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GST & The Cash Economy

Monday, March 07, 2011
GST & the Cash Economy –
An outline of the principles & principals of the Australian GST Law:
Will they Help or Hinder?

Catherine Smith
Ba.Comm(Acc). C.P.A.

Masters of Taxation Program

ATAX
University of New South Wales

Principles of GST Unit
0223

November 2000




index



 


Abstract


It has been postulated for several decades by political leaders from both major parties, that a fundamental ‘principle’ of the GST is that it provides a solution to tax evasion in the cash economy.  However, overseas experience indicates to the contrary.  This paper will examine what is meant by the term ‘cash economy’, why it exists and why the Australian Taxation Office (ATO) needs to address it.   This paper will then examine the fundamental ‘principals’ of the Australian GST law and their likely affect on the cash economy.  This paper will then suggest possible legislative solutions available to the Government.


Introduction


The Government has repeatedly stated that the New Tax System (ANTS) will improve compliance and impact on the cash economy.  The whole package has been stated to ‘enhance community confidence in the fairness of the system and specific measures will make greater in-roads into the cash economy’.[1] According to the ANTS proposals the new measures will net an excess of $3.5 billion in tax revenue over three years.[2]  This estimate is based on the assumption of 95% compliance with the GST by the Treasury’s estimated $18 billion dollar cash economy.[3]

As with all political issues the Opposition tells a much different story.  They cite a major International Monetary Fund (IMF) study of GST systems around the world which concluded:  ‘Like other taxes, VAT is evaded….increasing rates for VAT make the tax conspicuous and makes successful evasion all the more valuable to the trader and public alike.’[4]

So what is the likely Australian experience?

This paper will examine;
¨      The nature of the cash economy and taxpayer evasion in this area. 
¨      The experience of other countries.
¨      The basic ‘principals’ of the Australian GST system.
¨      Whether these ‘principals’ will deter the cash economy.
¨      Whether there are any legislative solutions available to the Government.

 


The Cash Economy:


What is the Cash Economy?


The cash economy can be defined as “market-based production of goods and services, whether legal or illegal that escapes detection in the official estimates of GDP (gross domestic product).”[5]  The focus of this paper will be on legal activities only as these are considered the largest part of the cash economy.[6]   

According to background research[7] into the cash economy there is still no reliable estimate of the size of the cash economy.  However it has been estimated to be anywhere between 3.5 and 13.4% of GDP, or in dollar terms between $3.9 billion and $15.1billion per annum.[8]  The risk of the cash economy to the administration of the GST has been identified by the ATO GST Compliance Management Team to be in the category of a ‘severe’ risk.[9] 


This paper will analyze the likely impact of GST on the cash economy in the Small and Medium Enterprise (‘S&ME’) businesses[10].  These businesses have more opportunity to deal in cash and it has been suggested that these businesses form the largest part of the cash economy[11].

Why is it important to address the Cash Economy?


Aside from the obvious revenue drain, it is important for the ATO to deal with, and be seen to be dealing with, the cash economy.  According to the Draft White Paper “The essential criteria for assessing a tax system are equity, efficiency and simplicity.  An equitable tax system is critical, not only to the attainment of economic and social objectives, but also to the maintenance of basic respect for the tax system from which a high degree of voluntary compliance derives”.[12]   As the Australian Taxation System is based on the principle of self-assessment, voluntary compliance is essential.  As outlined above, voluntary compliance relies on a basic respect for the tax system.  To maintain community confidence and thereby engender that basic respect for the tax system, the ATO needs to achieve its purpose of collecting the revenue ‘properly payable’.  To fail to address the cash economy would not be equitable as it would not collect the revenue properly payable, would result in a loss of respect for the tax system and an overall decrease in voluntary compliance. 

According to Tax Commissioner, Michael Carmody the cash economy represents a major cost to the Australian community in terms of:
  • Unfair price competition on honest business;
  • Increased welfare costs as it impacts on means tested social benefits.[13]
  • Avoidance of superannuation, workers compensation and child support obligations; and
  • Lost tax revenue that is used to fund community services and government programs.

The ATO has recognized that of greater concern is the growing perception that tax evasion is an escalating problem which, if not addressed, may impact on the level of confidence in the tax system.[14] 

Particularly, during the introduction of ANTS, and in particular the politically sensitive and emotive issue of the GST, community confidence and support is imperative.

Taxpayer Non-compliance – why is eluding the taxman so attractive?


US Audit evidence suggests ‘that only about one third of individual taxpayers set out to cheat in a significant way’ (emphasis added).[15]  Whilst this quote has been used by the ATO to support the fact that most taxpayers voluntarily comply, it depends on whether you look at the cup being half empty or half full.  One third of taxpayers cheating in a significant way appears quite high.  What about the ‘non-significant’ cheating, does this make up another one third?  But considering that the majority of taxpayers are salary and wage earners with little opportunity to cheat, the cheating statistics could be about 100% of those that can.

Whilst the study of tax evasion/compliance is a relatively new area and the conclusions are varied, a common theme is the importance of feelings of equity and norm commitment.[16]

Findings indicate:
·         Many taxpayers think compliance by others is lower than their own. [17]
·         The more evaders a taxpayer is aware of, the poorer his compliance is likely to be. [18]
·         Citizens no longer sense an expectation that they should comply with the system, but instead believe normal expectancy is a modicum of evasion.
·         Also referred to as the ‘bystander effect’, taxpayers may think their evasion is minute and would not make much difference. [19]
·         Taxpayers reduce their guilt feelings accompanying deviant behavior by employing the ‘neutralization theory’ that ‘everyone does it’.[20] 
  • Even if the direct revenue losses are small, a general awareness that many persons don’t comply has a demoralizing effect on taxpayers and may prompt them to evade their liabilities.[21]

Taxpayer Non-Compliance in the Cash economy:


Directly relevant to the cash economy is the finding that “the primary motivation for non-compliance is often to expand business through offering customers a product at a price that does not reflect the proper levels of taxation.  Non-compliance is the means of gaining a market edge”.[22] 

Further, if non-compliance does not attract effective responses, two consequences arise:
i)                    the business of the non-complier expands; and
ii)                  competitors of the non-complier adopt similar practices in order to maintain their business and reduce the non-complier’s market edge.[23]

Whilst overlooking the real importance and impact of the cash economy may be simple for the ATO in the short term, the long-term effects could be disastrous.  “This behavior would condone a lot of tax evasion and would generate tax revenue in a way that would be far from optimal.  It would also conflict with other objectives of taxation such as neutrality and equity”. [24] 

According to Tax Commissioner, Michael Carmody, [25] what makes the cash economy such a difficult issue to tackle is that the community has a split personality on the issue.  On one hand they realize they are victims of the cash economy and think that everyone should pay their fair share of tax.  On the other hand, the community willingly participates in it by accepting a lower ‘cash price’ for a product or service. 

Perhaps, compliant taxpayers are rebelling against the fact they shoulder the majority of the tax burden by making these cash payments.  The negative externality can be summarized as ‘Well, if you can’t beat em, join em and at least get some benefit from the cash economy’.

