David Butler (Chair - Australian Taxation Office)
Neil Mann (Project Manager - Australian Taxation Office)
Helen Barnes (Australian Taxation Office)
Les Coventry (Reserve Bank of Australia)
Peter Dowling (Tax Practitioner, Ernst & Young)
Allan Histon (Australian Taxation Office)
Phillip Ironfield (Australian Taxation Office)
Ron Letheren (Qld Chamber of Commerce & Industry)
Peter McDonald (Australian Taxpayers' Association)
Rona Mellor (Australian Taxation Office)
Martin O'Meara (ICAA, Tax Practitioner)
Paul Ryan (Australian Transaction Reports and Analysis Centre)
Steven Shepherd (Vic. Employers' Chamber of Commerce & Industry)
Ian Thomas (ASCPA, Tax Practitioner)
David Widdowson (Australian Customs Service)
The Task Force wishes to thank all of the Australian Taxation Office officers who have made a contribution to this report, in particular:
- Chris Grey
- John Hayes
- Paula Lane
- Peter Smith, and
- Gary Saliba.
1.
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The Task Force will 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 Australian Taxation Office (ATO).
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2.
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The Task Force will provide a preliminary report on its findings to the Commissioner of Taxation by the end of February 1997.
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3.
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The Task Force will meet on an ongoing basis (possibly 6 monthly) from its first meeting on 4 December 1996 to review progress, and determine future activity. (Meetings of the Task Force may be scheduled on an as-required basis.).
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Matters to be taken into consideration by the Task Force include:
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- voluntary compliance: what may cause taxpayers to not voluntarily comply, and how can non-compliant behaviour be corrected?
- what is currently being done to improve compliance, and
- are current enforcement techniques effective in today's environment and will they be effective in the future.
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5.
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In undertaking this activity, the Task Force will give consideration to existing research and relevant overseas experiences.
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6.
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Future reports on progress will be provided to the Commissioner of Taxation as and when required.
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Cash plays an essential role in the Australian community and will continue to do so into the future despite the growth in the use of EFTPOS and other forms of electronic commerce. The reality is that the nature of cash means that there will always be an opportunity for tax evasion by people dealing in cash.
Furthermore, the nature of the activities undertaken in the cash economy makes it difficult to quantify its size and impact on revenue. However, the Task Force believes that there is sufficient evidence to conclude that tax evasion by participants in the cash economy is a significant problem, particularly in light of community perceptions that the problem is escalating. While there is no reliable estimate of the tax revenue foregone, it is clear that the Australian community is denied the benefit of billions of dollars each year that could be funding improvements in health, education, and other government programs. The cash economy also imposes significant costs to the community through the linking of taxable income to eligibility for welfare payments and to obligations such as superannuation contributions, workers' compensation premiums and child support payments.
The Task Force has identified a range of structural elements that influence behaviour in the cash economy and has concluded that taking a long term perspective in addressing each of these elements is vital to achieving an effective and systemic approach to the problems caused by the cash economy. Of particular concern is that feedback from taxation and industry representatives and ATO research indicates that there is a widespread acceptance in the community that not paying tax on cash is OK. This view appears to be supported by individual motivations, industry practices and cultural attitudes. The Task Force believes that these attitudes must be challenged. There also appears to be a perception that there is little likelihood of detection and, in any case, that the consequences of being detected are not severe. Taxpayers complain that there are few incentives for them to do the right thing by declaring cash payment or reporting cash transactions, particularly where their competitors are perceived to be failing to do so.
The Task Force concluded that although the programs currently in place by the ATO do have an impact on the cash economy and should be maintained and refined, there is a need for a greater ATO presence in the community and the development of more effective compliance improvement initiatives. These include incentives for compliance as well as sanctions for non-compliance.
In this report, the Task Force proposes a package of priority initiatives to improve the ATO's effectiveness in dealing with the cash economy. The key features of this package are described below.
Maintaining community confidence in the taxation system requires that tackling the cash economy must be a priority for the ATO and will require the ATO to be more visible in the community. This should be done by undertaking a significant shift in resources to target high risk areas within the cash economy. Current approaches should be maintained and refined to focus on practices designed to evade taxation. The ATO should work more closely with industry associations, community groups and tax practitioners to develop industry profiles and more effective approaches to improving compliance. Data analysis and case selection tools need to be refined, including the use of wealth indicators data bases and Financial Transaction Reports. There is also a need to ensure ATO staff have the skills and development programs they need to effectively use these tools and approaches.
The Task Force identified a range of policy proposals that may improve the effectiveness of the ATO in dealing with the cash economy. These require further evaluation. The ATO should develop the following proposals for wider consideration:
- extending withholding and reporting systems to additional high risk industries
- introducing specific documentation requirements for cash transactions in cash industries
- evaluating the effectiveness of the current sanctions for non-compliance and examining alternatives such as on-the-spot fines for poor record keeping
- an amnesty for taxpayers with unreported cash receipts
- less stringent record keeping requirements for complying taxpayers
- incentives to encourage the reporting of cash transactions, and
- strengthening registration requirements for businesses and individuals.
Research undertaken by the ATO has identified a perception that "... the ownership of the tax system is associated with the Government or the ATO. When taxpayers choose to avoid their obligations they do not connect this with cheating the community, or the system that is there for the benefit of the entire Australian community".1
The Task Force believes it is essential to address what appears to be a widespread acceptance in some sections of the community that "not paying tax on cash is OK" by developing community awareness campaign that explains the costs to the community of tax evasion and that tax evasion is a crime. Industry associations should see that there are benefits for their industry being seen to be good compliers and should be encouraged to consider a degree of self regulation through, for example, the adoption of codes of practice. There is also a need to promote to business people the benefits of good record keeping and professional business advice. Social research may be required to inform such a campaign.
