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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. 

Property Investment Articles

Monday, March 07, 2011
This article describes the SEVENTH ELEMENT of the SEVEN  elements to building a successful property portfolio so that you can reach your financial goals sooner”

Download the full report at www.wfscanberra.com.au

 7 .The Right First Steps – “Discover the first steps to putting you on track to build a property portfolio that will meet all your life goals

The Right First Steps

“Discover the first steps to putting you on track to build a property portfolio that will meet all your life goals”
 
“At Wholistic Financial Solutions we will help you determine what your goals are and then guide you in the achievement of your goals, whatever
they may be.”

How do we do this? Let’s go through 6 simple steps:


Step 1

First we help you develop the Right Strategy. Our first interview will involve delving into everything we need to know to determine your ‘what’, ‘why’ and ‘how’ factors and ensure that both parties fully understand your goals. This is not the end of the process however, but just the beginning. We will conduct regular reviews to ensure you are still on track to achieving your goals and re-orientate you if you have veered off the track. Our aim is to work with you on your strategy for the rest of your life.

We will use this consultation to meet with you and gather all the information we need to prepare a Property Portfolio Plan which puts your individual strategy into a full financing plan that takes into account the right structure for your finance, the tax implications, your short- and long-terms goals and the steps you need to take to get the process started. You’ll also get a chance to meet with us and determine whether you trust us enough to be your long-term property advisors.

Once we know your strategy we will help you find the Right Finance and the Right Structure for the finance.

Step 2

Wholistic Financial Solutions can put together a Property Portfolio Plan that takes your individual financial circumstances and goals into account and shows you your property portfolio potential.  How many properties you can buy, in what name you should buy the properties, how you should structure the finance, how to minimise tax and at the end of the day – how much it will cost you per day.

Step 3

Then we will help you find the Right Property:

Our consultants will meet with you after you have considered the ‘right strategy’  decided on the ‘right finance’ and sorted out the ‘right tax advice’. Once your ‘so that’ factor, and your goals and how best to achieve them is clear, our sales consultants will meet with you and help you decide what is the ‘right property’ for you! Everyone is special and has a different strategy, a different finance structure and a different tax situation. As everyone’s situation is unique, different properties meet different people’s needs. There are some many conflicting opinions on property investment it is very difficult for the average investor to sort between the ‘facts’ and the ‘sales talk’. As we have many different properties available from many different sources we are not biased towards any particular location, developer, type or property. We just want to help find the ‘right property’ for you.
 
We do not employ high-pressure sales people. In fact, all our sales people are trained in leading a horse to water but not forcing it to drink. We will convince you to buy a property WHEN YOU ARE READY TO BUY A PROPERTY and not anytime before. We want you so satisfied with our service that you will come back year after year for your future properties and will also tell all your friends and family about our service.

 Step 4

Next we will help you find the Right Management:

“At Wholistic Financial Solutions, we have some of the most powerful property management solutions available. Guaranteed rental income every month for the term of your ownership of the property. Imagine never having to be concerned about short rental payments, no rental payments or your property sitting vacant costing you money! NEVER AGAIN!”

Under the Wholistic Financial Solutions banner we also have full use of a management facility. By listing your property in
the leaseback scheme provides you with a full property management team to look after your investment. They will look after your property guaranteeing you market rental income, full property inspections, professional tenant selection and all other property management criteria charged at the same fee rates as real estate property management divisions.

 Step 5

Then we will help you reach your goals through the Right Coaching:

Our mentors and coaches will provide you with an alliance that will help you work through any blocks that may prevent you from meeting your goals in your bright new future. Do you need to stop your spending? Do you need to aim higher? Take more risk? Be more conservative? This is all well and good but do you know how to change your approach to achieve this? Find out what is holding you back, look at the obstacles and move right over them. It is time to get rid of the excuses, ignite your inspiration and build wealth and fulfillment in all areas of your life. With the right information and the right motivation you are the best investment you can ever make!
Our coaching strategy is ‘Wholistic’ – we will help coach your life including examining your money psychology, look at what might be holding you back, find solutions and design a bridge with you to get you there.