The effects of previously compliant taxpayers converting to avoiders/evaders can have disastrous long-term consequences due to the ‘catastrophe effect’ and the ‘inertia theory’.  The catastrophe theory suggests an initial decrease in the audit rate can result in a catastrophic increase in evasion.  The initial increase in evasion decreases the effectiveness/output of future audits, thereby further increasing evasion, which further decreases the effectiveness/output of future audits, etc.[26]

The inertia theory asserts that after an individual routinely engages in a given practice, he has little incentive to change.  This applies to both compliant and non-compliant behavior.  The danger for the ATO is that if it does not maintain public confidence previous compliant taxpayers may convert to non-compliers and then their behavior may be very hard to change. [27]

To maintain public confidence and respect for the tax system, the ATO has to be seen to be focusing on the cash economy. The general community must see that a deliberate practice of non-compliance does not create a significant and unfair commercial advantage but is met by an effective, forceful, timely and importantly a public, response from the ATO.[28]  A strong enforcement program, by deterring evasion, ensures that the tax burden is spread more equally and reassures honest taxpayers that their honesty is not misplaced. [29]

 

Will GST help or hinder the cash economy?


Overseas Experience:


Overseas experience clearly indicates that the introduction of a GST contributes to the growth of the cash economy.[30]  In fact, in Canada studies revealed “a substantial increase in the underground economy since the introduction of the GST.  The underreporting of income means not only GST revenue is lost, but also associated income tax”.[31]  It has even been suggested the Canadian cash economy has more than doubled since the introduction of the GST.[32] 

According to Ray Regan, the President of the National Taxation and Accountants Association (NTAA), reports have confirmed the growth of the cash economy upon introduction of the GST in England, Italy and Israel.[33]  Research in the United Kingdom also found that more than one in three British consumers regularly negotiate cash deals to avoid GST.  Further, 70% did not consider it ‘morally wrong’ to pay a trader in cash in order to avoid the GST.[34] 

European Commission Economists also report that the Black Economy is growing.[35]  Estimates of VAT evasion range from 2-4% in the UK to 40% in Italy.[36]

The ‘evidence overwhelmingly suggests that GST increases the degree of cheating’.[37]  Particularly, in the area of home repair and renovation, where the suppliers labour is a large proportion of the cost.  The existence of a GST gives the customers an additional incentive to pay cash and be a party to the tax evasion.[38]

It has been suggested that Australia’s experience should differ from other countries due to the unique principals of the Australian GST Law.[39]  The validity of this claim, and other claims as to the efficiency of GST[40], in combating evasion in the cash economy, will now be examined.

‘Principals’ and ‘Principles’ of Australian GST Law and their effect on the Cash Economy:


When considering whether the postulated unique principals of the Australian GST Law will deter the cash economy, it is necessary to first examine whether there are any unique principals that apply to the cash economy.  An examination of the principals of the Australian GST Law quickly reveals that there are no such unique principals that apply directly to the cash economy.  Businesses that operate within the cash economy are treated akin to all other businesses.  There are no specific provisions that deal with cash payments and it is not illegal to pay or accept cash for goods and services.   Thus it is necessary to examine the general principals of the GST Law and decide whether these principals will have an effect on the cash economy.

Unless  otherwise stated all legislative references hereafter are to A New Tax System (Goods & Services Tax) Act 1999 (‘GST Act’).


Registration Principals:


A taxpayer is required by Division 23-5 to register if they are;
 *carrying on an *enterprise with an *annual turnover that meets the *registration threshold (* terms are defined terms in the Act). 

An enterprise is defined by Section 9-20 to be an activity, or series of activities, done:
a)      in the form of a business; or
b)      in the form of an adventure or concern in the nature of trade; or
c)      …

The registration threshold is defined in Section 23-15 to be (except for non-profit bodies):
a)      $50,000; or
b)      such higher amount as the regulations specify.

Section 23-10 allows a taxpayer to register as long as they are carrying on an enterprise.

The effect of these provisions on all businesses, including those who deal in cash, is that businesses with a turnover (projected or actual) above $50,000 are required to register for GST.  Whereas businesses with a turnover (projected or actual) below $50,000 may choose to register for GST.   

According to section 7-1 GST is payable on *taxable supplies.   ‘Taxable supplies’ are defined by Section 9-5 to be if:
a)      you make the supply for *consideration; and
b)      the supply is made in the course or furtherance of an *enterprise that you *carry on; and
c)      the supply is connected with Australia; and
d)     you are *registered or *required to be registered.
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Section 9-10 further defines ‘supply’ to be ‘any form of supply whatsoever’.

Section 9-15 defines consideration to include ‘ any payment, or any act or forbearance, in connection with a supply of anything;…


The effect of these provisions on all businesses, including those who deal in cash, are that Registered businesses are required to charge 10% (as per 9-70) GST on all supplies of goods and services, that are for consideration, in furtherance of their enterprise (as defined above) and connected with Australia).  It should be noted that a crucial principal of the Australian GST system is that under Section 9-70, the liability to pay the GST to the ATO rests on the supplier, not the customer.  This means, that if a supplier fails to add 10% GST to the value of the goods, he will still be liable for GST on 1/11th of the price.

The definition of consideration is very wide and includes the payment of cash.  As the definition of consideration includes ‘any act’ it is also wide enough to apply to Barter transactions, which are a common feature of the cash economy.

Businesses that do not Register (and are not required to be registered) will not have to charge GST on their goods and services.  It is worth noting that businesses that are not registered are therefore not required to charge GST are able to undercut their competitors by 10%.  Alternatively, they can match their competitors prices but pocket the extra 10%.  This ability is countered to some extent by the input tax credit mechanism.

Input Tax Credit Principals:


Another fundamental principle of the Australian GST Law is that it is designed so as to prevent cascading of tax.  This basically means that the tax is only collected on the final price of the goods or services.  However, tax is collected at each stage of the process and cascading is prevented through the ‘input tax credit’ mechanism.[41]

Under Section 7-5, the amounts of GST and amounts of *input tax credits are set off against each other to arrive at the *net amount. 

As per Section 7-1 (2) ‘entitlements to input tax credits arise on *creditable acquisitions and *creditable importations[42].          


Under Section 11-5, you make a creditable acquisition if:
¨      You acquire a thing for a *creditable purpose,
¨      The supply of the thing to you is a *taxable supply,
¨      You provide, or are liable to provide, *consideration for the supply, and
¨      You are *registered or *required to be registered.

Under Section 11-15 you acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your enterprise.  However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making of supplies that would be *input taxed or of a private or domestic nature.

Section 29-10(3) specifies that: If you do not hold a *tax invoice… a) the input tax credit …is not attributable to that tax period.

The affect of these provisions on all businesses, including those who operate in cash, are that a registered business can claim input tax credits, which offset its GST amounts, to the extent that it acquires things in the carrying on of its enterprise.  However, the acquisition has to be a taxable supply, that is; the vendor must be registered or required to be registered and must have charged GST on the sale.

A registered business cannot claim an ‘input tax credit’ where the item was purchased for input taxed[43] or private purposes. The words in Section 11-15 ‘to the extent that’, indicate that if a business buys an item partly for creditable and partly not for creditable purposes, it will need to apportion the ‘input tax credits’.  Unlike income tax deductions, ‘input tax credits’ can be claimed for capital purchases.

