House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Attachment 1: Extracts from the Final Report of the Taskforce

Executive Summary

Following an initial investigation by the Board of Taxation, supported by Treasury and the ATO, the Government (in December 2016) established this Taskforce to develop an innovative, forward-looking and genuinely whole-of-government strategy to combat the black economy.

The black economy is a significant, complex and growing economic and social problem. In our opinion, it could have increased in size by up to 50 per cent since 2012.

The costs it entails are not only financial in nature (lower tax revenues and higher welfare costs), but also societal. The black economy is manifestly unfair, allowing some to play by their own rules and penalising businesses, employees and consumers who do the right thing. Under cover of the black economy, vulnerable workers are exploited, criminal groups flourish and social capital and trust are undermined.

The black economy is not standing still, but rapidly shifting and evolving in step with wider economic, technological and social changes. It is a growing problem which, if not dealt with, can develop a dangerous momentum of its own: a 'race-to-the-bottom' which we are already seeing in particular areas.

In 2012, the Australian Bureau of Statistics estimated that the black economy equated to 1.5 per cent of GDP, with the illicit drug industry adding a further 0.4 per cent of GDP. This estimate is now outdated. We consider that the black economy could be as large as 3 per cent of GDP (roughly $50 billion) today, given the trends we identify in this Report.

A sense of urgency is needed from policymakers, leaving behind business-as-usual approaches from the past. A new strategy and commitment is required: one which addresses underlying causes, not symptoms, while keeping regulatory burdens low; one which goes beyond tax; and one which breaks down agency silos and embraces joint action and the intelligent use of data and analytics. This Taskforce was a genuinely whole-of-government undertaking, bringing together 20 Commonwealth agencies.

This agenda has a clear purpose and objective: to make our society both fairer and more equitable by creating a level playing field. To the extent that this yields a revenue dividend, the Government's capacity to fund needed services (or provide tax relief or lower deficits) will be greater.

Combatting the black economy is not just a matter for governments. We all need to be part of the solution. We need a new social contract: a renewed commitment from the business community and wider public to fight the black economy. Our hope is that our work, including our public hearings and consultations, has helped start an overdue national conversation.

In the time since the Interim Report in March, the Government announced the adoption of two of our key recommendations in the 2017-18 Budget.

In late May and throughout June, we conducted a national roadshow, holding public hearings and industry roundtables in every state capital city and the regional centres of Bathurst, Mildura and the Gold Coast. We have received 149 submissions from businesses, unions, community organisations, state and territory governments and members of the public. The Taskforce Chairman has held over 140 bilateral meetings with stakeholder representatives. In August, we released a detailed consultation paper containing over 50 ideas.

Perhaps as a result of this review, we have been told by tax and law enforcement authorities that public reporting and enforcement of black economy offences has increased.

What we have learned

Our engagement with the public has deepened our understanding of the black economy, the factors that drive it and, critically, the wider societal damage it causes. We have benefitted enormously from the insights and expertise of our private sector Reference Group and Inter-Departmental Committee of Commonwealth officials.

In particular, we have learned the following:

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The black economy is more diverse, more complex and influenced by a wider range of factors than we first realised. While the black economy has always been with us, it is constantly changing form and focus as the commercial, economic, technological and social landscape shifts. A decade ago, the sharing economy was in its infancy, phoenixing was not as prominent as it is today, supply chains were under less pressure, Australian Business Number fraud and identity fraud were less of a concern and the criminal face of the black economy was very different. There has been a noticeable increase in white collar crime.

•

The black economy is an endemic cultural problem. It is supported by values and assumptions that participation in the black economy is a 'victimless crime', that 'everyone does it'. We are seeing it become more entrenched with such views spreading through families and communities including through social media.

•

The adoption, up-take and spread of new business models in the economy, while a positive development, facilitates black economy activities when our policy and regulatory frameworks fail to keep pace. The shift of contracting into new sectors (including human services), the sharing or gig economy, the expansion of domestic services, the fragmentation and growing complexity of supply chains, the growing sophistication and cross-border nature of criminal activity and financial innovations (including the use of cryptocurrencies) are all cases in point.

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That the traditional view which placed the 'cash' and 'black' (or criminal) parts of the problem in different categories, leaving the former to tax authorities and the latter to law enforcement, is outmoded. Modern criminal networks are more sophisticated and business-savvy than ever, pursuing opportunities wherever they arise, including the legal economy. Indeed, this is a factor behind the growth of the black economy in recent years. Criminal activities do not respect the silos of government organisation so any government response needs to be flexible and coordinated.