The ATO should work closely with industry and community groups and undertake further research to better understand the structural issues and motivating factors that support the cash economy. Joint research should be undertaken with the Australian Bureau of Statistics into the extent and nature of undeclared income.
There is a need for effective coordination of cash economy initiatives between business lines within the ATO and with external agencies such as the Departments of Social Security, and Immigration and Multicultural Affairs.
The Task Force believes that tax agents have an essential role to play in fostering compliance with the tax laws. The ATO needs to work cooperatively with tax practitioners and their representative bodies in developing and implementing compliance improvement initiatives, and "tool kits" to help tax practitioners who provide services to clients in high risk areas. In particular, the ATO should consider providing tax practitioners with benchmark information on key financial characteristics of selected industries to assist them in advising their clients.
The Task Force recommends:
1.
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that the priority initiatives presented in this report be addressed as part of the 1997/98 ATO planning process and implemented subject to the ATO's overall risk assessment and available resources
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2.
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that the ATO develops an evaluation framework to monitor the impact of its cash economy initiatives, and
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3.
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that the Task Force meets on an on-going basis to review progress and advise on issues emerging from the implementation of the priority initiatives.
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In November 1996, the Commissioner of Taxation established a Cash Economy Task Force in the light of perceptions in the community that non-compliance with the taxation laws through the cash economy is escalating. Feedback to the Australian Taxation Office (ATO) from taxpayers and tax practitioners indicates that there is a growing perception that the ATO is focussing its efforts on groups of taxpayers who are largely complying with the tax laws or where there are administratively simple ways to improve compliance, for example through income matching systems. The result is that these efforts are seen to occur at the expense of improving compliance amongst other groups that are perceived to be evading their tax obligations to a greater degree, particularly those involved in cash businesses. As a consequence, there is an emerging perception of inequity in the tax system. Left unchallenged, this perception could reduce the level of voluntary compliance with tax laws in the Australian community.
The Task Force was asked to examine the cash economy, determine the compliance issues and recommend additional steps that can be taken by the ATO to improve compliance. The Task Force comprises ATO and other government officials, tax practitioners, a small business operator and representatives of taxation and industry bodies who have expressed concerns in other consultative forums about tax evasion in this area.
Between December 1996 and March 1997 the views of the external members of the Task Force were gathered along with the views of ATO staff working in the small business and withholding tax area. Additional information was provided by other government agency members of the Task Force including the Australian Transaction Reports and Analysis Centre (AUSTRAC), Australian Customs Service and the Reserve Bank of Australia. Academic research into the nature of the cash economy and the motivating factors affecting taxpayer behaviour was also examined. A preliminary review of international approaches and a review of current ATO approaches was undertaken.
In April 1997 a workshop was held by the Task Force to develop a framework within which to consider the above information, determine the compliance issues involved and make recommendations on additional steps to improve compliance. The Task Force recognised the need to identify the key structural elements that drive the cash economy and understand the interactions between these various elements. Viewing these structural elements as potential leverage points, the Task Force developed a range of desired outcomes and processes that would contribute to a more effective approach by the ATO to dealing with tax evasion by participants in the cash economy and significantly addressing community perceptions. The results of this analysis are documented at Attachment A.
This report to the Commissioner outlines a package of priority initiatives the Task Force believes the ATO needs to address if it is to improve its effectiveness in dealing with the cash economy.
Definition
The Task Force adopted the following definition of 'cash economy':
This definition includes non-declared business and employment income derived from legal or illegal activities and includes evasion by those who keep records and lodge tax returns as well as those who do not. While the definition is broad enough to include a wide range of practices such as barter, electronic commerce or misdescribed expenses, the Task Force decided to focus its attention initially on cash income.
Cash is a fundamental and legitimate component of the Australian economy. It is regarded as a reliable store of value and as a highly convenient medium of exchange. Figures supplied by the Reserve Bank of Australia show that there is currently approximately $20 billion of currency in circulation, an increase of 33% in the last five years. The ratio of cash to GDP has remained steady at 4% and its use continues to grow in line with GDP despite a rapid increase in the use of EFTPOS and other forms of electronic commerce. Of the 20 billion consumer payment transactions made annually in Australia, 18 billion are conducted in cash.
Currently, there is no official or reliable estimate of the size of the Australian cash economy or the revenue foregone. Academic studies estimate the cash economy to be between 3.5 % and 13.4 % of GDP2. Using 1995/96 GDP figures as a base and an effective average tax rate of 23%, these studies suggest that the annual amount of income tax revenue foregone could be between $3.9 billion and $15.1 billion.
The Task Force has not attempted to verify these estimates as it recognises that there are shortcomings in whatever methodology is adopted. Indeed, some commentators argue that basing estimates of revenue foregone on macro measures and average tax rates may significantly overstate the size of the problem as the act of taxing underground activities would by itself change the level and composition of economic activity3. However, there is sufficient evidence to conclude that the size of the cash economy and the consequential amount of tax foregone is indeed significant.
Perhaps of greater concern is the growing perception that tax evasion is an escalating problem which, if not addressed, may impact on the level of voluntary compliance with the taxation laws and in turn, governments' ability to fund their programs. In particular, tax evaders are seen to have a competitive advantage over businesses that do the right thing. The message from the small business community is for the ATO to do its part in ensuring there is a level playing field.
