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Small business

The black market boom

February 7, 2014
Cash: hugely attractive to some businesses.

Cash: hugely attractive to some businesses.

Three things happened in the past week that sparked my curiosity in the underground economy. A tradie mate admitted he gives customers a discount if they pay in cash with no transaction recorded. A friend returning from Argentina mentioned he purchased his currency on the street, thereby getting more for his buck. And, on suspecting my cleaner hasn’t been declaring all his income, I asked him to start providing me with a receipt each fortnight.

I’m particularly sensitive to this issue because, being a passionate Greek, I have watched the beautiful Mediterranean nation tragically disintegrate over the past six years in part due to the pervasiveness of its underground economy. The latest figures released by the OECD indicate it comprises 25 per cent of Greece’s GDP, which means approximately $30 billion in tax revenue is sacrificed each year.

At the moment it’s not really a big issue in Australia. According to the World Bank, the underground economy here makes up about 15 per cent of GDP – but that figure is disputed by the Australian Bureau of Statistics, which reckons it’s more like 2 per cent. The problem is that identifying an accurate measure is tough since the underground economy is, you know, underground.

Even if the scale of the problem is negligible, it’s worth considering the potential ramifications if the lure of saving money means the practice expands. So who are the main culprits? According to the ABS, it’s small businesses with either zero or just a few employees. Those operating in repair work, catering, personal care and domestic services are the most likely to be tempted to the dark side.

But even though there are greater numbers of small businesses finagling the Tax Office, the reality is that it’s the massive multinationals profiting the most. They do it via ‘transfer pricing’, which is when companies (such as Google and Apple) pay little tax in Australia despite generating millions, and sometimes billions, in revenue by the establishment of accounts in low-tax countries like Ireland.

The difference is that what those big companies do is legal. What the rest of us do, however, in our pursuit of a cheaper service or a lower tax bill, is not.

The GST was supposed to fix the problem. The Howard government claimed the introduction of an ABN would curb the underground economy because it heightened the chances of such behaviour being detected. As the Treasurer Peter Costello professed at the time: “This tax cracks down on the black economy, and that's the whole idea of it.”

But that was not to be the case. An analysis a few years later by the Taxpayers’ Research Foundation concluded the underground economy had actually increased by 1 per cent. The author of that study was Christopher Bajada, an economist at the University of Technology Sydney, whose estimates a decade later indicate it’s now even worse, amounting to $100 billion a year.

One of the studies conducted by Dr Bajada looked at the unemployed and their role in the underground economy. He discovered it’s not uncommon for people to be “officially unemployed”, which means they derive an income not only from welfare benefits but also from their black market activities. 

While that may not be surprising, what is surprising is his conclusion that this combination of income is “likely” to be higher than what the unemployed would get from a legitimate job. The incentive to cheat is clearly there and not insignificant. 

Perhaps what’s protecting Australia from sliding towards the quagmire of Spain (where 1 million people are employed in the underground economy) and Greece is that, unlike those countries, an overt pride in rorting the system doesn’t seem to exist here. 

Were that to take hold culturally, it would become a very different story.

Do you participate in the underground economy? What are your experiences?

twitter Follow James Adonis on Twitter  @jamesadonis

71 comments so far

  • I once worked for a US multinational, they used to refer to ICTP, officially, Inter company transfer pricing as Inter country taxation planning. Says it all really.

    Commenter
    Charley
    Location
    4285
    Date and time
    February 07, 2014, 6:43AM
    • This article highlights why PAYE taxpayers are the ones who should be angry. The ones who are paying the tax they are meant to be. The GST should be raised to 15% and the tax office should spend more on compliance. This means when tradie X or criminal Y buys a car or Big Mac that they at least pay some tax if they arent paying income tax.

      Commenter
      jg
      Location
      CAnberra
      Date and time
      February 08, 2014, 8:42AM
    • As highlighted, it is the multinational tax avoidance is the main problem not the local tradesman.

      Why is it such a big problem for the government to pull the plug on that. Abbott said it would be a big accomplishment if governments merely start to talk about it. It would be a much bigger accomplishment to actually see some some action on this. During the GFC there was a movement to stop the tax havens. This was vetoed by the Republicans in the US who are Abbott's bedfellows. I'm not optimistic about any action from him.