Step 6

Finally, follow all this up with the Right Information

It can be very lonely being a property investor. I often ask my clients, “Do you discuss your portfolio with your friends and family?” The overwhelming response is, “Absolutely not!” The reason for this is that people who don’t invest in property don’t understand it. And what people don’t understand they either fear, resent or reject. How many property investors have told their friends and family only to be asked, “You’re doing what? You’re an idiot!”

My answer to that is, “If you want to soar like an eagle – don’t hang with turkeys.” Or in kinder words, “Don’t discuss your dreams with those that don’t share similar dreams.”

To assist property investors stay on track we will be offering our clients:

•       FREE weekly  educational webinars.
•       FREE regular property investment educational seminars.
•       FREE monthly newsletter updates outlining tax information, loan product specials, investment opportunities, plus much more.
•       FREE invitations to affiliated property investment and motivational seminars.
•       Regular social get-togethers to provide an opportunity for property investors to network and simply socialize with other like-minded investors.

 “Our aim is to give you the right motivation, the right direction and the right focus. The financial side of the business provides the RIGHT INFORMATION and the coaches and mentors provide the RIGHT MOTIVATION.”

RIGHT INFORMATION + RIGHT MOTIVATION = all you need for SUCCESS.

Arrange your One-On-One Consultation & Property Portfolio Review today! Don’t delay or you may miss out on the right time to begin your step-by-step plan. Simply go to our website to register for your now, get yourself started on the path to success!

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011
This article describes the SECOND ELEMENT of the SEVEN  elements to building a successful property portfolio so that you can reach your financial goals sooner”

Download the full report at www.wfscanberra.com.au

Element 2. The Right Finance – “How to be confident that you have found the right loan and structure so that you can meet long-term financial goals and avoid     serious costs – potentially saving 1000’s of dollars in long-term exit fees and interest rates”

The Right Finance

 “How to be confident that you have found the right loan and structure so that you can meet long-term financial goals and avoid serious costs – potentially saving 1000’s of dollars in long-term exit fees and interest rates”

“Finding the right loan to meet your needs can be a very daunting task. With so many lenders to choose from and so many products within each lender, it is almost impossible for the average person or investor to sort between the products (including all the fine print). It is important that you are sure the finance you are choosing is the best one for your circumstances.’

We like to use the example of buying a car.

If you walk into a Ford car yard and describe all of the features you want in a car and the salesperson thinks to themselves, “Gee, the latest Holden Statesmen would be the best,”– will he tell you that? No! He will convince you that the latest Ford something-or-other meets your needs. It’s the same with the banks. If you walk into a bank, any bank, you will only be sold that bank’s products.

We would recommend that everyone who wants to take out a mortgage should use the valuable services of a mortgage broker. Whether you are buying your first home or investment property or whether you are building a huge investment portfolio you should consult a mortgage broker. The advantages of using a broker are twofold. Firstly, it is free – the bank pays the broker the commission – and secondly, the broker is aligned to scores of banks and will find the best for you. It is in the broker’s interest to find the best product because they want your continued business.

Brokers have access to over 30 banks and lending institutions, including all of the majors (CBA, St George, NAB, Westpac, etc) and many popular smaller and non-bank lenders (ING, Bankwest, Rams, Suncorp, etc). Mortgage brokers will help you find your way through the complex maze of product choices and help you decide the best one for you. Everyone’s situation is different and different products suit different circumstances.

Mortgage brokers also assist you with all of the paperwork, submit the loan, handle all the bank’s annoying questions, co-ordinate the process with your solicitor and real estate agent and basically take all the stress and pressure from you. They’ll ‘hold your hand’ the whole way through and deal with any complications that may arise.

Mortgage Brokers

Pros

May save you time in shopping for loans.

May save money if fully independent.

Usually free.

Sometimes, given the broker-lender relationship, a bank will accept a loan application that they would otherwise have rejected.

Mortgage Brokers

Cons

•       You may pay more for your loan than necessary if the broker is not independent.
•      They may charge excessive fees or undisclosed commissions.
•       You may be persuaded to borrow more than you need, as this will boost their commission.

The cons can be easily overcome by using a broker aligned with Wholistic Financial Solutions as we ensure our brokers do are fully accredited, trained and ethically in all regards.

So, once you have chosen a product how can you be sure the ‘structure’ is right?