The very existence and nature of cash provides the opportunity for evading tax. It is difficult to trace as it often leaves no audit trail. The Task Force is of the view that there is a risk that tax evasion may occur in any business that has the opportunity to deal in cash. However, the risks appear to be greater in those businesses with high cash turnover and little internal or external controls. In the absence of such controls, tax evasion can occur through simple techniques such as skimming a percentage of cash receipts 'off the top' or falsely recording wages paid to 'ghost employees'. These practices often flow through to other taxpayers as the tax evader seeks to disguise his or her activities by paying cash wages to employees or making cash payments to other businesses for goods and services. In turn, these taxpayers have the opportunity to evade their tax obligations by not declaring these payments as income.
Where the activities are by their very nature illegal and therefore largely conducted underground, the scope for tax evasion is greater.
The Task Force has focussed its examination on income tax evasion but noted the strong links between the evasion of income taxes with sales tax evasion, non-compliance with other business obligations such as superannuation contributions, pay-roll taxes and workers' compensation premiums. The cash economy has other community costs through the linking of taxable income to eligibility for welfare payments and to obligations under child support legislation.
These implications highlight the need for the ATO to integrate its internal approaches to dealing with the cash economy and to ensure there are effective networks with other agencies at the federal and state level.
The complexity of the laws that regulate business activity is used by some as a justification for not complying with their obligations. This suggests that there may be benefits to be derived from simplifying the business regulatory system.
The Task Force identified that in many cases there are structural issues that help to entrench tax evasion. For example, tax evasion is not necessarily tax driven. There are a myriad of reasons that may drive the non-disclosure of income including personal motivations, peer pressure, and industry practices. The Task Force has identified the major structural influencers on the cash economy as:
- the nature of cash
- industry practice
- taxpayer motives
- widespread acceptance that non-disclosure of income is OK
- risk/reward trade-off
- the absence of incentives to do the right thing
- ATO effectiveness
- the role of tax practitioners and the judiciary in encouraging compliance, and
- context and complexity of government laws and regulations.
An explanation of these structural elements and how they affect compliance is provided in Attachment A.
Without an understanding of these key structural issues, it is possible that efforts to tackle the cash economy will prove ineffective as there may be stronger underlying reasons driving non-compliance. Long term solutions to tax evasion require an understanding of these underlying structural reasons and the development of appropriate systemic treatments. An approach which relies simply on detecting non-compliance and imposing sanctions on detected non-compliers will tend to be short term in effect and increasingly resource intensive.
The cash economy poses an equally significant problem to tax administrations in other jurisdictions. A scan across 10 Pacific-rim countries including Canada, USA, Japan, and New Zealand reveals that typically a mix of strategies have been adopted to tackle the issue. These approaches often include an emphasis on public education, implementation of withholding systems, industry based compliance projects and attempts to remove disincentives to paying taxes (reduced paperwork, easy payment methods, access to tax information and services, etc). Other common approaches include providing incentives for transactions to be reported either by taxpayers or third parties and utilising extensive data matching across local and national government agencies. To a lesser extent, other jurisdictions have put an emphasis on incentives, maximising audit, lodgment and registration coverage, employing data matching and utilising third parties in maximising leverage.
The approach taken in each country is determined by the culture and attitudes towards taxation and, to some extent, by the history and nature of their tax system. Therefore, seeking to find the answer to Australia's tax evasion issues directly from overseas jurisdictions is not straightforward. Nevertheless, the Task Force was conscious of these approaches in its deliberations.
The Task Force acknowledges that because of the limited resources available, the ATO must use a risk assessment process to prioritise the areas in which to target its activities. This risk assessment process takes into account information available from external government agencies and commercial data bases, project based audit results, ATO intelligence gathering and tax return analysis.
The ATO has a number of programs in place designed to improve compliance that have an impact on taxpayers that participate in the cash economy. These programs are detailed below.
Record keeping program
This program is primarily an education initiative that seeks to increase taxpayer compliance by encouraging more complete and comprehensive record keeping practices by small business operators. It is believed that better record keeping leads to more accurate reporting of income and expenses in business tax returns. This initiative has a number of components including record keeping reviews of small business, revisits to assess improvement, taxpayer education activities including an ATO sponsored record keeping booklet and tax agent education activities. These activities are backed up with targeted audit activity for taxpayers who continually fail to meet record keeping requirements.
Serious evasion program
This program consists of audit activity targeted at the most serious tax evaders using a wide range of audit techniques designed to detect undeclared income. These techniques include indirect income measurement techniques. Cases are selected for audit based on ATO risk analysis utilising project based audit results, AUSTRAC information and ATO intelligence gathering activities. A particular focus of the serious evasion program is to undertake audits of taxpayers where there is likely to be sufficient grounds for prosecution.
Prosecution investigation program
The purpose of this program is to investigate offences against the taxation laws and to gain sufficient evidence to provide a prosecution brief for referral to the Director of Public Prosecutions. The ATO liaises closely with the AFP in evidence gathering activities. A major outcome of this program is the publicity that results from a successful prosecution and the deterrent effect this can have in the community.
Special investigations program
This program is directed at auditing those taxpayers engaged in illegal activities. A particular characteristic of this group is the dealing in cash. Special investigations staff work closely with other federal and state law enforcement agencies.
There are five main types of Financial Transaction Reports available under the FTR Act that may be used by the ATO in its risk analysis, case selection, audit and other program activities:
- Suspect Transaction Reports (any transaction, actual or attempted, which the Cash Dealer has reasonable grounds to suspect, may involve the proceeds of crime, the evasion of tax or other breaches of the law).
- Significant Cash Transaction Reports (cash deposits or withdrawals of $10,000 or more).
- Significant Betting Transactions Reports (cash bets or collections of $10,000 or more).
- International Currency Transfer Reports (carriage or mailing of cash amounts of $10,000 or more, in Australian or foreign currency, leaving or entering Australia).
