Improving black economy enforcement and offences
We are supportive of the endeavours of the Black Economy Taskforce to tackle the issues arising from black economy activities. In this regard, we welcome the government’s latest initiative to consider alternative forms of enforcement to act as a deterrent for those contemplating or undertaking such activities.
The measures under consideration are outlined in the consultation paper titled Improving black economy enforcement and offences. The consultation paper outlines a range of potential financial and non-financial enforcement measures. Among other things, these include:
- The granting of certain additional information and data gathering powers to the Commissioner of Taxation;
Reversing the burden of proof for certain elements of black economy activity;
Amendments to the taxation penalty regime to impose greater penalties on repeat offenders;
Imposition of travel bans for those with outstanding tax debt;
Potentially increasing civil penalties and lowering the “recklessness” test threshold for sham contracting arrangements under Fair Work legislation; and
Record keeping requirements for those in receipt of gambling winnings and gifts.
An overarching theme in the consultation paper was the call to grant additional powers of enforcement to the commissioner. Specifically, these extended powers include the ability to obtain certain third-party information within a shorter time frame for criminal investigations, the imposition of freezing orders on bank accounts for longer periods, and the ability to access certain telecommunications data.
In the current environment, small businesses and individual taxpayers, whether rightly or wrongly, are sensitive to the wide-ranging powers of the ATO. These concerns follow reports of unfair influence being exerted. As such, there is a perception that the revenue authority has too much power, which could be open to misuse without appropriate safeguards and oversight.
While it is unequivocal that unscrupulous members of the community be deterred from undertaking black economy activities, the granting of any further powers to the ATO without sound justification would only create distrust and reinforce the current community perceptions.
Therefore, to build community confidence in the tax system, the government must ensure that there are safeguards, accountabilities and oversight in place for any new powers granted. Among other things, these safeguards may include:
- Imposing restrictions on when and how certain powers are to be applied;
- Regular reporting on the exercise of those powers and their outcomes to the government and the community for transparency and to ensure relevance; and
- Additional oversight from the offices of the Inspector-General of Taxation and the Australian National Audit Office.
It is hoped that such safeguards will go some way to allaying community concerns that the powers granted are not misused or abused.
Another concern proposed in the consultation paper is the reverse onus of proof for certain elements of black economy activity, where the onus is placed on a defendant to disprove certain elements of their offence (rather than the prosecutors as is ordinarily the case). Worryingly, such measures could adversely impact the rights of individuals and their liberties.
We therefore strongly urge that the government give due consideration to any such proposal and that caution and restraint be exercised and take time in considering the possible ramifications.
The consultation paper outlines that in some very serious offences (relating to terrorism, drugs and child sex offences) the burden of proof is already reversed to require the defendant to disprove certain elements of their offence.
While the paper indicated that these measures would be reserved only for very serious black economy offences, it did not specify the nature of black economy offences that should be considered; instead seeking recommendations on appropriate offences.
Prima facie, we are not supportive of a reverse onus of proof for black economy activity. Our concerns rest with those who may be wrongly prosecuted for offences because they cannot disprove the relevant element under a reversal of proof.
Further, we also do not necessarily believe that such a measure would act as a deterrent as those who seek to commit such serious activities would do so with a complete disregard of the law and their repercussions.
Given the adverse impacts that a reverse onus of proof has on an individual’s rights and their liberties, we strongly urge the government to exercise caution and restraint if they were to introduce such a measure for certain elements of black economy activity.
The ATO already has the ability to issue an amended income tax assessment whereby the onus is on the taxpayer to prove that the assessment is excessive, which acts as a default reverse onus of proof in many ways.
The ATO can and has on many occasions issued amended assessments to taxpayers who it believes are understating their income. It is up to the taxpayer to prove that the assessment is excessive, so in effect the ATO already has powers to reverse the onus of proof.
Amended assessments are quite common for businesses operating in the cash economy. We need to better understand the rationale for this proposed change and how it will be used for the most egregious taxpayer situations.
When it comes to sham contracting, we consider that there are adequate financial penalties under a suite of laws for those businesses that choose to engage in such contracting arrangements. When tallied, such financial penalties can be substantial for a business and in their own right act as a sufficient deterrent.
The mere increasing of civil penalties under the Fair Work Act in respect of sham contractor arrangements may not achieve the desired effect.
We therefore consider that financial penalties alone are not sufficient and instead argue that there would be greater impact if the existing penalties are coupled with non-financial penalties.
Additional penalties, such as minimum terms of imprisonment, travel bans, deregistration from operating a business or being a company director, may better tackle these sham arrangements and act as a more forceful deterrent.
For income tax purposes, the generally accepted view is winnings from gambling and gifts are not assessed to the taxpayer as they are taken to be windfall gains. As such, there is no requirement for those amounts to be disclosed in the individual’s income tax return.
The consultation paper proposes that records be kept for substantial gambling winnings and/or gifts. We understand that the objective for seeking such information, among other things, is for asset betterment testing purposes.
While we are open to further disclosure of gambling winning and gifts, we note that this should not be done at the expense of increasing compliance burden on the community.
Providing the commissioner with powers to request such documentation to substantiate these winning and gifts may be the better approach than requiring all taxpayers who have had significant windfalls to report or keep records.
Having a dollar threshold for record keeping as suggested may assist in alleviating the need for all individuals in receipt of winnings or gifts to retain such records.
Of course, there would still be difficulties where funds are obtained from private or illegal sources or in respect of family dealings. For example, gifts from family members for love and affection can be difficult to prove unless there was some form of deed of gift or can otherwise be appropriately justified; for example, a contribution from parents to purchase a first home by their adult children.
In that regard, it may be appropriate to provide a list of acceptable types of documentation to prove any forms of windfall gain.
Lastly, travel bans. The imposition of travel bans for ‘delinquent’ taxpayers with debts of a certain quantum warrants consideration in an Australian context.
Our observations in relation to how such a ban could apply include:
- As is the case with the US, providing a non-discriminatory basis for revoking an individual’s passport would ensure transparency and clarity. The issuing of any bans should not be at the discretion of the commissioner as is currently the case with departure prohibition orders (DPO);
- Consideration should be given to those taxpayers who are currently under a repayment plan and whether they should also be included in the ban, particularly if they are a flight risk;
- The interaction between how these travel bans would operate in conjunction with the commissioner’s issuing of a DPO should also be made clear. It is also worth considering whether DPOs would still be necessary in light of this measure;
- Having situations where a travel ban is not imposed on compassionate grounds; for example, an individual travelling overseas to visit a sick or dying family member.
It is without doubt that black economy activity must be curtailed for the benefit of the community and it is entirely appropriate that our enforcement rules remain effective.
Notwithstanding this, any additional powers that are granted to the commissioner need to be balanced with certain safeguards, accountabilities and oversight to ensure that those powers are appropriately used.
Tony Greco FIPA, general manager of technical policy, IPA