      Commenter
      Good Logic
      Location
      Date and time
      February 08, 2014, 6:10PM
    • I would just like to agree that the problems with our economy are not with trades people & the cash economy. Though it doesn't help things.
      The institutional tax avoidance, middle class welfare, family trusts, buying properties to save tax etc ... are the main issues.
      I often give discounts for cash. It doesn't mean I don't claim the work. It means I have the money upfront without having to think about it, or go after people for money.
      As a business owner I would like to say ....
      - I do not want to employ people in the current joke of a market. Too much headache, too many rules, too much paper work & liability.
      - I will not earn more than $75k because I never want to have to deal with the stupid GST rubbish ever again.
      Our tax system & business compliance issues are an absolute travesty. Our system keeps people in business or going broke & makes it harder for people entering small businesses.
      The top end of town is where the money is getting manipulated on the grand scale.
      GST means there is no longer a completely cash economy. Every single person has to pay taxes .. its just which & how much.
      Once upon a time for baby boomers & the like .. they could take cash their whole lives & then buy many large assets... It no longer works that way anymore.
      Now, if you can't prove where the money comes from you basically don't have any legal right to it in many situations.
      Employment market is underemployed, businesses are over worked & over extended, families are over burdened ....
      Those with money .. get the tax breaks ... those without struggle to earn enough to live.

      Commenter
      Yuppy
      Location
      Yuppy Ville
      Date and time
      February 09, 2014, 9:21AM
  • When governments are so enslaved to big business, it's little wonder they are able to 'legally rort the system, they basically do what they like and as for the underground economy, I'm sure it will continue to expand as unemployment increases. There is a small saving grace however, but it does have a limited time line. Most governments have blindly followed the primitive Keynesian model of economics which is based on consumption, interest rates and money printing. The saving grace is that most money earned via the underground economy will be spent and therefore prop up businesses and employment etc. Additionally, a percentage of it will end up in the hands of the tax man. I don't think the pollies are too concerned, at the moment anyway.

    Commenter
    kanga
    Location
    Date and time
    February 07, 2014, 6:55AM
    • CONT
      I agree with ending the black economy for Australia's better future but before doing so also end the pilfering by secondary companies due to all the regulations/insurances required to even operate. The government is one of these pilferers with all the regulation payments tradies make.
      It’s effectively just another tax.
      I would start with the big guys like Google who have very little overheads due to being a website but pay little or no tax on 10 of billions in profits.
      Tradies should get out of this mugs game and build a website for finding tradies when the black economy ends .KACHING!

      Commenter
      Mark
      Location
      oz
      Date and time
      February 08, 2014, 12:44PM
  • A friend of mine works in a bank and she tells me that each month she handles transactions where she has to supply customers amounts of cash sometimes up to and more than fifty grand. They tell her that it is usually to pay for trade work or even sometimes cars - they receive discounts for cash. The last three tradesmen i have used have all asked for cash. Is this any different to nifty professionals using creative accountants to avoid or evade tax?

    Commenter
    grace
    Location
    Date and time
    February 07, 2014, 8:05AM
    • Yes, it's different. One is legal, one isn't. Sure - it may not be in the best interests of society for nifty professionals (as you put it) to reduce their tax bill but it is legal and if you don't like it then campaign for tax law reform to make it harder for them (and, more importantly, big multinationals).

      Commenter
      Peter
      Location
      S
      Date and time
      February 07, 2014, 10:16AM
    • Yes a lot of tradies ask for cash, but this if often because of the fees that are incurred by them if they use credit card or electronic transactions. At the end of the day, no matter the method of payment, it is always important to ask for a tax invoice or receipt. This legitimises the transation, protects you as a consumer in the event of any work performed not being to standard, and reduces the risk of the transaction avoiding the tax man.

      Commenter
      Bloke
      Location
      Date and time
      February 07, 2014, 2:43PM
    • Creative accounting is just criminal activity. Most people don't use their accountants this way. They use them to stay organised and out of trouble. If someone wants cash only it is because they want to rip you off. Either directly by not issuing a receipt or indirectly by not paying tax. You just don't want to use them either way.

      Commenter
      Busker
      Location
      Date and time
      February 07, 2014, 6:25PM

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