It goes without saying, that unregistered businesses cannot claim any input tax credits.


Affect of the Registration and Input tax credit principals on the Cash Economy:


The combined effect of the Registration requirements and the Input tax credit mechanism on the cash economy, according to Michael D’ascenzo (ATO) is that many of the businesses operating in the cash economy are below the $50,000 GST registration threshold and are thus not required to register.  However, he believes that there is some incentive for them to register to gain input tax credits.[44]  This was evidenced by the New Zealand experience[45] where 180,000 registrations were expected but 280,000 actually registered.[46] 

The ANTS proposals also state that those that don’t register will at least pay some tax due to the inability to claim their input credits.[47] 

However, the incentive to register, and the tax forgone, if a business does not register is not great where the major business input is labor or profit margins are high.  This has been verified by European and New Zealand experience where it has been found evasion is common in trades such as decorating, carpentry, plumbing and gardening, where taxable inputs are small and value added is high,[48] and where services are provided to householders.[49]  The reason for this is twofold. Firstly, the input tax forgone is only on a minor amount of tools and materials.  Secondly, as householders have no requirement for input tax credits the business is not often requested to provide a tax invoice (as to which, see later).  This as mentioned above, means that a business can undercut its registered competitors or raise its price 10% to match its competitors and pocket the extra.  Thus, any input tax forgone is often more than compensated for by the increased price charged.  It must also noted that many of their inputs may have fallen in price due to the removal of the sales tax previously imbedded in prices.


It is also claimed that taxpayers have an incentive to return their sales in order to claim their input tax credits.[50]  This claim is patently incredulous.  It is equivalent to saying I’ll give you $100 if you give me $50 back.  In addition, most businesses are not so foolhardy as to try to evade all taxes.  Most will choose some fraction of the sales not to report and then claim all of the materials and input tax credits against the reported income.[51]  The Government has accepted that the introduction of the GST will not change this situation.[52]

ABN Principals:


The ABN provisions are not part of the GST Law but are contained in……..  Businesses are not required to obtain an ABN, however under Section…, payers are required to withhold tax at the highest marginal rate from all payments made to a recipient who does not supply an ABN.

Further Section 29-70 specifies that a *tax invoice for a taxable supply must contain an ABN of the entity that issues it.  

***(Validity of Abn requirements)

The effect of these provisions on all businesses, including those who operate in the cash economy, is that a business is only entitled to an input tax credit on acquisitions for which it holds a *tax invoice specifying an ABN.

Affect of the ABN Principals on the Cash Economy:


Michael D’Ascenzo (ATO) points out that GST registered businesses will prefer to deal with ABN registered businesses so they can obtain the tax invoices required to claim input tax credits and do not have to withhold tax from the payment.[53]  According to the Government “the strength of the ABN is that if you want to stay in the black economy you have to stay in it in its entirety”.[54]  However, other countries have found that the quantitative significance of this is not be large.[55]  Any aboveground enterprise would have already demanded invoices from it suppliers for the purpose of income tax substantiation.  Those suppliers determined to stay under-ground would have already devised methods of falsifying invoices.  The only additional requirement will be a false ABN.[56]

A business may simply quote a business name and ABN that it has obtained from the electronic register[57].  Alternatively, it may declare a false ABN and rely on the fact that most payers will not verify the ABN against the electronic register.

Many examples of fictitious invoices are found by ATO auditors.  Examples can range from:
  • the small operator who, when requested to provide an invoice, writes one in an invoice book obtained from the local supermarket, to
  • large scale fraud schemes, such as those recently found in Sydney by the NSW Building & Construction Audit Team (see appendix 1 for full discussion).  In these cases, the operator falsified his own invoices to justify large cash with- drawls that he was using to pay cash wages.

It is believed that the ABN requirements will not rectify the above examples. 

Crack down on Contractors:


It has also been claimed that the ABN laws will prevent people moving into the cash economy by opting out of employment relationships and avoiding withholding taxes.[58]  No further detail is given as to how this might work and it is doubtful that this claim is correct.  To opt out of withholding all a taxpayer need do is apply for an ABN and then quote this to the payer (or as mentioned above, quote a false ABN).  At least under the previous system payments in some high-risk industries[59] were still subject to withholding and/or reporting.   In fact, it has been recognized by the ATO that there will be increased incentive for individuals to become contractors (and obtain an ABN) as no form of withholding will apply.[60]  It is also recognized by the ATO that this can cause serious problems for revenue collections if taxpayers do not put aside money to meet their tax bills.

Self Policing ‘Principle’:


A much heralded ‘principle’ of the GST Law is that it is self-policing. Basically, one firm’s outputs are another firm’s inputs and therefore invoices can be crosschecked between firms.  As explained above, to claim an input tax credit a business must hold a tax invoice obtained from the vendor business.  Thus, a tax auditor can theoretically, cross check the purchase invoices from one firm against the sales invoices from another firm.  This was a common technique used by the recent ATO Audit Project on Sales Tax Computer Fraud.

However, as found in the UK and Asia, this does not work due to the resources required for such detailed checking.[61]  As succinctly put by Neil Brooks ‘most countries do not have the technical capacity of matching information returns collected for one tax base, let alone matching documents from two’.[62] In fact all commentators have one common conclusion – the theoretical self-checking mechanism does not work.[63]

Even where a taxing authority dedicates resources to such intensive cross-checking, such as in the above mentioned project, the mechanism breaks down when invoices are falsified (as discussed above).  Many times an auditor is unable to trace vendor firm, which has given false contact details on the invoice or may not even exist.

 

Tax periods and GST Return Principals:


Under Section 27-5 a taxpayer’s tax periods are each period of 3 months ending on 31 March, 30 June, 30 September or 31 December in any year, except to the extent that:
a)      an election is in force under section 27-10; or
b)      the Commissioner determines otherwise under this division. 

Under Section 27-10 a taxpayer can elect to have monthly tax periods.

Under Section 27-15 the Commissioner must determine the tax periods applicable to a taxpayer to be monthly if;
a)      he is satisfied that their annual turnover meets the tax period turnover threshold  (set by 27-15(3) to be $20 million); or
b)      he is satisfied that they will be carrying on an enterprise for less than three months; or
c)      he is satisfied that they have a history of failing to comply with the tax obligations….

Under Section-5 & 10, a taxpayer who is registered or required to be registered must give the Commissioner a GST return showing the net amount for each tax period on or before the 21st day of the month following the end of the tax period.

The effect of the provisions on all business is self explanatory.  The effect of these provisions on cash economy businesses is that, even if they are not registered, they are required to lodge GST returns as they are *required to register (see above explanation of this term).  Most cash economy businesses will be required to lodge quarterly, however, if the Commissioner is able to satisfy himself as to their delinquency, he may determine that they are required to lodge monthly.

It has been claimed that these provisions equate to an inherent principle of the GST Law - that it enables more accurate data matching.  The ATO claims that “the GST, the alignment of business payments, the establishment of the ABN and the new withholding arrangements will, together, result in more timely receipt of better information and a more comprehensive matching capability for the Tax Office to act upon.[64].