- International Funds Transfer Instructions (all telegraphic transfers into and out of Australia).
The PPS was introduced in 1983 to collect income tax at source from certain prescribed payments for work or services in specified industries including building and construction, road transport, motor vehicle repairs, joinery and cabinet making, and cleaning. These industries were identified for inclusion in the PPS on the basis of a history of poor compliance and a high level of cash transactions. Payers in prescribed industries are required to withhold tax from payments unless the payee has a valid exemption or variation certificate. Certain payees are able to have a reduced rate of withholding by applying for a variation certificate. Where a payee holds an exemption certificate, payers are not required to withhold tax or report the payment.
The RPS is an additional reporting system that was introduced in 1994 as a way of preventing tax evasion in other high risk industries. The system requires the reporting to the ATO of income payments by the person making the payment where the payee quotes a tax file number. If the payee elects not to quote a tax file number, tax at a prescribed rate is withheld from the payment. RPS was introduced to the clothing and fishing industries in late 1994, extended to smash repairers in late 1995 and, from 1 March 1997, applies to fresh fruit and vegetable suppliers.
A number of projects have been initiated on the basis of risk assessments compiled from project based audit results and ATO intelligence gathering activities. Some of these projects are industry based and others utilise alternative audit techniques. All are designed to have a broad compliance improvement effect by working with industry associations, other third parties and community groups to develop strategic solutions to non-compliance. A large number of these projects have been undertaken in recent years. Examples of projects currently underway include:
- cheque laundering/clothing industry
- taxi industry
- restaurant industry
- gold bullion transactions
- flower growing industry, and
- small business income checks.
This program seeks to obtain lodgment of income tax returns from taxpayers that have failed to lodge by the due date. There are two distinct arms of the program. One which utilises an ATO database to ensure that taxpayers who are recorded on the system continue to lodge returns, and the other which uses external databases to identify taxpayers who have never lodged income tax returns.
The SME program was introduced to improve compliance in the medium sized segment of business where there is significant revenue at risk. It targets businesses that have a turnover in excess of $1 million but which would be considered too small to be included in a Large Business program. The program's particular focus is on a financial audit of both the business and the principals that operate the business. It achieves a level of wider taxpayer compliance improvement through prosecution of offences and contributes to community knowledge that all areas of the business segment are subject to audit activities.
The Task Force is of the view that each of these programs is having an impact on tax compliance in the cash economy. However, taken as a package these current approaches are not perceived by taxpayers, tax agents and the wider community as having sufficient impact. While there is scope for the ATO's approaches to be made more effective, the Task Force is of the view that the lack of a sufficiently visible ATO presence in the business community is a major factor that has led to this perception. This view that the ATO is not taking adequate action with tax evaders poses a major threat to maintaining public confidence in the tax system and the ATO's administration. There is a risk that failing to address the cash economy and its inherent compliance problems will undermine existing levels of voluntary compliance.
The Task Force considers that the problems presented by the cash economy are enormous. The complexity of the structural components of the cash economy and their interrelationships will require the implementation of an integrated strategy. There is no simple innovation that will provide a quick fix solution. The ATO's current approaches are making an impact but much more will need to be done to change community perceptions and improve tax compliance in those sectors that participate in the cash economy.
The Task Force has identified a range of steps the ATO can take to increase its effectiveness in dealing with evasion through the cash economy. Some of these steps will have an immediate impact while others will produce results over a longer time frame. A number of suggestions have policy and legislative implications that would require government decision. The ATO should consider developing these proposals for wider consideration. This package of priority initiatives is set out below.
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Undertake a significant shift in ATO resources to deal with the cash economy in accordance with national and regional priorities.
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Identify major risk areas through greater use of ATO intelligence, industry compliance research and AUSTRAC data.
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3.
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Undertake industry-based and community-group-specific compliance improvement initiatives in major risk areas encompassing research, publicity, consultation and audit activity. In particular:
- develop industry and community profiles through stakeholder consultation and intelligence gathering activities, including the examination of current period business transactions
- develop industry benchmarks of financial characteristics
- identify high risk compliance issues
- use knowledge of motivating factors as leverage points
- market industry profiles with industry groups and tax practitioners, and
- encourage the use of these profiles to achieve compliance improvement.
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Maintain existing cash economy initiatives ensuring they are focussed on major risk areas, including:
- strategic enforcement (serious evasion, illegal activities)
- lodgment compliance
- Prescribed Payments System, and
- Reportable Payments System.
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Improve systematic use of all available data including:
- information available under the Financial Transactions Reports Act, and
- wealth indicator databases.
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Undertake a skills assessment of ATO compliance improvement staff and deliver training and development programs designed to improve industry knowledge and the ATO's capability in income measurement and cost effective compliance improvement techniques.
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7.
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Develop and implement a staff communication strategy to support cash economy initiatives.
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Increase the number of cases referred for prosecution for evasion and record keeping offences, and publicise outcomes.
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Develop national guidelines to maximise the effective use of information supplied by the public and ensure appropriate resources are available for follow-up action.
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Maintain tax agent seminars and discussion groups with increased focus on cash economy issues.
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Develop proposals for extending FTR reporting requirements based on research into third parties with significant cash handling.
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Develop proposals for the extension of withholding or reporting systems to additional high risk areas.
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Evaluate the benefits of proposals to specify the nature of records necessary in a cash industry or to require the issue of receipts on request.
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Review the effectiveness of sanctions for non-compliance including:
- the appropriateness of the current administrative and judicial penalty regime
- reviewing the ATO's prosecution policy and procedures, and
- undertaking discussions with the judiciary and the Director of Public Prosecutions on the priority of cash economy issues in the tax system.