“It is very important to get the ‘right finance’ right from the start but it is also just as important to get the ‘structure’ right. It can be very costly, frustrating and time-consuming to act hastily and rush the finance part of the property transaction and not get it right. Realizing your mistake later can cost you tens of thousands of dollars in break fees, discharge fees, re-valuation fees, applications fees, fees, fees, and more fees.”
    
For example, we are seeing countless clients who locked in at 8.5% for five years. They are now paying far more for their mortgage and are coming to us for advice about breaking out of the loan. We had one quote from a bank of break fees in the order of $66,000. The client is simply locked in and has no way out other than the pay these exorbitant fees.

Other clients we have seen have taken out what they thought was a very simple and easy to understand loan. However, when they have come to us to buy their next investment property, we’ve had to inform them that to restructure this loan they’d be paying deferred establishment fees in the order of $16,000. And not only that, they would have to refinance their whole portfolio because their bank had

‘cross-collateralized’ all of their properties across all of their loans. A very simple mistake that could be avoided with the right advice.

Another common example is the client who has taken a loan to buy their home with the intention of eventually upgrading to a bigger home. They did what they thought was the right thing and paid as much as they could off the loan. Then when they came to us for advice about buying their dream home and using the existing home as an investment property, we had to give them the unpleasant advice that they would now be fully taxed on all their rental income and their large loan for their home would be non-tax deductible. Another simple mistake that could have been avoided.

So, as we explained above, it is very important to use the services of a mortgage broker. However, you need to be careful about choosing the Right Mortgage Broker. The average mortgage broker is ‘transactional’ – they just get the best deal for you for that transaction. They do not normally consider your long-term strategy and whether the loan they are signing you up for will be the right loan for you 12-months down the track when you buy your next property. We have seen so many clients who were signed up for the wrong loan and are now paying the price.

To determine whether your mortgage broker is the right one for you ask the right questions.

Questions to ask your mortgage broker:

•       How much does the service cost and when do I have to pay?
•       Do you belong to an industry association such as the MIIA/MFAA and if so, does that association have a dispute resolution policy? (Ask to see it in writing. Disgruntled borrowers can also contact the Mortgage Industry Ombudsman on 1800 138 422.)
•       How do you identify the best solution? Is it simply commission-based or do you use a software package? (Their criteria for selection should be logical and transparent.)
•       How many lenders (and which lenders) do you represent? (Make sure the broker deals with a spread of lender types i.e. banks, mortgage managers and others.)
•       How do you get paid? (Ask them to disclose all commissions and payments.)
•       Can you provide comparisons of any loans recommended, including upfront and ongoing fees?
•       Can you clarify the actual cost of the loan, including and excluding interest, fees and ongoing costs?
•       Do you comply with the Privacy Act?
•       Do you have professional indemnity insurance?
•       How long have you been in the industry and can I read your testimonials from previous clients?

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011
“Stop Wondering what is the Right Investment Strategy for You and Discover How to Build a Property Portfolio the Right Way – Right from the Start”

This FREE report will reveal the 7 elements to building a successful property portfolio so that you can reach your financial goals sooner”
This is the first element of the 7 elements – download the full report at www.wfscanberra.com.au

1.The Right Investment Strategy

– “Discover the most critical step to property investment before you start to invest – if you DON’T define this step you will never have success with property investment”

The first step is determining your strategy. The question is not what the right strategy is but rather which strategy is right for you? You should not invest in property until you know your strategy. 

Getting the strategy right is the absolute crucial first step.

The majority of investors are what we call ‘accidental investors'’ – they accidentally buy a property without much thought. Perhaps they upsized to a new house and decided to rent their old house rather than sell, maybe they bought while on holiday, perhaps they inherited or maybe they just bought because it seemed like a good idea. However, they most likely did not sit down and actually plan what they were attempting to achieve from their property investments.

As they say, “If you fail to plan, you plan to fail.”

“Everyone who wants to be financially independent needs to plan how they are going to get there! Financial independence rarely happens by accident. The plan needs to include these three important points:

1) What you want to achieve
2) Why you want to achieve it
3) How you are going to achieve it


The ‘what’s’, ‘why’s’ and ‘how’s’ are paramount to your success!”
 In order to determine your strategy you need to determine what you want to achieve by investing in property and why.

What is your ‘so that…’ factor?
What is your ‘emotionally dominant’ reason?