However, enhanced detection ability is unlikely for the following reasons:
  • If the taxpayer is only skimming a small percentage and doing so consistently (see Appendix one for fuller discussion). Comparative ratios across businesses are notoriously inaccurate and, to date, no tax assessment based on such has ever been successful.  They can be used as an indicator for case selection but the success of this will depend on ATO resources available for follow up (as to which, see later).
  • If the taxpayer is operating completely outside the system as there will not be any data to match.
  • Due to lack of ATO resources for such data matching (see Appendix one for fuller discussion).   

Multi-staged tax ‘principle’:


As outlined above, it is a principle of the Australian GST system that GST is not to be cascading.  However, tax is charged on each transaction and cascading is prevented through the input tax credit mechanism.  This is to be compared with the previous Sales Tax regime, where tax was only charged on the last leg of the transaction (usually when a good was sold from the manufacturer to the end user or retailer).

Further, it is claimed that the principle of replacing a tax primarily collected at the manufacturing level with one collected at all levels should decrease the evasion.  This is supposedly because even if one level evades at least some tax is collected at other levels.  However, to the contrary, it has been found that due to the multi-stage aspect of the tax ‘there are many more points in the economy at which scope for fraud exists’.  This is particularly so at the retail level.  Many buyers have no need for invoices so sales may go unrecorded.  If the retailer claims all of the GST paid as an input tax credit against other sales, then all the GST is refunded to the retailer and no GST is collected on the sale.[65]  In fact, if all levels of the chain are evading, the tax lost is simply compounded.


Tax on Cash Income when spent ‘principle’:


A final argument for the GST hindering the cash economy is the principle that those that benefit from the cash economy will now at least be taxed when they spend their cash.[66]  This argument appears reasonable on the surface. However, further analysis reveals its fundamental flaws.  Firstly, this has always been the case as the majority of goods have had hidden sales tax imposed.[67]  Secondly, this argument does not address the social inequity of Mr Salary&Wage Earner who also pays the same amount of tax on goods that he purchases with his after tax income. Thirdly, even if correct, the argument is said to be seriously exaggerated in its impact.[68]


Administrative Factors regarding Australia’s GST Law:


ATO Costs:


The ATO's costs of monitoring GST compliance are also compounded.  According to Patrick Gallagher, Deputy Director ATAX, University of New South Wales, under Sales Tax, 421 taxpayers pay 58% of the Sales Tax.[69]  In contrast it is estimated that over one million taxpayers will be involved in the GST system and most of these will be small businesses.[70]


What changes could the Government make to the GST LAW?


Industry reporting:


Common sense, and statistical studies confirm, that non-compliance is lowest where there is withholding and somewhat greater where there is information reporting.[71]  Further, IRS studies have found that when auditable records are produced (such as a tax invoice with an ABN) but no information is reported to the IRS, non-compliance remains substantial.[72] 

Therefore a possible compliance measure could be to introduce industry reporting.  The PAYG legislation provides for the application of reporting requirements in high-risk industries.  According to D’ascenzo “this will be especially relevant in industries where businesses have significant cash dealings”.[73]  If enabled, this could require payers to provide the ATO with the details of all payments, including the ABN of the supplier.  This would be similar to the previous requirements under the Prescribed Payments (PPS) and Reportable Payments (RPS) Systems. 

The Cash Economy Task Force support this recommendation but stress that it any proposals to extend withholding or reporting systems need to demonstrate that the burden imposed on third parties is justified in terms of the benefits of increased. [74]   It is suggested that the extension of the new PAYG system to industries previously covered by PPS and RPS would not impose considerable compliance costs on these industries.  These industries are accustomed to such reporting and recognize the need for such.  In fact, anecdotal evidence suggests that Industry Bodies, tax agents and taxpayer’s are all concerned about the ‘lack of withholding’ under the new arrangements as they realize that this may make it more difficult for some taxpayers to meet their tax liabilities.


Income Tax Return Recording & Reporting:


A proposal considered by the IRS was a ‘toll charge approach’.  The approach was to require taxpayers to divide their business expenses into cash & cheque payments and declare this information on their tax return.  Further, the taxpayer would also be required to fill in a schedule detailing all the names and addresses (and ABN’s) of those payees which had been paid cash.  If they fail to fill in these details they are not entitled to the tax deduction.[75]

This approach imposes no burden on taxpayers who do not pay cash and not an onerous burden on those that do.  Most importantly, it would have a substantial effect on payers and recipients of cash.  Finally, those that choose to forgo the deduction rather than report the information effectively pay tax for the recipient.[76]

A similar reporting requirement could also be introduced to require businesses to report non-ABN payments.  This information could be cross-checked against remittances to ensure payers are deducting and remitting.

Making payer liable where reasonable suspicion:


In Belgium, the client is made liable for the VAT if workers they employ are not registered.[77]  This is similar to the Australian requirement under Section  12-190 of the A New Tax System (Pay as You Go) Act 1999 that the payer is required to withhold where the payee does not quote an ABN.  The payer is liable to a penalty under section 16-25 equal to the amount they failed to withhold.

The government could take this one step further and enact similar provisions to those enacted to deal with Sales Tax Fraud in the delinquent Computer Industry.  Section 91X of the Sales Tax Assessment Act required a payer to withhold the sales tax component of the purchase price when they purchased Part 7A goods (basically computer goods) from an unaccredited person.  Further section 91X(3) required the payer to take reasonable steps to determine whether the person was accredited.  If a payer failed to take these reasonable steps then they could be made liable for the Sales Tax that should have been deducted.

Such reasonable steps could include verifying the veracity of the business ABN by checking the electronic register.[78]

It may be considered that such provisions would be too onerous for all taxpayers to comply with.  If so, the Government could consider enacting such provisions only in particularly delinquent industries.

Require Pre-printed & Numbered Invoices:


The Belgium government requires hotels, restaurants and cafes to use pre-numbered invoices.  This however may not stop the business failing to fill out an invoice, so in Italy, consumers at restaurants and hotels can be stopped by the police on leaving the premises and asked to show their receipt.  Even this is not foolproof as it has been found that some restauranteers employ “escorts” to accompany patrons to their car and then pocket the receipts.[79] 

It is unlikely that such heavy-handed techniques would be acceptable to the Australian community and as evidenced they are not foolproof anyway.

Provide Incentives for Customers to request receipts:

           
Some countries have considered running lotteries by using customer’s cash transaction receipts or allowing a tax rebate for home expenditure to encourage the obtaining and retaining of receipts.  The Cash Economy Task Force considered that these proposals are not warranted as the ATO does not have a cost-effective way of using such data in a way that would justify the cost to government of providing the incentives.[80]    

Provide Incentives for Customers to Report Information:


A proposal not considered by the Task Force was the offering of rewards to payers of cash who inform the ATO.  This could be a powerful deterrent to some forms of tax evasion.  As stated by Feffer, G “a moonlighting plumber or carpenter would think twice about discounting for cash if he believed the payer might obtain a reward for turning him in”.[81]  Such rewards would only be paid for accurate and verifiable information that warranted investigation.

The ATO already has designed and implemented the infrastructure and technology to handle such information.  It is submitted that the ATO should investigate the viability of this option further.

Householder Reporting


Further to providing incentives for householders to obtain receipts, the Government could take this one step further and make it a mandatory requirement.  Further, in delinquent industries the Government could consider requiring householders to report to the ATO.

