an instructional
booklet provided by the ATO, known as TaxPack
(128 pages in length in 2000).  Almost 50 per cent of the relevant
respondents reported that they had not experienced any problems completing
their tax return.
For those respondents who had completed their own return and had
encountered problems, questions were asked to determine the most common
cause(s) of complexity and of the most difficult problems encountered. 
The most common problem reported was in understanding the
instructions in TaxPack. In terms of level of difficulty, the more
serious problems were attributed to the rate of change in tax rules,
understanding the instructions in TaxPack
and other written material provided by the ATO, and the time taken to complete
the return form. In terms of respondents'
three most difficult problems, TaxPack
was ranked the most common major problem by more than double any others. Complexity of rules and understanding other
written material from the ATO were ranked as the next two most difficult
problems. The time taken to complete the
tax return and the rate of change followed. The use of technical language did cause
problems, but this was ranked as being a minor concern.
It was concluded that the principal cause of complexity, in this
context, was ambiguity. To address this
cause, the ATO had included ever increasing amounts of detail in material
prepared for the use of personal taxpayers.
Due to both the volume of material and its rate of change, taxpayers
found that understanding the information provided took up too much time. The most constructive means for addressing
ambiguity appeared to be the development of clear and simple rules, with less
detail and less exceptions. This should
reduce both uncertainty and the time taken for personal taxpayers to complete
The Committee approves of the efforts undertaken by the
ATO to simplify taxpaying for individuals (and, indeed, for other
taxpayers). However, the ATO should note
finding that too much explanatory material can in fact increase, rather than
decrease, the complexity of the system.
The cash economy
The term cash
economy refers to economic activity which takes place outside the tax
system for the purpose of avoiding tax liabilities. This may include, for instance, cash payments
made by consumers which are then not reported as taxable revenue; it may also
include cash payments to employees made outside their formal wage
structure. The Cash Economy Task Force
outlines activity within the cash economy as follows:
For the tax system, the major risk arising from the cash economy
is business revenue not being reported.
This can occur when entities:
are completely outside the taxation system
they are not registered and do not report activity;
have engaged with the system sufficiently to
become registered, but do not report revenue as required they do not lodge
activity statements or tax returns; or
fulfil basic registration and lodgement
requirements, but do not report all their revenue.
Size of the cash economy
During this inquiry, the Committee held one hearing
specifically in relation to the cash economy.
The Committee questioned Centrelink, the Australian Transaction Reports
and Analysis Centre (AUSTRAC) and the Australian Tax Office, and none of these
agencies was able to indicate the size of the cash economy. In evidence, officers from Treasury stated:
We have observed various academic studies in relation to the
cash economy and, as you would know from that discussion, it is anywhere
between three and 15 per cent. What we would say is that we have a substantial
risk to address in relation to the cash economy regardless of size. The range
in the academic studies shows that it is very difficult by its nature to
estimate the cash economy. What we can help you with is the impact of
activities. Obviously we do monitoring within particular industries where we
are having a focus, and we can go into some more detail around that about what
we are observing in terms of the effectiveness of our strategies.
Officers from Centrelink stated:
We have not attempted to extrapolate.  work on the size of
the cash economy or the impact on welfare payments has not been undertaken. I
have spoken to academics on this point, and it has not been done anywhere in
AUSTRAC stated that 'the ability to form an opinion
about drivers of the cash economy, the size of the cash economy and the nature
of the cash economy is not really something that we would have.'
The Australian National Audit Office, in a 2002 report
on the cash economy, broadly agreed with the view expressed by Treasury:
Estimates from various academic studies show that the cash
economy may range from 3.5 to 13.4 per cent of gross domestic product
(GDP). Using the 2000-01 GDP figure and
assuming an effective tax rate of 23 percent, this gives a potential loss to
taxation revenue for the year of between $5.4 billion and $20.7 billion.
However, the precise size of the cash economy, while warranting
much debate, is of lesser importance than the fact that it exists, that it is
significant and that there is some broad measurement of an increase or decrease
in it. Even at the lowest estimate, it
is a very large number.