Is it ‘so that’ you can retire early and relax on the beach or travel the world? Is it ‘so that’ you can provide housing for your children as you realize housing is becoming less and less affordable? Is it ‘so that’ you can gift more money to charitable causes? The more you understand the ‘what’ and ‘why’, the more likely you are to stay on track and achieve

-your goals, the more likely you are to feel the fear and do it anyway, the more likely you are to take the steps necessary to reach your goals and realize your dreams.

The ‘what you want to achieve’ needs to be in clear and measurable terms so that you can set the specific goals that you want to achieve. For example:

“Let’s say you want to retire at age 55 so that you can help your daughters with their children by babysitting when they are due to go back to work. This is a ‘so that’ factor and it is specific. We can then calculate how much money you will need to have at age 55 to make this happen. Then we can look at the ‘how’ to achieve this goal through property investing.

Or you may have a completely different strategy. Maybe you are a ‘handy man/woman’ who loves home improvements and handiwork yet you’re stuck in a boring office job. Perhaps you would like to purchase a set of units so that you can eventually retire early and
look after the maintenance on the units as a full-time job.

Perhaps you want to buy properties close to home and good universities so that your children can move into them when they are studying to become doctors and lawyers.”
    
Everyone has a different ‘so that’ factor and it is important that you understand this right from the start.
So once you understand your ‘so that’ factor, we can begin to look at the ‘how’? We will help you identify your individual strategy. Is it…?

For the next 6 elementsof the 7 elements – download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011
This article describes the FOURTH ELEMENT of the SEVEN  elements to building a successful property portfolio so that you can reach your financial goals sooner”

Download the full report at www.wfscanberra.com.au

4. The Right Property – “How to buy the right property at the right time in the right location in less than 5-minutes

“How to buy the right property at the right time in the right location in less than 5-minutes”


Sourcing the Right Property:

Once you have decided the Right strategy, organized the Right finance and sought the Right tax advice you then need to source the Right Property.

This can be an extraordinarily time-consuming, complex and confusing process. You can do it yourself if you have ample, and I mean ample spare time to spend hours upon hours every night and weekend researching and ensuring that you are completing your due diligence. You will need to research:

•       the best states to invest in all across Australia
•       the best suburbs within those states
•       the best streets in those areas
•      the demographics (in relation to those in the area – their age, sex, marital status, average income, family size and
Whether they are renters or owners – both now and predicted)
•       the capital growth of the area – both now and predicted
•       the average rent of the area – both now and predicted
•       the infrastructure of the area – both now and predicted
•       the government zonings of the area (now and planned changes)
•       the government’s plans for development of roads, hospitals, schools, shopping centers, etc
•       the government’s planned changes or improvements to surrounding roads, highways and suburbs
•       plus many, many more factors

Once you have researched all of the above and you are sure that you have located the right area of Australia to invest in, you will then need to contact all the local real estate agents, set aside a few weeks of your time, try to arrange all of these agents to show you the stock they have on hand at that time and hope you can find a property that meets your criteria during this time, otherwise you will need to re-book the trip and go again when new stock reaches the market…

…or you can simply use a property buyer’s agent service or a property aggregator…

 What is a buyer’s agent or property aggregate? 
You need impartial, independent and reliable advice in order to be successful at property investment and that’s precisely what buyers’ agents and property aggregators are in the business of providing.

‘Buyer’s agents work for the buyer NOT the seller’.

Imagine that instead of having to contact heaps of different real estate agents and developers and then having to sift through all of the competing and contradictory information they give you, imagine if you could contact just one agent and they would do all the running around for you.  They would contact many different vendors, real estate agents, developers, etc and, after determining what your needs and wants are, they will then present a summary of the best options available on the market at the moment that suit YOUR NEEDS. 

That’s what Buyer’s agents or Property Aggregators’ do. They work for you.