As outlined above, the majority of the cash economy evasion occurs in the provision of services to householders.  This was countered to some extent by the previous PPS system that required householders and owner builders to report payments to the ATO.  A similar system could be implemented for the GST

Making Better use of Austrac information:


Currently cash transactions over $10,000 that involve financial institutions are required to be reported to the ATO.  Also, any suspicious transactions under this threshold are also reported. 

Consideration should be given to improving the Austrac facility by:
¨      Lowering the reporting threshold.
¨      Widening the definition of those required to report.[82]
¨      Cross-referencing data with ABN details.
In addition, the people required to report such transaction could be widened.[83]

The Cash Economy Task Force support these options but admit that its feasibility would have to be determined in conjunction with the availability of ATO resources to follow up such information (as to which see later).[84]

Conclusion


This paper has shown that the political fanfare about GST attacking the cash economy is just that – fanfare.  Overseas experience clearly indicates significant growth in their cash economy’s upon the introduction of a GST.  There is nothing unique about the Australian GST Law that is far superior to other countries in terms of its influence on the cash economy.  The ABN, whilst a minor deterrent, is easily falsified.  As explained, there are no particular GST laws that apply to the specifically to the cash economy.   

It has been explained that, despite politician promises to the contrary, the GST will probably increase the cash economy.  This has been reported widely in the Australian media[85].

As also explained in Appendix one, there are administrative measures that the ATO could implement to assist in addressing the cash economy.  These include; integrating business lines, ensuring they have educated and experienced staff and dedicating sufficient resources to the prevention of fraud.  However, as concluded by Appendix one, these measures are not sufficient to fully combat the cash economy.
and the community perceives that the ATO’s does not have the ability to address the problem.  

As community confidence is imperative to the Australian taxation self assessment system and the introduction of the New Tax System and the GST, it is recommended that the Government consider implementing legislative strategies to convince the Australian taxpaying community that they are taking the cash economy problem seriously.  Some viable strategies include legislative amendments to:
¨      Invoke industry reporting requirements,
¨      Introduce tax return reporting requirements,
¨      Provide cash incentives for dob-ins,
¨      Make better use of Austrac data.

It is submitted that until the Government is willing to show that it is taking the cash economy seriously by introducing specific legislation to address it, it will continue to flourish.  After all, in all honesty, who isn’t going to pay cash to secure a 10% better deal?





Appendix 1:

Major compliance risks for Australia:


The major risks for these ‘SME’ businesses have already been identified by the ATO.[86]  Some of these risks apply directly to the cash economy and others are factors that may encourage the business to go ‘underground’.  Some of these factors include:

  • Confusion about obligations.
  • Inadequate record keeping.
  • Poor cash flow planning resulting in inability to remit GST, PAYG(W) and pay PAYG (I). 
  • Non-lodgment of BAS (Business Activity Statement) may lead to escalating debt.
  • Tax Agents many not want to represent these businesses.

The above may result in the following risks for the ATO in relation to cash economy participants:

  • Non-registration for ABN and/or GST
  • Non-remittance of GST & PAYG(W).
  • Non-withholding where there is no ABN.
  • Obtaining an ABN to avoid withholding but not lodging BAS and paying PAYG & GST.
  • Non-disclosed sales/income.
  • Over-claimed expenses/input tax credits.

What does the ATO have planned  & is it enough?


Underlying Philosophies:


The ATO bases its compliance programs on two corporate philosophies being; the Taxpayer’s Charter and the ATO Compliance Model. 

Briefly, the Taxpayer’s Charter recognizes that the Australian Taxation System is based on taxpayers voluntarily complying with the law.  This requires the ATO to take responsibility to assist taxpayers understand their obligations and provide a high level of service. 


The Compliance Model has been designed to complement to Taxpayer’s Charter.  The model recognizes that taxpayer compliance is influenced by many motivating factors including Business, Industry, Sociological, Economic and Psychological (BISEP) factors.  The model proposes a hierarchical approach to compliance that involves:
  • Understanding taxpayer behavior
  • Building community partnerships
  • Increased flexibility in the ATO operations to encourage and support compliance
  • More and escalating regulatory options to enforce compliance.

The Compliance Model indicates that whilst the ATO has an obligation to understand taxpayer behavior, it also has an obligation to enforce compliance. 

GST Audit Work:


GST Audit work is planned to commence in April 2001 (unless fraud is indicated).[87]

It is planned that compliance work will encompass the following strategies:[88]
  • Automated Contact
  • Telephone Contact
  • Advisory Visits
  • Enterprise Registration Checks
  • Sensitive Issue Enquiry’s
  • GST Specific Check
  • GST Review
  • Comprehensive Audit
  • Fraud Investigation

The above tactics are a clear example of the Taxpayer’s Charter and the Compliance Model at work.  Initial contact will be ‘gentle’, i.e.; by letter or phone.  Some taxpayers may voluntarily comply after this initial contact.  For others, an Advisory Visit or Specific Check may have to be undertaken.  However, if these do not get the taxpayer back on track, contact is escalated to a Review, Audit or Investigation.

Will these Audit Strategies deter the Cash Economy?


It would be expected that those that are not complying due to lack of understanding, lack of bookwork ability, or perhaps a degree of ‘liaise fare’ would respond well to the initial contacts.  However, it must be recognized that there is a degree of deliberate evasion that these contacts will not address.  This can be broken up into two main elements:
i)                    The deliberate skimming of a small percentage of the top by otherwise compliant taxpayers, and
ii)                  Deliberate Evasion by non-compliant taxpayers.

The ATO’s Cash Economy Project, in particular the Building & Construction Project, has been focusing on these two areas for some time now with mixed success.

Skimming off the top:


The first issue has been addressed primarily through increased presence within the industry and increased coverage with ‘Real time reviews’.   This issue is particularly hard for the ATO to address.  Such cash transactions are rarely detected in the audit process and they are inherently difficult to quantify.[89]  Industry Ratios and Costs of Living can be analyzed to determine whether the taxpayer is returning adequate income.  But at the end of the day, if the taxpayer is only taking a small amount of the top and spending it on untraceable items, cash income is impossible to prove.  As an Auditor, I have been faced with the situation of a taxpayer saying “Yes, of course I take cash.  Everyone does.  I spend it on grog and food.  I have no idea how much, could be a couple of hundred to a couple of thousand.  I don’t keep a record of it”.  What could I do, but thank him for his honesty, tell him not to do it again and close the file.

Calculated across the economy, this ‘small’ evasion represents a huge loss to the revenue.[90]  However, the ATO needs to consider whether it is cost effective to commit the intensive resources required to address this type of evasion.  A similar situation exists in London where the authorities deliberately turn a blind eye to restaurateurs operating on a cash basis.[91]

However, as explained earlier, the ATO needs to maintain a presence and give the impression that it is still focusing on this area to deter this type of evasion from escalating.  However if the ATO and the Government, are serious about addressing this, they should consider introducing additional measures which will be discussed later.

Deliberate Evasion:


In relation to the cash economy, deliberate evasion can be evidenced in various ways, from the tradesman who remains completely out of the system, to structured and systematic fraud. 

