The financial and accounting sector has a key role to play in the federal government's crackdown on the black economy.
By Nina Hendy
The black economy has ballooned on the back of the growth of the digital economy to account for as much as 3 per cent of gross domestic product (roughly A$50 billion), according to estimates outlined in the final report from the Black Economy Taskforce.
The report, released on Federal Budget night 2018, blames poor transparency, strong incentives and limited enforcement for the growth.
The federal government has agreed with almost all the recommendations outlined in the 363-page report, which outlines substantial measures to stamp out illegal financial activities following an investigation by the Board of Taxation.
Black Economy Taskforce chairman Michael Andrew AO told INTHEBLACK that the task of cracking down on the activity is vast, and that the government’s response to the report is very encouraging.
“It’s a very big task, because the modern black economy is more diverse and more complex than people realise,” Andrew says.
“There are 80 recommendations in our report as an integrated package, and the government has agreed to consult on or implement nearly all of them.”
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The report points out that a decade ago, the sharing economy was in its infancy, so-called “phoenixing” was not as prominent as it is today, supply chains were under less pressure, Australian Business Number (ABN) fraud and identity fraud were less of a concern, and the criminal face of the black economy was very different.
“The black economy is an endemic cultural problem, supported by values and assumptions that participation in the black economy is a victimless crime, that everyone does it,” the report states.
“The adoption, uptake and spread of new business models in the economy, while a positive development, facilitates black economy activities when our policy and regulatory frameworks fail to keep pace.”
While the majority of small businesses operate within the rules, some hospitality staff refuse to work without cash wages, and some consumers demand discounts for cash from tradespeople. In other cases, employees are mistreated.
The government will establish a multi-agency Black Economy Standing Taskforce to lead a cross-agency approach to combating the black economy.
A key feature will be more effective exchange of information to develop increased intelligence, which will enable the most egregious cases to be identified and prosecuted.
The two pivotal strategies to be used in the crackdown include a push for cultural change and the use of new technology.
“We laid out a comprehensive blueprint and, in the immediate term, the government has decided to crack down on illegal activity, both through a new cash payment limit of A$10,000 and a multi-agency taskforce on illicit tobacco,” Andrew says.
The A$10,000 cash payment limit made to businesses for goods and services does not apply to individual-to-individual transactions. It is aimed at reducing money laundering and tax evasion.
“The black economy is an endemic cultural problem, supported by values and assumptions that participation in the black economy is a victimless crime.” Black Economy Taskforce
The crackdown will include more coordinated and visible enforcement activity through the Black Economy Standing Taskforce, strengthening business identity verification through the ABN system and bolstering reporting systems to capture high-risk industries.
It also recommends updating government procurement policies to ensure government departments only contract with honest businesses with a good tax record.
However, combating the black economy isn’t just a matter for governments; we all need to be part of the solution. Accountants and finance professionals play an important role in stamping out black economy activity, Andrew says.
“Tax practitioners play a vital role in the tax system,” he maintains. “It’s crucial they don’t enable black economy behaviour, and report suspicious behaviour by egregious practitioners and their clients.
“Behind every instance of phoenixing, false claim or money laundering, there is an adviser. Egregious practitioners undermine trust in our profession and we need to weed them out.”
What is the black economy?
There is no internationally agreed definition for the black economy, and definitions vary within Australia. According to the Black Economy Taskforce, it generally covers activities which take place outside the tax and regulatory systems, both legal and illegal.
The Australian Bureau of Statistics estimates that the black economy equated to 1.5 per cent of GDP in 2012, with the illicit drug industry adding a further 0.4 per cent of GDP. This amounted to approximately A$25 billion.
The final report by the taskforce points out that the black economy undermines community trust in the tax system and gives some businesses an unfair competitive advantage. It also puts pressure on the margins of honest businesses and often includes the exploitation of vulnerable employees through underpayment of wages and loss of legitimate entitlements.
The black economy taskforce: what it means for accountants and their clients