They provide market analysis and identification of growth areas in the capital city markets. They identify, source and negotiate specific investment properties in keeping with market conditions and the client’s requirements. Clients are provided with recommendations in a written report covering:

•       indicative investment cash flows
•       detailed market demographics and commentary
•       specific property recommendations
•       property plans, ,photos, specifications etc
•       full financial spreadsheets
•       assisting clients with the inspection and purchase of appropriate investment properties
•       negotiation of purchase price
•       coordination of the purchase process and ongoing client support

 What to look for in a buyers agent

Independence is the number one factor. Ask them if they:

•   Sell more than one product from more than one           developer
•       Have access to all of the fast-growing states of Australia.
•       Are knowledgeable about investment strategies.
•       Are experienced in property investment. Do they walk their talk? Ask them, “How many properties do you own?” Don’t be afraid to interrogate them. It’s your money they will be spending so you need to ensure you are 100% comfortable with their knowledge and experience.
•       Have access to every other specialty field necessary to help you complete the transaction, that is:                                          
1.      property strategists
2.      a finance team
3.      tax advisors
4.      property managers
5.      life coaches
 
“A really good buyer’s agent is knowledgeable about most mainstream investment strategies. They have an understanding of what the client’s needs are on a more personal level with regard to their goals, strategies and fears. They have the ability to ‘hear’ the client’s views and to take them and turn them into fully-realized achievements.”

Why use a buyer’s agent?

In a nutshell, because they save you the time you would otherwise spend researching. They save you the cost of the trips (all of which are non-tax deductible as you haven’t selected a property yet). AND THEY ALLOW YOU TO SLEEP AT NIGHT because you have done your due diligence by focusing on selecting the right buyer’s agent, trusting them to select the right property.

Buyer’s agents are experienced professionals who buy properties on behalf of clients on a daily basis. They have extensive contacts and have many buying strategies at their disposal. In other words;
‘They take a client’s request and apply their experienced strategies to deliver the best result for that client. You wouldn’t ask a boxer to do brain surgery…why not use an expert property sleuth to find the right investment for you?’

  An example of this is my own experience with buying a property in Frankston, Victoria and Springfield, Queensland.  For the Frankston property, my husband and I spent hours researching, calling agents, comparing properties on the internet, etc. Then we took four days off work, flew to Melbourne and spent four solid days in a hire-car looking at as many properties as possible. Our heads were spinning and we had no real idea of what we were doing. In the end, we spent $3,500 on the trip (not to mention the cost of four days off work and countless hours of research) and simply wanted to buy something…anything…so we didn’t have to do it again. So we bought the best of a bad lot and hoped for the best.

When we decided to buy in Queensland, we hired a buyer’s agent, accepted his recommendations and signed on the dotted line. To this day, we have not even seen this property and it has performed far better than the Frankston one.

I used to think I knew it all and could do it all myself. Now I realize it is far more appropriate and time-saving to pay the experts to do what the experts do best – allowing me to do what I do best – advising others on tax and finance strategies.

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011
This article describes the FIFTH ELEMENT of the SEVEN  elements to building a successful property portfolio so that you can reach your financial goals sooner”

Download the full report at www.wfscanberra.com.au

5. The Right Management – “How to have a remote control property portfolio which means no rental headaches for the  lifetime of the ownership of the property”

The Right Management

 “How to have a remote control property portfolio which means no rental headaches, ever, guaranteed”

What if I were to suggest that you don’t have to worry about late rents? Or no rents? That’s right – we can find you properties with guaranteed rent for 10 years without excessive management fees and restrictive clauses locking you in for the whole period. But oops…! This is a secret I shouldn’t be revealing!

Why Use a Property Manager?

  “It’s crucial that your investment property is well-managed and that you choose a good property manager. Effective property management is the key to protecting your asset. Remember, it’s not just a property, it’s a significant investment and you want it well looked after. You want its value to remain high and you want the best rental return on your investment.”

 Some landlords try to manage their investment property themselves. Sometimes this works OK. However, there can be many pitfalls. We have found from our experience that a good property manager is worth their weight in gold in looking after our investment and saving us hassle.

A good property manager will excel in the following:

Marketing
– Marketing your investment properly to get the maximum exposure to the right kinds of tenants. Effective marketing is a key factor in ensuring your property is not left vacant.

Legal requirements
– Being fully aware of all legal requirements and ensuring that all requirements of government legislation relevant to your investment property are complied with – advising you on your rights and obligations.

Your rent
– Consistently monitoring market trends for rental returns and ensuring your investment is getting the highest possible rental return – regular rental reviews – ensuring tenants pay the rent on time.

Tenant selection
– Ensuring the best quality tenant for your investment property – following strict and professional guidelines in
tenant selection, including checking references, employment stability and proof that the tenant is capable of paying the rent and a proven quality in their previous rental history.