In fact, it has been suggested that there are taxpayers with experience in VAT frauds who enter countries upon introduction of the GST with the sole intention of committing GST fraud.[92]  The first major GST frauds in New Zealand were detected within seven months of commencement and involved sums in excess of $4million.  These frauds are committed in a very similar way to the evasion found in the ‘Bodgie’ schemes in Australia recently. 

The ‘Bodgie’ schemes are predominantly being undertaken by Irishmen who enter the country with the sole intention of committing fraud.  These schemes have already netted the entrepreneurs with ‘tens of millions of dollars’[93].  The schemes involve pocketing the PAYE & PPS taxes that should otherwise be remitted to the ATO. 

Phoenix’s are a similar scheme which involve escalating the taxes due payable to the ATO and liquidating at the first sign of ATO suspicion.  The ATO recently detected phoenix companies defrauding the revenue by more than $100 million.[94]

Other schemes are even more blatant and simply involve paying workers and suppliers cash in hand and failing to deduct and or remit the taxes.  Schemes of this nature are reported to be evading taxes of up to $50 million in the NSW Construction Industry alone.[95]

All of these schemes may become even more prevalent under GST as the evasion simply becomes 10% more profitable.

What is the ATO doing to deter Deliberate Evasion?


The ATO has been undertaking substantial work in the area of ‘Serious Non Compliance Re-engineering’ and has reviewed overseas best practice as part of the LB&I ‘Optimizing the Basics’ Project.[96]  The Project is attempting to improve the ATO’s capacity to address serious evasion.  .[97]  It has been recognized that the ATO’s traditional response can be very time consuming, resource intensive and with no certainty of a successful outcome.  The ATO also only has very limited resources devoted to dealing with serious evasion.[98]  The Project recognizes that the most crucial factor in addressing such evasion is adequate resources. This will be elaborated on later.

What else could the ATO do?


Integrate business lines:


As outlined above, it is claimed that increased and more timely reporting of information to the ATO will enhance the ATO’s ability to match this data and detect and action anomalies.  As also pointed out above this depends on the ATO’s ability and resources.  It is submitted that the ATO should, as soon as practically possible, integrate the GST and the Small Business Lines.  Other countries have recognized the importance of linking the administration of VAT to other taxes.[99]  The importance of VAT enforcement having joint controls and audits with income tax was pointed out to the Government by the GST Senate Committee.[100]

Whilst, the business lines remain separate, it remains very hard to expect enforcement officers to understand, audit and cross match both GST and Income Tax.  It is further submitted, that it is not until enforcement officers fully understand both taxes, that they will be able to fully detect anomalies.

Educated & Experienced Staff:


Experience in overseas countries has shown that Fraud Investigation is a very important factor in creating a climate of self-compliance.[101]   

Many overseas countries (such as the European Union, Indonesia and Asia) realized that the lack of experienced officers was a significant problem in dealing with VAT fraud.  To combat this problem they felt it was essential to establish expertise in all areas of auditing, from accountants through to solicitors[102].  Each inspector is fully trained in accounting, taxation, criminal law and information gathering.[103]

Further, in China the inspectors are put through very rigid and thorough training programs involving examinations, prizes and awards for outstanding achievement.  Any inspectors failing the program were not allowed to enforce VAT.

Further, that it was most efficient to have all of these experienced officers stationed within special investigative units.[104]

This is obviously very difficult in the current economic climate due to the shortage of skilled accountants and bookkeepers.  The ATO is also severely hampered by the current industrial awards governing the public service.  In an ideal world, the ATO would be able to recruit qualified Accountants, Auditors and Solicitors and pay them a wage commensurate with their worth.  The ATO would then have some chance of detecting, auditing and proving very elaborate fraud schemes.

In the meantime however, the ATO needs to ensure that its Audit staff is fully trained in all aspects of Accounting, Auditing and Taxation (including both Income Taxation and GST as outlined above).  It is noted that to date the GST line have been intent on recruiting people with a high level of people and communication skills.  Whilst it is accepted that this is valid for the educative phase of the implementation, the ATO now needs to recruit experienced accountants and auditors.  This is not to say that Accountants and Auditors do not have people skills but that the ATO needs to recruit people with the appropriate balance of both aspects.  

Enough Resources Dedicated to Fraud Detection:


It has been found that an individual’s decision to pay or evade tax “depends upon his attitude toward risk taking, his perception of the morality of the tax, and his perception of the probability of detection”. [105]  Jenkins & Forlemu suggest that taxpayers will continuously attempt to evade taxes whenever the benefits from tax evasion outweigh the risk of detection and punishment.[106]  Studies have also shown that compliance varies directly with changes in the audit rate. [107]

The above findings indicate that a taxpayer’s perception of the audit rate directly influences his ‘voluntary compliance’.  Many taxpayers’ view evasion as a ‘game’ in which the less likely they are to get caught the more they are willing to evade.[108] 

It is accepted that, the majority of the ATO’s resources have been dedicated to implementation and education.[109]  However, as outlined by the New Zealand experience (see above) the ATO needs to recognize that GST Frauds will start from day one.  The ATO needs to consider allocating more resources to GST enforcement to, at least, give the impression of an audit presence.

Is it enough?


A common thread running through all of the above suggestions is that the effectiveness of these measures is determinant upon the ATO having adequate experienced, educated and competent staff to detect and action anomalies in a timely manner.  There currently exists a growing awareness of the ATO’s lack of ability in this regard.[110] 
This paper has therefore focused on other strategies that the Government could do to combat the cash economy.


