James Paterson (Victoria, Liberal Party) Share this | Hansard source

I didn't get an opportunity to make a contribution to the second reading debate on this bill, the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018, but I would have liked to; so I want to take the opportunity while we are considering Senator Polley's amendment now before the committee to share a few reflections and observations about the bill. Firstly, I think it's important that we reflect on why it is important that we address the black economy. Particularly following Senator Anning's contribution, I think that's an important question to consider. Some might argue that it is self-evident why a black economy is a bad thing and it's obvious why this should be tackled, but I don't think any question should go unexamined. So I think it's worth stepping through carefully why it is that the government is taking the action that it is to address the black economy.

The first and most obvious reason that a black economy is of concern to any government is the impact that it has on taxation revenue. I and all my Liberal and National colleagues strongly and passionately believe in lower taxation and less taxation for Australian businesses and citizens, and we've demonstrated that very strongly in recent times with a series of initiatives to reduce the tax burden on small business, on medium-sized business—on all businesses—and of course on individuals.

As other colleagues of mine have observed in this debate, what we don't believe in is a self-help approach to reducing the taxation burden. It is not up to individual businesses or individual citizens to go outside and go around the law to reduce their own personal taxation burden in a way that is not consistent with the law. We don't believe in, don't support, don't endorse and don't encourage avoiding lawful taxation. The black economy and the growth of the black economy is a big problem from the point of view of tax revenue. If Australians are illegally evading taxation, then they are, in effect, helping themselves to a lower personal or company tax rate that is not afforded to their fellow citizens and their fellow businesses. That is obviously unfair, and we don't want to encourage that kind of risk-taking behaviour.

The second reason why governments seek to crackdown on the black economy is on the question of corruption. Globally, Australia ranks very high on transparency indexes and on anticorruption indexes. We are a relatively corruption-free jurisdiction. But no jurisdiction is completely free from corruption, and the existence of the black economy is something which contributes to the potential for corruption in any jurisdiction. The greater and larger the economic incentives that exist in a black economy, the greater the risk that government officials and representatives of police forces or other arms of the state will become implicated and involved in that black economy. So keeping the size of the black economy as small as practical limits the opportunity and limits the risks for corruption.

Finally, and I think in some ways most importantly, tackling the black economy is in part about fairness. It's about ensuring that, as far as the law is concerned, all businesses and all individuals have operated on a level playing field and have an equal opportunity to compete. Let's think about if we were a small business operator in an industry where there are problems of the black economy and where people do illegally evade their taxation obligations as just one example. What are the kinds of incentives that that puts in place for an ethical and honest small-business operator who wants to pay the tax that they're required to pay, who wants to pay their employees the pay that they're entitled to receive and who wants to abide by and comply with the law? They're faced with an unenviable situation. Some of their competitors are not as honest and not upstanding citizens like they are, and they are taking advantage of an opportunity to break the law, which will give them an unfair competitive advantage over their honest competitors.

That gives those honest participants in the market a very bad set of incentives. They're encouraged, too, to participate in the black economy and to evade the law, whether it is on the question of taxation or whether it's on the question of a lawful rate of pay for their employees. It encourages good people to do bad things in order to stay competitive, and we don't want that to be the case. We don't want people to prosper by breaking the law. We don't want good people to suffer by abiding by the law. So it is the duty of the government not just to pass laws, have them on the books and hope that all citizens comply with them but also to ensure that those laws are rigorously, appropriately and evenly enforced and that reported instances of evasion of that law are aggressively prosecuted to ensure that there is that fair and equal playing field.

The evidence is that the black economy in Australia, regrettably, is large and that it has been growing in recent years. In 2012, the Australian Bureau of Statistics estimated that the black economy equated to about 1½ per cent of GDP. That was not including the illicit drug trade, which added an estimated further 0.4 per cent of GDP, taking the total black economy, by the ABS's measure in 2012, to 1.9 per cent. My advice is that this estimate is now out of date, and it is considered, in fact, that the black economy could be as large as three per cent of GDP, equating to roughly $50 billion, today.

That's a very significant growth. That's a very significant size of the black economy in Australia, and it's broken down into a number of different categories that were identified by the Black Economy Taskforce report, which was delivered in October 2017. They identified, on the one hand, illicit activities, like drug trade, to be between $7 billion and $10 billion; identity fraud to be approximately $2.2 billion; motor vehicle fraud to be about $300 million; the underpayment of GST, including GST fraud, to be about $3.8 billion; border crime to be up to $1 billion; and money laundering to be up to $16 billion. On the other hand, it also identified understated business income in the range of $10 to $20 billion; the payment of wages in the form of cash, to avoid taxation obviously, at $8.5 billion; illicit tobacco at $4 billion, and this has been a particular concern and a growing concern; unregulated offshore gambling at an astonishing $2 billion; counterfeit goods, $2 billion; phoenixing, $3 billion; and the underpayment of wages and superannuation at $3 billion. So it's very clear. As the report itself says, the black economy is a significant, pervasive, damaging and growing economic and social phenomenon. I think it demonstrates very clearly why action by this government is necessary and why this government takes the issue of the black economy as seriously as it does.