Agreement preparation
– Arranging the preparation and signing of the residential tenancy agreement and lodging the rental bond.

Tenant management
– Ensuring the tenant is well educated in the terms of the residential tenancy agreement and that the terms of the tenancy agreement are complied with
– Building a good relationship with the tenant – a happy tenant is a tenant who stays and who will contact their property manager immediately with any issues.
– Acting as a negotiator in any disputes between tenant and landlord. A good property manager can ensure that most disputes between landlords and tenants are solved before they escalate.

Rent collection
– Providing a good range of options for tenants to pay their rent – requiring tenants to pay rent in advance – daily
monitoring of incoming rentals – having zero tolerance for any rental delays.

Looking after your investment
– Knowing your property, inside out – conducting regular inspections of your property (as per the legislation) and forwarding you a written report on its condition and any maintenance that may be needed.
– Conducting regular external surveillance of the property to assess the external appearance and to ensure its being well-maintained.
– Giving you feedback to help you budget for larger items of expenditure that may be required – providing an after-hours contact for emergencies.

Communicating
– Communicating well with you on your investment.

Saving you hassle
– No need for you to interact with your tenant at all – paying bills for you – invoicing tenants for user-pays water costs – monitoring and handling any maintenance required, obtaining quotes, dealing with trades people, ensuring the job is well done – providing statements for your tax return.

And if you decide to refresh your investment portfolio
– Liaising with your tenant and your real estate agent to make the sales process easier, smoother and faster – or liaising with your mortgage broker regarding access for valuation purposes, all making things easier for you to refresh your portfolio.

The Right Management solution is one of the most important strings to your investment bow. The management of your property ensures that your investment is being looked after in all aspects. The property manager makes sure that your interests are looked after priority number one! Diligent property management will ensure that your investment property is always tenanted with only top quality tenants.
  
The point is that the Right Management is the tool that allows you to have a safe worry-free investment solution that is truly ‘Set and Forget’.

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011

This article describes the ninth strategy of nine property investment strategies.


Download the full report at www.wfscanberra.com.au

Strategy 9 – Guaranteed Leasebacks

Pros

A genuine guaranteed leaseback is a rare thing. If you can find one it can be an outstanding way of ensuring your ‘sleep-at-night’ factor. The biggest fears in property investing are; “What if I can’t find a tenant?” and “What if my tenant doesn’t pay their rent?”

A genuine guaranteed leaseback can take both of these fears away as the guarantor pays you your rent regardless of whether the property is tenanted or whether the tenant is paying the rent.

You can therefore rest easy knowing that your rent will be coming in to cover your mortgage, each and every month.

Cons

Well… don’t get me started on this one or I will go on for pages! In a nutshell:

There have been many fly-by-night companies predominantly based in Queensland who flew around the country hosting free property information sessions and drawing innocent investors in through mass telemarketing and promises of free holidays for their attendance. Then the holiday turned out to be a property tour, free of course, as long as they viewed the properties whilst they were there. The organizers then convinced the innocent investors to purchase the properties through ‘rental guarantees’ that sounded too good to be true.

And yes, they were too good to be true.

In some cases, the company went into liquidation straight after completing the final sales. Of course, this meant that the guarantee wasn’t worth the paper it was written on. Alternatively, the cost of the guarantee to the company was simply embedded in an inflated price for the property. At the expiration of the guarantee the investor found that they

could not rent their property for anywhere near as much as was predicted. Further, there was never any real tenant in their property. The company had simply used the inflated profits to pay the rent to the investor for the promised period.

Worse still, there were now hundreds of vacant properties in the area all on the market for rent at the same time. And to add insult to injury, investors who couldn’t afford to keep the property now that the rent was substantially less than predicted, tried to sell their property only to find that it was worth considerably less than what they had paid in the first place.

Solution
             
Once again, do your due diligence:
•       Ensure the properties are not over-inflated to compensate for the rental guarantee.  For example, are you able to buy the property on the open market, or from the developer for the same price without the rental guarantee?

