Federal budget likely to plug the black hole that is the black economy

We expect that this year’s budget will act on the recommendations of the Black Economy Taskforce’s final report and introduce measures to tackle a cash and hidden economy that could be worth between $35-$50 billion.

While it does generate some media, most people are unaware of the significant risks the black economy poses to our tax system, both in terms of lost tax revenue and broader impacts on the economy. As part of this year’s Federal Budget we expect that the Government will release the final report of the Black Economy Taskforce, which was delivered to Government back in October 2017. The Taskforce is expected to have made recommendations on many of the problems canvassed in the earlier interim report (issued in March 2017) and consultation paper (issued in August 2017).

What is the black economy?

The black economy typically refers to businesses and individuals who operate outside the tax and regulatory system. It includes activities such as the non-lodgment of tax returns, understatement of income, ABN and GST fraud, and phoenixing (where a business continues in a new entity after the old entity is deliberately liquidated to avoid paying its debts). It can result in underpayment in taxes such as income tax, PAYG, superannuation guarantee, GST, customs and excise and can enable welfare fraud and money laundering.

The Australian Bureau of Statistics (ABS) estimated in 2012 that the black economy had grown to approximately $25 billion (in today’s dollars). The Chair of the Black Economy Taskforce has since commented that the size of the cash economy could be between $35 to $50 billion and the impact on tax and welfare collections could be as much as $15 billion. (By comparison, the ATO estimates the tax gap for large business and multinationals to be $2.5 billion in 2014-15).

What’s been done previously to address it?

Despite the delay in Government response to the final report, there have been a myriad of Government actions over the past year or so to tackle some of the more egregious practices;

What we’re expecting

But the next lot of announcements could impact legitimate businesses by focussing on their interactions with the cash economy. The Taskforce has previously considered measures to:

  • Deny deductions for cash wage payments particularly where no PAYG payments or superannuation contributions are made or where there is a failure to issue payment summaries. Alternatively, the Taskforce considered whether to require all wages to be paid electronically.
  • Deny deductions for contractor payments where a valid ABN is not quoted and the payer has not withheld sufficient withholding.
  • Limiting access to Australian Government procurement contracts to firms with a good tax record. This could potentially mean that firms with turnovers over $100 million must disclose tax information in accordance with the Voluntary Tax Transparency Code.
  • Extend the TPRS more broadly to all contractor payments in the sharing economy, labour hire companies, owner-builders, and IT contractors.
  • Improve supply chain management practices through a national framework which sets minimum standards for ethical sourcing and industry-developed certification schemes.
  • Possible consumer-focussed sanctions, including the loss of consumer protections, warranties and legal rights for people who make cash payments without obtaining a valid receipt.
  • Strengthening Know Your Client documentation and checks.
  • Extensive ABN reforms including fit and proper person tests.

Given the depth and breadth of the black economy, the measures needed to tackle it will also be far reaching. We expect that many businesses will be surprised by the increased controls, administration and regulation likely to be imposed to reign this issue in. The release of the Taskforce’s final report together with the Government’s response will be keenly watched this Budget cycle.

Deloitte will be reporting live from Canberra on 8 May, sharing key takeaways and analysis as this year’s Budget announcement unfolds. Be the first to know by pre-registering.

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