Turning now to the bill that the committee is considering, the government have obviously responded to the Black Economy Taskforce's interim report and we did so in the 2017-18 budget. We announced a range of measures to address this growing economic and social problem. Firstly, as we've heard, this bill bans the manufacture, distribution, possession, sale and use of sales suppression technology. This is the technology which allows businesses to unlawfully conceal their income. We're extending the taxable payments reporting system to two industries that present particular tax-compliance risks, and that includes the cleaning industry and the courier industry. The purpose of this is to ensure that payments made by businesses to contractors in these industries are reported to the Australian Taxation Office, as they should be. Effectively, this bill delivers on our 2017-18 budget decisions. They are obviously part of a much broader suite of reforms that the government is progressing through our response to the taskforce's final report that I mentioned earlier.

Electronic sales suppression tools are banned under schedule 1 of this bill. This schedule creates new offences for the manufacture, distribution, possession, sale and use of electronics sales suppression tools for the purpose of not disclosing business income. That's important: 'for the purpose of not disclosing business income'. The truth is that there is no legitimate reason for possessing these tools; there's no legitimate purpose for using these tools. All that they do is remove transactions from electronic record-keeping systems. They change transactions to reduce the amount of each sale and they can even modify GST taxable sales to GST non-taxable sales. In all instances, as we've heard already in this debate, no audit trail of the changes made can exist. I think it very clearly demonstrates the nefarious intent of these software tools and the fact that there isn't a legitimate purpose to use them. The government is introducing offences that are subject to strict liability, as we've heard from the minister, and significant penalties to deter the use of such technology across the software supply chain. The technology is used solely for the purpose of tax evasion, and the new offences will help restore some integrity to the tax system.

Recent reports from the OECD have highlighted that this software is in fact spreading globally and its use has been identified in a number of jurisdictions, including Canada, the United States, Germany and Sweden, and many of these jurisdictions have, in response to the proliferation of this technology, implemented measures to address this risk, as Australia is now doing. The ATO has in fact already uncovered instances of this software in operation in Australia.

Schedule 2 of the bill relates to third-party reporting. From 1 July 2018, businesses in the courier and cleaning industries will be required to give an annual report to the ATO regarding the payments they make to businesses for them to provide courier or cleaning services. That is, the reporting obligation will apply from 2018-19 income year and the reports will be required by 28 August 2019. This measure is estimated to result in a gain in taxation receipts of $132 million over the forward estimates period. Business-to-business payments for courier and cleaning services are within the scope of this reporting requirement. Implementation of the taxable payments reporting system in the building and construction industry resulted in improved contractor tax compliance and reporting of income. What the government is effectively doing with this measure is extending this reporting system to other industries which have been identified as high-risk, in the same way that the building and construction industry had been previously identified.

The ATO has prepared guidance material to assist businesses in these industries to comply with their new reporting requirements. The information reported to the ATO will be used for the pre-filling of tax returns or activity statements, which should actually make it easier for contractors to lodge their individual income tax returns, and also used for data-matching purposes to ensure that contractors comply with their tax obligations, such as correctly lodging their income tax returns and BAS obligations.

In the time remaining, I want to turn briefly to the OECD report on electronic sales suppression and the reason why it presents a threat to tax revenues globally. Modern cash registers in the retail sector effectively operate as a comprehensive sales and accounting system. They often use standard business software and they are relied on as effective business accounting tools for managing the whole enterprise. They're not simply there to take payments from customers. Consequently, they are expected to contain the original data, which tax auditors need to inspect, including those auditing value-added sales tax—like our GST—compliance. What's now apparent is the fact that such systems can be manipulated to permit skimming of cash receipts, just as manual systems like a cashbox or operating two tills have in the past. Once equipped with sales suppression software, they facilitate far more elaborate frauds through the ability to reconstitute records that match the skimming activity. What this means is that the sales suppression software allows businesses to effectively automatically cook the books without needing any significant accounting expertise, and it's one of the reasons why this software is of such concern to the government.

Internationally, it's been an issue that other jurisdictions have tackled. Revenu Quebec in Canada, for example, has estimated that they've had tax losses of C$417 million in the 2007-08 year because of the use of such software. In Sweden, they were able to recover €115 million in over 2,000 audits over four years. From 2006 to 2010, Sweden carried out 2,000 audits. The audits covered restaurants, hairdressers, clothing stores and food stores. The audits showed that between 20 to 40 per cent of the turnover was underreported. What that amounted to was effectively €150 million lost in income taxes, VAT and employment taxes. This underreported turnover is feeding the grey or underground economy and, in some areas, also supporting organised crime. Other jurisdictions like South Africa identified a single case of €22 million being expatriated. In Norway, a single case involved €7 million underreported. These are significant global problems the OECD has identified as a growing issue internationally, and it's entirely appropriate that the Australian government is responding in kind to address this issue.