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Evaluate:
- an amnesty for business taxpayers who have unreported cash receipts, have kept false records, or have failed to lodge returns
- less stringent tax return and record keeping requirements for taxpayers with "good" compliance records
- incentives to encourage the reporting of cash transactions, such as concessional tax treatment for payments made for certain household services where the provider is registered for tax and social security purposes
- streamlined business registration requirements and other business regulations
- introducing on-the-spot fines for record keeping offences, and
- the re-introduction of naming tax offenders in the Commissioner's Annual Report.
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Examine taxpayer registration refinements including:
- the introduction of registration requirements for all new businesses at the point when they commence operations
- one common TFN or Business Registration Number across all Federal and State agencies
- improved TFN registration procedures for people entering the country
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Implement the Government's response to the Small Business Deregulation Task Force Report.
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Review the tax regime as it applies to small business.
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Develop and implement a communication program, based on an understanding of community attitudes and taxpayer motivations designed to:
- raise awareness of the costs of the cash economy
- publicise there is no excuse for failing to declare cash income
- publicise the consequences of detection are serious
- raise awareness of the ATO cash economy program, and
- publicise the effectiveness of ATO compliance improvement activities.
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Ensure ATO schools program includes an emphasis on the costs of tax evasion.
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Develop and implement a communication strategy to promote benefits of good record keeping and professional business advice.
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Develop and implement a communication strategy to promote to industry associations that there are benefits in their industry being seen as good compliers and encourage a degree of self regulation through, for example, the adoption of codes of practice.
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Seek tax agent participation in the implementation of industry and community compliance improvement initiatives.
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Develop "tool kits" that add value to tax agents' practices and help improve compliance, such as industry profiles and benchmark data.
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Provide assistance to agents whose practice includes a significant proportion of clients in high risk areas.
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Identify a methodology for profiling the quality of tax agent prepared returns.
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Consider tightening tax agent registration requirements to require all agents to undertake a prescribed CPD program.
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Undertake compliance improvement initiatives for tax agents who consistently lodge poor quality returns.
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Conduct joint ATO/ABS research into the extent and nature of undeclared income.
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Increase understanding of the cash economy by undertaking community and taxpayer research that examines:
- individual motivations, such as financial survival, peer pressure, costs of compliance structural elements including the tax system, the welfare system and industry behaviour, and
- incentives that motivate taxpayers and third parties to declare cash income and document or report cash transactions.
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Liaise with the Department of Immigration and Multicultural Affairs (DIMA) to:
- ensure tax obligations are explained as part of the immigration process
- ensure TFNs are issued to new arrivals who have work rights
- require confirmation of immigration status prior to issue of TFNs, and
- examine the tax compliance issues involving people without work rights.
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Establish effective networks across ATO Business Lines and with other agencies on cash economy issues including:
- greater coordination of sales tax and income tax compliance improvement activities, and
- work with DSS to achieve greater coordination of tax and welfare compliance activities.
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The Task Force recommends:
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that the priority initiatives presented in this report be addressed as part of the 1997/98 ATO planning process and implemented subject to the ATO's overall risk assessment and available resources
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2.
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that the ATO develops an evaluation framework to monitor the impact of its cash economy initiatives, and
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3.
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that the Task Force meets on an on-going basis to review progress and advise on issues emerging from the implementation of the priority initiatives.
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Attachment A
The cash economy: desired outcomes, key strategies and priority initiatives
The Task Force considers it is necessary to identify the major structural elements of the Cash Economy before determining the compliance issues and recommending steps to address those issues. These structural elements can be viewed in a manner similar to the components of an engine in the sense that they all work together to create an emergent property, namely the cash economy. An impact on, or change in, any one of those structural elements can have an effect on the entire cash economy in the same way that a change to any engine component will effect its entire performance.
The Task Force considers that achieving significant long term improvement in tax compliance in the cash economy can only be achieved with an understanding of these structural elements and recommendations designed to impact on them.
The Task Force has identified a number of structural elements of the cash economy. These fall into nine key elements that are considered to be potential leverage points. A visual representation of these elements is shown below and an explanation of each is provided in Key leverage points in the cash economy.
The Task Force has developed desired outcomes for each of these key structural elements that would result in a change in the nature of the cash economy and proposes a package of priority initiatives designed to achieve them. The details of these priority initiatives and how they contribute to the desired outcomes are below.
Key leverage points in the cash economy
1. Nature of Cash
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The ability of people who receive cash income to evade tax is made easier by the fact that cash leaves no audit trail to connect the recipient back to the provider. It is also difficult to trace how cash is used eg. to purchase other assets or other goods and services. Where an individual or industry has access to high levels of cash there is greater opportunity for cash payments to be made and go undetected. Since the introduction of the Financial Transaction Reports Act 1988, however, it is possible to identify the high users of cash by industry and by post code. This can assist the ATO to target its activities and also identify individuals or companies that are making large cash deposits or withdrawals from the financial sector. There may be transactions by people involved in tax evasion or by third parties with whom they deal. Other measures that require the reporting or documentation of cash transactions, such as the Reportable Payments System (RPS), help to overcome the anonymity of cash. Measures which withhold tax from cash payments, such as the Prescribed Payments System (PPS), are even more effective in reducing the opportunity for tax evasion.
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2. Industry Practice
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The degree to which participants in a particular industry are involved in tax evasion is influenced by a number of factors. These factors include the degree to which cash payments are a common way of making or receiving payments for goods and services. The level of cash transactions is typically high where there are high numbers of small value transactions, eg. take away food retailers. However, there are also examples of industries (eg. construction) where it has become accepted practice to make cash payments even though the value of the transactions can be high. The level of internal controls or industry regulation can also affect the opportunity for concealing cash transactions. For example, the opportunity for "skimming" cash appears to be significantly less in a well organised franchise business.
