Cracking down on the black economy could raise $5 billion per annum for the government

Grant Wardell-Johnson, Leader, Australian Tax Centre

Last year, when the government set up a task force on the black economy under the chairmanship of Michael Andrew, we made a series of proposals it could consider.

Now, as the government considers the recommendations of the Andrew taskforce, we have crunched the numbers – and are redoubling our call for action to be taken, starting in the forthcoming Budget.

A concerted crackdown on the black economy could generate up to $5 billion per annum in additional Commonwealth revenue alone. The states and territories would also stand to gain large amounts of extra revenue from the proposed crackdown through the GST and state taxes and charges.

In our new report, The Last Frontier, KPMG has used a methodology employed by the Australian Bureau of Statistics (ABS), and via this we estimate the size of Australia’s black economy at $32 billion per annum. This is a serious amount of untaxed money.

The Commonwealth Government has taken steps to bolster the capacity of the Australian Taxation Office (ATO) to deal with the black economy’s impact on the tax system, suggesting an expected return of around $14 for each $1 in extra ATO resources.

A 14:1 return is not to be sniffed at. So we urge the allocation of $100 million to $400 million per annum to the ATO for additional enforcement activity.

The revenue-to-expenditure ratio of this investment would conservatively be at least 7:1 – so raising additional revenue of $700 million to $2.8 billion – and may be substantially greater. Other taxation revenue for the states and territories would be a further natural consequence.

In addition to tackling tax evasion through organised crime, we propose a suite of ten measures to deal with the under-reporting of revenue and income, including:

  • Providing limited amnesty for businesses to voluntarily disclose incorrect tax reporting, followed by a second stage where employees can disclose their under-reported wages and the employer’s associated failure to withhold PAYG tax. Subsequently, increased penalties would apply to businesses that did not participate in the amnesty.
  • Legislating to deny income tax deductions for cash payments to employees, contractors and tradespeople and other service providers.
  • Strengthening the evidentiary requirements for eligibility to obtain an Australian Business Number (ABN) to crack down on their use for sham contracting purposes.
  • Making a clean tax history a requirement for participating in Federal, state and local government tenders.
  • Banning cash transactions for amounts exceeding $10,000.
  • Implementing a government “one stop shop” for all necessary business and employer registrations.
  • Tying vendor rights to maintenance of invoice records and evidence of electronic payment.

Adopting these measures would increase the fairness of the tax system and level the playing field between dishonest and honest businesses and individuals. It would also support community ethics and rebuild trust, as honest taxpayers witnessed the reduced incidence of others cheating the system at their expense.

At a time when other revenue measures are struggling for bipartisan support, the proposed crackdown on the black economy is more likely to gain passage through the Senate, generating much-needed additional revenue for budget repair.

The May Budget would be a good time for the Federal Government to take action on an issue that we as a society have ignored for too long.

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