•       Ask the guarantor, “What’s the catch?” There must be something in it for the guarantor or they wouldn’t do it. Ask them, “How do you make your money?”
•       Check www.allhomes.com.au or www.realestate.com.au  and ensure the predicted rental is in line with the current market rental.
•       Check that the company offering the guarantee has been in business for a considerable length of time.
•       Check the company has a sound reputation. ‘Google’ the company name and you will reveal any ‘dirt’ or dissatisfied customers.
•       Ensure the rental management fee is in line with industry norms – around 7–8% depending on the state.
•       Ensure you can withdraw from the leaseback any time you want to in case your circumstances change and you want to sell the property or move into it.
•       Most of all Get professional advice

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011

This article describes the eight strategy of nine property investment strategies.


Download the full report at www.wfscanberra.com.au

Strategy 8 – House and land packages

Pros 

Delayed settlement gives you time to get your finances in order and even buy more property than you could afford to in your current situation.

Stamp duty savings as you pay stamp duty on the land component only.
In a moving market, an investor can make a gain on the investment simply by holding it in the period between agreeing to purchase and when construction is complete.

Some investors use this opportunity to buy several ‘off the plan’ developments with a view to selling off some before settlement to pay for the remainder.

Cons

Units are subject to the possibility of oversupply in the period between agreeing to purchase and when construction is completed. (avoid this con by sticking to house and land packages, townhouses or unit developments with lower number of units)

You have no control over another 10 apartments blocks going up around yours.

Can become a nightmare if the developer goes into administration before the project is complete.  (avoid this con by ensuring the developer is fully insured).

Low valuations of the final development may lead to additional funds being necessary to complete.  (Avoid this con by obtaining professional advice as to your financial position if this occurred)

Solution

“The good news is that a lot of the cons can be extinguished by undertaking the due diligence and research. You need to ensure that the developer has a sound track record of choosing houses in the right location, choosing builders that have stable and profitable track records, and choosing house and land packages instead of units. Land is much more governed by the rules of demand and supply because it is scarce. The closer to a CBD the scarcer it is.”

You also need a really good mortgage broker. House and land contracts and the process itself is fraught with complications and technicalities. You need a broker who is experienced in financing for such developments. See later – how to select a mortgage broker.

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011

This article describes the sixth strategy of nine property investment strategies.


Download the full report at www.wfscanberra.com.au

Strategy 6 – Buy and flip

This can mean different things to different people but what it usually means is to buy ‘off the plan’ and sell before settlement. Some investors use this strategy to buy a few properties and then sell most of them before settlement. They then apply the profits to reduce the debt on the properties they retain. A fantastic strategy for the experienced investor and it works well in an upward-moving market. However, it can be fraught with danger if the market falls during the construction period and you don’t have the spare resources (cash or equity) to cover the shortfall. It can be a bit like the stock market ‘margin calls’ that are rapidly bringing the share market to a grinding halt.

If you intend to buy and flip it is important to get professional advice to ensure that you can cope with a possible decline in value.  If your financial position is such that you could survive such then the buy and flip strategy can bring some fantastic possibilities.

If you proceed down the buy and flip path (after seeking professional advice) – look for developments with the following criteria:

•       Look for brand new developments
•       Developments that have the longest possible timeframe to completion
•       Projects with Progress payment plan that does not require the bulk of the payment till near the end of construction
•       Be first in – often the best gains are to be made early when the developer needs to sell quickly to meet the banks
‘pre-sales’ requirements.  If you wait till the end – you are only choosing from stock no-one else wanted to buy, and /or the price may have already risen substantially as the developer is no longer in need of a quick sale.
•       Of the other hand, sometimes the final lots are discounted as the developer needs to move them quickly so as to move on to his next project.
•       Just get advice from a food quality buyer’s agent who knows about the development.

Download the full report at www.wfscanberra.com.au

Property Investment Articles

Monday, March 07, 2011

This article describes the fifth strategy of nine property investment strategies.


Download the full report at www.wfscanberra.com.au

Strategy 5 – Buy and build and sell or hold

Pros

This strategy is similar to the ‘buy and subdivide and sell’ strategy and once again not for the faint-hearted. On the upside, once again there is profit to be made, particularly for those able to be involved in the building process themselves.

Cons

As above for subdivision –tax consequences will be adverse and you will have to become involved not only with councils, surveyors and the like but also with builders, trades-people, suppliers, etc. It could almost be a full-time job, so unless you’re like me and enjoy that sort of thing, I would recommend you stay away from this strategy until you are more experienced.

Download the full report at www.wfscanberra.com.au

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