Other systemic factors may affect the level of compliance in an industry. Some businesses and perhaps some industries remain viable by paying low wages and thereby also avoiding imposts placed on employers such as payroll tax, superannuation contributions, and workers' compensation premiums. They may seek to do this by paying their employees totally, or in part, in cash and not recording these transactions or their full extent. Their employees may seek to compensate for their low wages by not declaring the cash payments as income for tax purposes and seeking to obtain income support payments. Businesses that engage in these practices put their competitors at a competitive disadvantage.
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3. Taxpayer motives
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The extent to which people comply with the tax laws and declare all their cash income may be influenced by whether the rewards of non-compliance outweigh the risks of being detected. For example, some basic motivations that influence this equation include the need for money and the need for peer acceptance. Depending on the incentives and disincentives put in place for a particular industry or community group that condones tax evasion, the desire for financial rewards and peer acceptance may or may not outweigh the financial penalties and public humiliation that would follow detection and prosecution for tax offences. Further understanding of the relative strength of these motivations for participants in the cash economy will assist the design of an effective program to deal with tax evasion.
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4. A widespread acceptance that non-disclosure of income is OK
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The Task Force concluded that there appears to be a level of tolerance amongst the community towards the failure to disclose all cash income. In some respects, this tolerance may be based on self-interest. For example, you may get a discount for goods or services by paying in cash. In other respects, this tolerance may also be based on a sense of fairness. Australians have a long-standing tradition of seeking a "fair go for the little guy". For example, people may not object to financially struggling students seeking to support themselves by making some extra money as a kitchen hand or waiting tables for cash wages. Put simply, in some contexts at least, people do not see that failing to declare cash income is wrong.
Community perceptions about the fairness and rates of taxation may also have an impact on the level of tolerance towards the non-declaration of income. People coming to Australia bring with them experiences in dealing with government and other tax systems that may flow through to their perceptions of the Australian tax system. Also, the degree to which people approve of the use of taxes may be a relevant factor. The ATO has promoted for a number of years that taxes pay for the public goods and services that the community expects, such as hospitals and schools. Research undertaken by the ATO and other feedback to the ATO however suggests that some people who fail to declare income seek justification from the fact that they disagree with the specific programs and activities funded by government. Measures designed to improve compliance with the tax laws need to be based on an understanding of these community values and attitudes.
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5. Risk/reward tradeoff
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The Task Force concluded that there is a growing perception that the rewards to be gained from engaging in the cash economy outweigh the risks of getting caught. Many factors contribute to a perception that the likelihood of detection is not high and the consequences of detection do not outweigh the rewards. These include: a perception that over the last decade the ATO's focus has shifted from detailed assessing and auditing of tax returns to supporting taxpayers with education and support (eg rulings, Tax Pack, record keeping reviews); the small number of reported prosecutions for tax offences; a perception that the penalties for tax evasion are not severe as there is little likelihood of a gaol sentence or public criticism; and a perception that the ATO is focussing on taxpayers already in the system rather that those operating outside it. On the other hand, the rewards of not declaring income are obvious. For example, more disposable income, competitive advantage, and less paperwork.
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6. Incentives to do the right thing
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A traditional approach to improving compliance has been to focus on improving the likelihood of detection (eg tax audits) and increasing the consequences of detection (eg penalties). That is, the general approach was to primarily focus on the motivation of fear. More recently, the ATO has balanced this approach with the view that generally people will comply if they understand their obligations and it is easy for them to do so (eg Tax Pack, record keeping reviews). However, there appear to be few real or perceived benefits to be gained by declaring all cash income or in reporting tax evasion by others. The Task Force sees merit in the ATO evaluating proposals that may provide greater incentives.
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7. ATO Effectiveness
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The effectiveness of the ATO in dealing with the cash economy depends on the resources the ATO can dedicate to dealing with the cash economy and the skills, capabilities and management of the ATO's people. The Task Force believes there is scope for the ATO to better deploy its resources, develop more effective approaches to dealing with the cash economy and develop the skills of its people. However the ATO's effectiveness also depends on other factors, such as: the level of cash transactions; the degree to which these transactions are anonymous; the level of community and government support for the ATO's activities; the degree to which tax evasion in the cash economy is entrenched; the legislative framework within which the tax laws operate, including the powers at the ATO's disposal; the level of cooperation from tax agents; the standards of taxpayer behaviour set by the judiciary; the level of cooperation with other government agencies; the effectiveness of its relationships with industry and community groups. Change in all these areas is required to maximise the impact the ATO has on the cash economy.
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8. The role of tax practitioners and the judiciary in encouraging compliance
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The ATO does not manage the tax system alone. Over 94% of small business taxpayers and over 70% of individual taxpayers use the services of registered tax agents. Therefore the support of this group is essential in any attempt to improve the level of cash income declared. The Task Force concluded that tax agents are an under utilised resource and their current relationship with the ATO is not fully exploiting this potential. Similarly, in adjudicating tax offences that come before the courts, the judiciary play a key role in reflecting community attitudes and setting standards for taxpayer behaviour.
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9. Context, complexity of government laws and regulations
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Government laws and regulations impact on the cash economy on a number of levels. For example, the more the tax system (eg. high tax rates) is seen to interfere with the primary objectives of a business (eg. profit making) the easier it is to justify non-compliance. Likewise, the more complex and costly compliance with business regulation becomes, the easier it is to justify non-compliance. The tax system is simply one component of a much larger system of government administration. It is becoming increasingly apparent that the cash economy and the interaction between the taxation and other laws need to be tackled through a whole of government approach.