A recent study from the Centre for Tax System Integrity
(CTSI) noted some of the challenges to estimating the size of the cash economy:
Gathering statistics about who is engaged in underground (or
criminal) activities, the frequency with which these activities occur, and the
magnitude of such activities, is crucial for making effective and efficient
decisions regarding the allocation of a country's resources. Given that the individuals who are engaged in
such behaviour do not want to be identified, it is difficult to obtain accurate
information about the nature and extent of these underground activities. There is also little understanding about what
motivates individuals to work in the shadow economy or to request such work.
However, the same report gave some general indications
of the size of the cash economy in Australia,
based on survey data. The data indicated
that 6.0% of respondents had received cash in hand payments during the previous
12 months, while 14.4% of respondents had paid cash-in-hand for goods or
services over the same period.
Those who had done cash-in-hand work had made
approximately 8.82% of their official income in the cash economy, while those
households which purchased cash-in-hands goods or services spent 5.85% of their
incomes doing so.
The CTSI report extrapolated its data to suggest that
the size of the cash economy was somewhere between 4.81% and 8.8% of Gross
National Income (GNI). However,
two caveats should be noted. First, the
CTSI itself suggested that these extrapolated results be treated with
caution. Second, the results reflected
the cash economy prior to the introduction of the New Tax System.
The cash economy and welfare fraud
The cash economy clearly has implications for the
welfare system in addition to its implications for the tax system. Benefit recipients who fail to declare their
full income may be able to claim benefits on the basis of their declared or
official income, but may not be entitled to those benefits (or may be entitled
to a lesser benefit) if their full income, including the undeclared amount, were
to be assessed. Officers from Centrelink
the system of paying income support primarily depends on
Centrelink being correctly advised of the circumstances of the person applying.
One of these circumstances that we ask people about relates to income.
Centrelink has a system of data matching to identify cases where there is an
anomaly between the information that Centrelink has been given by the person
about their income and information we have from external sources. Where we get
an anomaly, we investigate it. This can uncover cases where people have not
declared all or part of their income. This element of our work is fairly
significant in the work that we do for uncovering incorrect payment and fraud.
As it is very difficult to assess the size of the cash
economy, it is also very difficult to assess the cash economy's impact upon the
welfare system. However evidence
suggests that Centrelink regards cash economy-related welfare fraud as a
serious issue. Centrelink informed the
Committee that 120 staff have been trained as investigators and placed in units
which have the task of detecting and prosecuting welfare cheats in the cash
economy. Centrelink is also a participant on the Cash
Economy Task Force, discussed below.
Cash Economy Task Force
The Cash Economy Task Force (CETF) is a key element of
the Government's current approach to dealing with the cash economy. The task force is chaired by a senior officer
of the ATO, and its membership includes representatives from other agencies
including Centrelink and AUSTRAC, from academia, and from the business
community (including micro and small business representatives, and a tax
The CETF's principal task is to 'examine the cash
economy with a view to determining what it is, what the likely compliance
issues are, and to develop a view about what additional steps can be taken by
the ATO.' It provides advice directly to the
Commissioner of Taxation.
Its most recent report, The Cash Economy under the New Tax System, was released in
September 2003. It contained 38 recommendations for various changes to enhance
the ATO's programs to target the cash economy.
The ATO either agreed or agreed in principle with all 38
recommendations, and the Committee will observe the ATO's progress in
implementing these recommendations.
The Committee concludes this chapter by returning to
its opening assertion: paying tax is the
right thing to do. It is necessary in
order to fund the activities of government, and should be undertaken by all
citizens and companies as a matter of social responsibility.
The various means of avoidance and evasion discussed in
this chapter whether through the use of trusts, the alienation of personal
services income, or participation in the cash economy all result in a
redistribution of the tax burden away from those avoiding their
responsibilities. They consequentially
increase the burden on those who do pay their fair share.
While the ATO has a responsibility to ensure that tax
procedures are as simple as possible, in order to assist people to comply with
the system, it also has a responsibility to prosecute those who avoid their tax