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[1] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chapt16a.htm
[2] ‘Tax reform: not a new tax, a new tax system.  Authorised by the Hon. Peter Costello, MP, Commonwealth Treasurer.  Fact Sheet No:140.  Canprint Communications.  Canberra.
[3] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chaptr14.htm
[4] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chapt16.htm
[5] Smith P, ‘Assessing the Size of the Underground Economy: The Statistics Canada Perspective’, Canadian Economic Observer, Statistics Canada Catalogue (May 1994), no. 11-010, 3.16-33, at 3.18.
[6] Spiro P, ‘Evidence of a Post-GST Increase in the Underground Economy’.  Canadian Tax Journal, (1993), Vol 41, No.2. 
[7] Improving Tax Compliance in the Cash Economy.  Background Research.  http://atoassist/general/business/cashecon/compliance/htm
[8] ‘Tax Reform: Let there be no half measures’.  Taxation Institute of Australia.  Volume No 1, No 4, April 1998, pg 192.  Blondell J, ‘Black Art’, Charter, April 1998, pg20.  Cole A. ‘Why GST is good news for the Cash Economy’.  BRW.  June 23, 2000, pg 71.
[9] GST Compliance Management.  ‘Compliance Compendium’, chapter 1, Part B: Risk Analysis.  http://atoconnect/gst/OrgStrat/Content/ComplianceCompendium/GSTComplyPartB.htm
[10] The S&ME sector is defined, for the purposes of this paper, as enterprises with a Total Business Income (TBI) between Nil and $10m
[11] Hill R & Kabir M, ‘Tax Rates, the Tax Mix, and the growth of the underground Economy in Canada: What can we infer?’  (1996), Canadian Tax Journal.  Canadian Tax Foundation. Vol 44, No 6.
[12] Aust, Reform in the Australian Tax System. (Draft White Paper.) (Canberra. AGPS, 1985)
[13] Media Release 97/19  ‘Tax Office Responds to Task Force Report on Cash Economy’.
[14] Improving Tax Compliance in the Cash Economy.  Cash Economy Task Force Report.  12 May 1997.  Pg 12.
[15] Andreoni, Erard and Feinstein, 1998:820 in D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000.
[16] See Generally, Wentworth DK & Rickel AU, ‘Determinants of Tax Evasion and Compliance’, (1985) 3 Behavioral Sciences and the Law.  455-466 at 463.
[17] See Generally, I Wallschutzky.  ‘Possible causes of Tax Avoidance and Tax Evasion’.  Unpublished PhD Thesis, University of Bath 1983.
[18] See Generally , Casanegra de Jantscher M, “Types of Tax Non-Compliance”.  (paper presented at the XVI General Assembly of the Inter-american Centre of Tax Administrators, Asuncion, Paraguay, 1982.)
[19] See Generally, Wentworth DK & Rickel AU, ‘Determinants of Tax Evasion and Compliance’, (1985) 3 Behavioral Sciences and the Law.  455-466 at 463.
[20] See Generally, Henderson, WT Jr, ‘Criminal Liability under the Internal Revenue Code: A Proposal to make the Voluntary Compliance System a Little less Voluntary’. (1992) 140. University of Pennslyvania Law Review.  1429-1461
[21] See Generally , Casanegra de Jantscher M, “Types of Tax Non-Compliance”.  (paper presented at the XVI General Assembly of the Inter-american Centre of Tax Administrators, Asuncion, Paraguay, 1982.)
[22] Serious Non Compliance Re-engineering Report. (Draft) ATO. Version 11, Jan 2000, pg 8.
[23] Ibid.
[24] Tanzi V & Shome P,  “A Primer on Tax Evasion”,   Bulletin for International Fiscal Documentation, IBFD, vol 48, no6/7 1994. 328-336
[25] Blondell J, ‘Black Art’, Charter, April 1998, pg20.  Media Release 97/19  ‘Tax Office Responds to Task Force Report on Cash Economy’.
[26] Boyd CW, ‘The Enforcement of Tax Compliance: Some Theoretical Issues’, (1986) 34. Canadian Tax Journal.  588-599 at 590.
[27] Jenkins GP & Forlemu E, ‘Enhancing Voluntary Compliance by Reducing Compliance Costs: A Taxpayer Service Approach’, (unpublished) International Tax Program, Harvard University, 1993. 1-31.
[28] Serious Non Compliance Re-engineering Report. (Draft) ATO. Version 11, Jan 2000, pg 8.
[29] Melia RM, “Is the Pen Mightier than the Audit?”.  (1987) 34. Tax Notes 1309.
[30] Hill R & Kabir M, ‘Tax Rates, the Tax Mix, and the growth of the underground Economy in Canada: What can we infer?’  (1996), Canadian Tax Journal.  Canadian Tax Foundation. Vol 44, No 6.
[31] Spiro P, ‘Evidence of a Post-GST Increase in the Underground Economy’.  Canadian Tax Journal, (1993), Vol 41, No.2,
[32] Cole A. ‘Why GST is good news for the Cash Economy’.  BRW.  June 23, 2000, pg 71.
[33] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chaptr14.htm pg3.
[34] Tait A, ‘Evasion, Enforcement and Penalties’.  Value Added Tax.  International Practice and Problems.  (IMF, Washington, 1988, pg 304).
[35] ‘A fairer tax system with no GST’.  Labors Approach to Tax reform.  Labor Government.  (Canberra: 1998, pg 57)
[36] Tait A, ‘Evasion, Enforcement and Penalties’.  Value Added Tax.  International Practice and Problems.  (IMF, Washington, 1988, pg 304).
[37] ‘GST Adding to the Underground Economy’, The Toronto Star, August 19, 1991.
[38] Spiro P, ‘Evidence of a Post-GST Increase in the Underground Economy’.  Canadian Tax Journal, (1993), Vol 41, No.2.
[39] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chaptr14.htm pg3.
[40] D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000.
[41] Except for input taxed supplies that are provided to a business that later charges GST.  Effectively, GST will be charged on GST in these cases.
[42] Due to tight customs regulations over imports, Creditable importations are not a common aspect of the cash economy and will not be discussed further.
[43] Supplies that are input taxed are defined in Section 9-39 as to be supplies that are input taxed under Division 40…These include; financial supplies (40-5), residential rent (40-35), sales of residential premises (40-65), supplies of residential premises by way of long term lease (40-70), precious metals (40-100) and school tuckshops and canteens (40-130).  These activities are not considered relevant to the cash economy and therefore *input taxed supplies will not be discussed any further.