At another level, the interaction of the tax laws with other legislative programs may tend to support or discourage participation in the cash economy. For example, without adequate coordination between tax and social welfare administrations, arrangements designed to evade taxation and de-fraud welfare may go undetected. Equally, action taken to avoid one set of regulatory obligations may affect compliance with other obligations. For example, businesses paying cash wages to avoid superannuation contributions, child support obligations, and pay-roll taxes will have an impact on the income tax obligations of that business and those of its employees.
The Task Force noted that a significant number of businesses have been operating in ignorance of their tax obligations, for whatever reason, for long periods of time. In a sense, they are on a treadmill and cannot get off for fear of the consequences or have become accustomed to the lifestyle that tax evasion affords. A down-side for many of these businesses is that they do not keep adequate records of their business to help them make sound decisions or plan for future growth. The Task Force concluded that fewer business operators would seek to 'cheat the system' if they were aware of the value of keeping good records to the long term health of their business and if they had access to sound business advice, including legitimate tax planning.
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Nature of cash
Outcomes:
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Key Strategies:
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Priority Initiatives:
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A greater proportion of people declare cash income because they are aware that the ATO has effective tools to deal with cash.
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Utilise internal and external data on cash transactions to identify high risk areas.
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Improve systematic use of data available under the Financial Transaction Reports Act 1988 (FTR Act) to identify high risk areas eg to profile cash industries by turnover and region.
Investigate the widening of FTR Act reporting requirements based on research to identify third parties with significant cash handling.
Define and develop a data base of broad based wealth indicators to target strategic compliance improvement programs and audits of taxpayers identified through the system.
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Ensure tax is withheld from cash transactions in high risk areas or that they are reported.
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Maintain integrity of PPS and RPS
Consider extension of withholding or reporting systems to additional high risk areas.
Evaluate the benefits of proposals to specify the nature of records necessary in a cash industry or to require receipts to be issued on request.
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Increase visibility of ATO in dealing with tax evasion in the cash economy.
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Dedicate ATO resources to deal with the cash economy in accordance with national and regional priorities.
Increase the number of prosecutions for evasion and record keeping offences.
Publicise the results of ATO successes.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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Industry culture and practices support tax compliance by participants because:
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Raise industry awareness of compliance issues
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Develop industry profiles through stakeholder consultation and intelligence gathering activities to:
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- industry associations play a role in improving tax compliance in their industry, and
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- develop industry benchmarks of financial characteristics, and
- identify high risk compliance issues.
Market industry profiles with industry groups and tax practitioners and encourage the use of these profiles to achieve compliance improvement.
Undertake industry specific compliance improvement initiatives in major risk areas encompassing research, publicity, consultation and audit activity, including:
- the development of industry benchmarks through stakeholder consultation
- examination of current period business transactions, and
- encouraging the establishment of codes of practice.
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- industry members perceive that the lack of a level playing field caused by tax evasion is not good for the survival or reputation of their industry
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Work with industry associations to develop cooperative approaches to improve tax compliance.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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A greater proportion of taxpayers accept that not declaring cash receipts is unacceptable regardless of personal motives.
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Increase understanding of the factors which motivate people to be involved in the cash economy or are used to justify their involvement.
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Work with industry and community groups in high risks areas to identify factors affecting compliance such as financial survival, peer pressure, costs of compliance.
Use knowledge of motivating factors as leverage points in developing industry/community specific compliance improvement initiatives.
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Raise awareness that tax evasion is not acceptable.
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Develop and implement communication strategies to publicise:
- there is no excuse for failing to declare cash income, and
- the consequences of detection are serious.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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A greater proportion of the community:
- is aware of the costs of the cash economy to the community
- strongly objects to people not declaring their cash income, and
- won't participate in cash transactions which are likely to result in tax evasion.
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Raise community awareness of the costs to the community of tax evasion in the cash economy.
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Develop and implement a communication strategy to raise awareness of the costs of the cash economy, based on an understanding of community attitudes.
Support the communication strategy with compliance improvement initiatives focussed on major risk areas.
Ensure ATO schools program includes an emphasis on the costs of tax evasion.
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Ensure that newly arrived Australians understand their obligations to pay tax.
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Establish links with community groups.
Develop and implement community group specific compliance improvement initiatives encompassing research, publicity, consultation, seminars, information / intelligence gathering and audit activity.
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Liaise with the Department of Immigration and Multicultural Affairs:
- to ensure tax obligations are explained as part of the immigration process
- to ensure TFNs are issued to new arrivals who have work rights
- to require confirmation of immigration status prior to issue of TFNs, and
- examine the tax compliance issues involving people without work rights.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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Taxpayers perceive the risks of not declaring cash receipts as income are high and outweigh the rewards. In particular:
- the perceived likelihood of detection is high, and
- the perceived consequences of detection are serious.
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Identify high risk areas in the cash economy.
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Identify major risk areas through greater use of ATO intelligence, industry compliance research and AUSTRAC data.
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Publicise high risk areas, consult with stakeholders and develop appropriate compliance improvement initiatives.
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Dedicate ATO resources to deal with the cash economy in accordance with national and regional priorities. Undertake industry specific compliance improvement initiatives in major risk areas encompassing research, publicity, consultation and audit activity, including:
- the development of industry benchmarks through stakeholder consultation, and
- examination of current period business transactions.
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Maintain existing cash economy initiatives ensuring they are focussed on major risk areas, including:
- strategic enforcement (serious evasion, illegal activities)
- lodgment compliance
- Prescribed Payments System, and
- Reportable Payments System.
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Develop appropriate sanctions for non-compliance
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Develop and implement communication strategies to publicise:
- the ATO cash economy program
- the effectiveness of ATO activities, and
- the consequences of getting caught and evading tax.
Review the effectiveness of sanctions for non-compliance including:
- current administrative and judicial penalty regime
- proposals for on-the-spot fines for poor record keeping, and
- proposals for the reintroduction of naming tax offenders in the Commissioner's Annual Report.
Increase the number of prosecutions for evasion and record keeping offences.
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Develop a systematic approach to the use of information supplied by the public concerning tax evasion.
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Develop national guidelines to maximise the effective use of information supplied by the public and ensure appropriate resources are available for follow-up action.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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The community perceives that there are effective incentives for good compliance.
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Develop a better understanding of how incentives may affect behaviour of participants in the cash economy.
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Undertake industry, community and taxpayer research to identify incentives that motivate taxpayers and third parties to declare cash income and document or report cash transactions.
Examine the benefits of:
- an amnesty for business taxpayers who have unreported cash receipts, have kept false records, or have failed to lodge returns
- less stringent tax return and record keeping requirements for taxpayers with "good" compliance records
- concessional tax treatment for payments made for certain household services where the provider is registered for tax and social security purposes, and
- streamlined business registration requirements and other business regulations.
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The benefits of good compliance are publicised.
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Develop and implement a communication strategy to promote benefits of good record keeping and professional business advice.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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ATO understands the cash economy and has the internal capability to deal with it effectively.
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The ATO undertakes further research into the cash economy and its leverage points.
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Undertake research to increase understanding of the interaction of structural elements in the cash economy including the tax system, the welfare system and industry behaviour.
Determine the need for further research to understand the cultural attitudes and taxpayer's motivation towards tax evasion.
Conduct joint ATO/ABS research into the extent and nature of undeclared income.
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Increase the ATO's visibility in the cash economy.
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Dedicate ATO resources to deal with the cash economy in accordance with national and regional priorities.
Increase the number of cases referred for prosecution for evasion and record keeping offences.
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Develop effective compliance improvement initiatives that deal with the cash economy, including better data analysis tools.
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Undertake industry specific compliance improvement initiatives encompassing research, publicity, consultation and audit activity, including:
- the development of industry benchmarks through stakeholder consultation, and
- examination of current period business transactions.
Refine industry analysis and case selection tools, including wealth indicator data bases.
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Maintain existing cash economy initiatives ensuring they are focussed on major risk areas, including:
- strategic enforcement (serious evasion, illegal activities)
- lodgment compliance
- Prescribed Payments System, and
Reportable Payments System.
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Publicise effectiveness of ATO activities.
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Develop and implement communication strategies to publicise:
- the ATO cash economy program
- the effectiveness of ATO activities, and
- the consequences of getting caught evading tax.
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Develop skills of ATO people in the following areas:
- financial analysis and indirect income measurement techniques e.g. T Accounts
- communication and negotiation skills, and
- industry knowledge.
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Undertake skills assessment and deliver a training and development program
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Ensure the cash economy initiatives are supported by effective leadership and clear objectives.
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Develop and implement a staff communication strategy to support cash economy initiatives.
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Develop better synergy within ATO and with other government departments eg DSS.
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Establish effective networks across ATO Business Lines and with other agencies on cash economy issues including:
- greater coordination of sales tax and income tax compliance improvement activities, and
- greater coordination of tax and welfare compliance activities.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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Tax practitioners foster greater compliance with the taxation laws.
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The ATO, tax agents and professional bodies work closely together to develop cooperative approaches to improve compliance e.g. through information sharing and help programs.
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Tax agents to participate in industry compliance improvement initiatives and benchmarking exercises.
Develop "tool kits" that add value to tax agents' practices and help improve compliance.
Provide assistance to agents whose practice includes a significant proportion of clients in high risk areas.
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Ensure all tax agents are appropriately skilled and trained.
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Tax agents' registration to require all agents to undertake an appropriate CPD program.
Maintain tax agent seminars and discussion groups.
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ATO to ensure that there is an effective mechanism to deal with tax agents who "turn a blind eye" to the cash economy.
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Identify a methodology for profiling the quality of tax agent prepared returns.
Undertake compliance improvement initiatives for tax agents who consistently lodge poor quality tax returns.
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Effective sanctions for tax evasion are imposed through the judicial system.
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Develop an understanding of the effectiveness of the current prosecution program on influencing taxpayer behaviour.
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Ensure that the ATO's prosecution policy achieves effective sanctions by:
- reviewing the ATO's prosecution policy and procedures, and
- undertaking discussions with the judiciary and the Director of Public Prosecutions.
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Outcomes:
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Key Strategies:
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Priority Initiatives:
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An integrated scheme of business regulation that is easier and less costly to comply with.
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Examine ways of reducing the complexity and compliance burden on business.
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Implement the Government's response to the Small Business Deregulation Task Force Report.
Promote the benefits to small businesses of good record keeping and sound business and tax advice.
Consider the introduction of registration requirements for all new businesses at the point when they commence operations rather than at lodgement of first return.
Examine introducing TFN refinements including:
- one common TFN or Business Registration Number across all Federal and State agencies, and
- linking TFN and immigration status.
Review the tax regime as it applies to small business.
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Develop more cooperative and efficient information sharing between government agencies.
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Work with DSS to achieve greater coordination of tax and welfare compliance activities.
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1 "Stepping into the Shoes of Small Business - A Review of the Small Business Market" (1996), Australian Taxation Office, Canberra.
2 Carter, M (1987) "The Size of the Underground Economy: Problems and Evidence", Paper Prepared for Conference on Taxation and the Underground Economy, Australian Tax Research Foundation, Sydney.
3 Carter, M (1987)
Last Modified: Wednesday, 8 November 2006