[44] D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000, pg 427.
[45] Ryan A, ‘Compliance Issues’. Business Essentials, ASCPA, Sep 1998.
[46] It has also been argued that this was due to charities and other small organization rather than black market businesses.  Stephens RJ, ‘New Zealand Tax Reform’, in Australian Tax Reform in Retrospect and Prospect.  Head, JG (ed)  Australian Tax Research Foundation.  Conference Series: No 8.  (Melbourne: 1989, pg 85).
[47] ‘Tax reform: not a new tax, a new tax system.  Authorised by the Hon. Peter Costello, MP, Commonwealth Treasurer.  Fact Sheet No:140.  Canprint Communications.  Canberra.
[48] Tait A, ‘Evasion, Enforcement and Penalties’.  Value Added Tax.  International Practice and Problems.  (IMF, Washington, 1988, pg 304).
[49] Chapman, R.  ‘GST: The New Zealand experience’.  Charter, April 1998, pg 28.
[50] Spiro P, ‘Evidence of a Post-GST Increase in the Underground Economy’.  Canadian Tax Journal, (1993), Vol 41, No.2
[51] Ibid.
[52] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chapt14.htm pg 4.
[53] D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000, pg 427.
[54] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chapt14.htm
[55] Spiro P, ‘Evidence of a Post-GST Increase in the Underground Economy’.  Canadian Tax Journal, (1993), Vol 41, No.2.
[56] A supplier can fake an ABN by quoting another businesses’ ABN or simply pluck a number out of the air.  There is currently no requirement on the payer to determine the validity of the ABN.
[57] www.abr.business.gov.au or phoning 13 72 26
[58] Parliament of Australia: Senate Committee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chapt14.htm
[59] Those industries covered by Prescribed Payments System (PPS) & Reportable Payments System (RPS).
[60] SB Compliance Risk Analysis.  Building & Construction Industry.  Compliance Management Integration Forum.  Nov 99.
[61] Sanford C, ‘Value-Added Tax – United Kingdom Experience’.  In Changing the Tax Mix.  Head, JG (ed).  Australian Txa Research Foundation.  Conference Series No 6.  (Sydney: 1986, pg 250).  Yoingco A, et al, ‘The VAT experience in the Philippines’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 78).
[62] Brooks N, ‘The Canadian Goods & Services Tax: History, Policy and Politics’.  Australian Tax Research Foundation, Research Study No: 16, Public sector Management Institute, 1998).
[63] Tait A, ‘Evasion, Enforcement and Penalties’.  Value Added Tax.  International Practice and Problems.  (IMF, Washington, 1988, pg 304).
& Sanford C, ‘Value-Added Tax – United Kingdom Experience’.  In Changing the Tax Mix.  Head, JG (ed).  Australian Txa Research Foundation.  Conference Series No 6.  (Sydney: 1986, pg 250).  Ridwan M, et al, ‘The VAT Experience in Indonesia’, in Yoingco A, et al, ‘The VAT experience in Asia’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 78).
[64] ANTS, Chapter 4, pg 150.
[65] Brooks N, ‘The Canadian Goods and Services Tax:  History, Policy and Politics’.  Australian Tax research Foundation.  Research Study No.16.  (1992)
[66] GST: Myths, Lies and Tax Reform.  Institute of Chartered Accountants in Australia,  Pg3.
[67] With the obvious exemptions of staple food, basic clothing, etc.
[68] Bascand, G ‘Implications of Alternative Tax Bases’ in in Australian Tax Reform in Retrospect and Prospect.  Head, JG (ed)  Australian Tax Research Foundation.  Conference Series: No 8.  (Melbourne: 1989, pg 275).
[69] On 1996/97 figures. 
[70] Gallagher, P. ‘Not a new tax…compliance and costs and GST’.  http://www.ozemail.com.au/~bwrees/gst-rep1.htm
[71] Feffer G, et al, ‘Proposals to Deter and Detect the Underground Cash Economy.  Income Tax Compliance, pg 295.
[72] Ibid.
[73] D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000, pg 427.
[74] Improving Tax Compliance in the Cash Economy.  Report, April 1998.  Cash Economy Task Force. (Canberra: 1998).
[75] Feffer G, et al, ‘Proposals to Deter and Detect the Underground Cash Economy.  Income Tax Compliance, pg 300.
[76] Ibid.
[77] Tait A, ‘Evasion, Enforcement and Penalties’.  Value Added Tax.  International Practice and Problems.  (IMF, Washington, 1988, pg 304).
[78] Above note 53.
[79] Tait A, ‘Evasion, Enforcement and Penalties’.  Value Added Tax.  International Practice and Problems.  (IMF, Washington, 1988, pg 304).
[80] Improving Tax Compliance in the Cash Economy.  Report, April 1998.  Cash Economy Task Force. Recommendation 4.10. (Canberra: 1998).
[81] Feffer G, et al, ‘Proposals to Deter and Detect the Underground Cash Economy.  Income Tax Compliance, pg 302.
[82] For example, include any merchant or person providing goods or services or perhaps high risk categories such as bookmakers and travel agents.
[83] Burgess, V. ‘Call to use ABN’s to Detect Crime’.  The Canberra Times.   September 2,2000.
[84] Improving Tax Compliance in the Cash Economy.  Report, April 1998.  Cash Economy Task Force. Recommendation 5.2.  (Canberra: 1998).
[85] Walsh, K. ‘Can GST kill the Cash Economy’.  The Sunday Telegraph.  June 4, 2000.  Crossley, P.  ‘Why GST is Good News for the Black Economy’.  Business Review weekly.  June 23, 2000, pg 68.
[86] See generally, SB Compliance Risk Analysis – Summary Report. Compliance Management Integration Forum, October 1999.
[87] D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000.
[88] GST Compliance Management.  ‘Compliance Compendium’, chapter 1, Part D: Compliance Strategies.  http://atoconnect/gst/OrgStrat/Content/ComplianceCompendium/GSTComplyPartD.htm
[89] Feffer G, et al, ‘Proposals to Deter and Detect the Underground Cash Economy.  Income Tax Compliance, pg 293.
[90] Spiro P, ‘Evidence of a Post-GST Increase in the Underground Economy’.  Canadian Tax Journal, (1993), Vol 41, No.2.
[91] Cole A. ‘Why GST is good news for the Cash Economy’.  BRW.  June 23, 2000, pg 71.
[92] Latimer N, ‘GST Fraud: the New Zealand Experience’.  Inland Revenue.
[93] ‘The Bodgie – Five Irishmen face charges over bodgie scam’.  The Irish Echo, October 6, 1999.  Hepworth, A. ‘Crime Authorities crack down on budding bodgie’. Financial Review. 2 October 1999.  ‘Bodgie Bubble had to burst’.  The Irsih Echo. October 7, 1999.  Baird, J. ‘Five charged on building labour fraud’. Sydney Morning Herald. 1 Ovtober 1999.  ‘Irish face tax fraud charges’.  Sydney Telegraph. 1 October 1999. 
[94] Chandler, M. ‘ATO swoop on builders after missing $100m.  Financial Review, 25 November 1999. 
[95] Humphries, D. ‘Cash in hand tax blitz’.  The Sydney Morning Herald.  August 17, 1999.
[96] Serious Non Compliance Re-engineering Report. (Draft) ATO. Version 11, Jan 2000, pg 16.
[97] Serious Non Compliance Re-engineering Report. (Draft) ATO. Version 11, Jan 2000, pg 4.
[98] Ibid.
[99] Yoingco A, et al, ‘The VAT experience in Asia’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 17).
[100] Parliament of Australia: Senat eCommittee: GST Main Report. http://www.aph.gov.au/senate/committee/gst/main/chapt16a.htm
[101] Yoingco A, et al, ‘The VAT experience in Asia’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 35).
[102] Yen cc, et al, ‘The VAT Experience in the Republic of China (Taiwan)’ in Yoingco A, et al, ‘The VAT experience in Asia’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 48).
[103] Yoingco A, et al, ‘The VAT experience in Asia’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 36).  Ridwan M, et al, ‘The VAT Experience in Indonesia’, in Yoingco A, et al, ‘The VAT experience in Asia’ Asian-Pacific Tax & Investment Research Centre.  (Manila: 1988, pg 78).
[104] Aronowitz AA, et al, ‘Value-Added Tax Fraud in the European Union’.  (Kugler Publications. Amsterdam, 1996). 
[105] Boyd CW, ‘The Enforcement of Tax Compliance: Some Theoretical Issues’, (1986) 34. Canadian Tax Journal.  588-599 at 590
[106] Jenkins GP & Forlemu E, ‘Enhancing Voluntary Compliance by Reducing Compliance Costs: A Taxpayer Service Approach’, (unpublished) International Tax Program, Harvard University, 1993. 1-31.
[107] Alm J, Jackson BR & McKee M, ‘Estimating the Determinants of Taxpayer Compliance with Experimental Data’, (1992) 45. National Tax Journal.107-114.
[108] Tanzi V & Shome P,  “A Primer on Tax Evasion”,   Bulletin for International Fiscal Documentation, IBFD, vol 48, no6/7 1994. 328-336
[109] D’ascenzo M, (ATO), ‘Y2K relationships – the ATO and you post 2000’.  Taxation in Australia.  Volume 34, No 8, February 2000, pg 423.

[110] Grbich, Y. ‘After Bellinz and Ralph – A New Focus for Decision Making in the Australian Tax System’.  UNSW, Sep 2000.    Bannon, M. ‘Deluge of reform proves taxing for accountants and businesses’.  The Canberra Times.  May 20, 2000. 
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