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More regulation is not the answer. Business after business has told us that regulations tie legitimate operators up in complexity and red-tape, while being completely evaded by hardened black economy operators. Our responses must be more intelligent and targeted than this, including employing the smart technologies we are seeing in the private sector. It is not beyond us to reduce red-tape for 'low-risk' businesses while focussing our enforcement efforts on the minority doing the wrong thing. In our consultations, the value of visible enforcement has been a consistent message.

•

The exploitation of vulnerable employees is widespread and may be growing. This manifests itself in the underpayment of labour, the denial of basic conditions and in some cases modern slavery.

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There is anger in the community about the unfairness of the black economy. Honest small businesses are sick of being undercut by competitors who have an unfair advantage, whether it is paying cash wages to employees, using illegal migrant workers or engaging in sham contracting. Honest employees suffer as well. While community frustration toward multinational firms has been acknowledged by the policy community, in part because it has a natural focus, the black economy's injustices and unfairnesses, while no less real, lack the same profile.

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It is wrong to tar the entire small business community with the black economy brush. The majority of small businesses and tradespeople do the right thing. Equally, we should avoid the temptation to paint consumers and employees as innocent victims in all cases. Some employees, including high-end hospitality staff, will not work for anything other than cash wages. Some consumers demand discounts from tradespeople. This is not to deny, of course, the situation of vulnerable employees in particular, who are, in many cases, subject to mistreatment.

Our strategy

In this Report, we outline a clear strategy for dealing with the black economy. We recognise that this must:

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Address the drivers rather than the symptoms of the black economy. We must focus on incentives, deterrents and measures which will limit opportunities for participation in the black economy across the board. Strengthening identity regimes (for individuals and businesses), transparency (for contractors and sharing economy operators), moving to a near non-cash world, visible enforcement, education and 'hardwiring' government all have a role to play.

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Be practical and implementable, while avoiding increasing regulatory burdens, and tailored and targeted. We need to recognise different degrees of culpability: there are many who innocently participate in the black economy (for example, occasionally paying cash for childcare); others deliberately flout the law; and still others find themselves trapped (for example, exploited employees).

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Include short-term, urgent measures, addressing the most pressing concerns, but also early actions which provide a foundation for later interventions. We set out an indicative timetable for implementation of our key recommendations.

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Our efforts need to be sustained. We need to leave a lasting institutional legacy, to ensure this problem receives the attention it deserves in future years. This will require changes to the machinery of government, but also new patterns of cooperation with the states and territories and other countries.

Our strategy, at the highest level, is to:

1.

Move people and businesses out of cash and into the banking system, which makes economic activity more visible, auditable and efficient (Chapter 3 in this Report).

2.

Strengthen the identity underpinnings of the banking system by introducing a more reliable, safe and modern individual identity credential (initially for interactions with the Commonwealth Government) and reforming the Australian Business Number system (Chapter 4).

3.

Improve agencies' ability to enforce existing laws by promoting better sharing of data and more modern data analytics (Chapter 5). At the same time, closing data gaps by extending our tax reporting systems and promoting more data sharing with state governments (Chapters 6 and 15).

4.

Improving Commonwealth agencies' effectiveness by working more closely with other governments (state, local and international) and business organisations, community groups and unions (Chapters 11 and 15).

5.

Tackling behaviours directly by strengthening incentives for consumers and small businesses including an amnesty and benefits for small businesses which adopt non-cash business models (Chapters 3 and 7).

6.

Supporting this with a dedicated social norms agenda, including education, public awareness and new-business strategies (Chapter 11).

7.

Making enforcement more visible, better tailored to the offence and more effective (graduated penalties, greater use of civil law and multi-agency action). Targeting particular problem areas, including phoenixing, sham contracting, visa abuses and vulnerable workers. In the criminal area, adopting a more strategic approach on illegal tobacco and gambling (Chapters 8, 10, 12, 13 and 14) and disrupting the proceeds of crime.

8.

Pursuing a new responsible supply chain agenda, which is an emerging integrity issue, in both the public and private sectors (Chapter 9).

9.

Disrupt crime and illegality, the sharp end of the black economy, including illegal tobacco and unregulated gambling (Chapters 12, 13 and 14).

10.

Institutional changes to strengthen, modernise and better marshal our future efforts on the black economy (Chapter 16).

In our Interim Report, we pointed out that, in many areas, relevant work is being done by other reviews. These are looking at the treatment of migrant workers, phoenixing, individual identity, modernisation of business registers, under-payment of superannuation, money laundering and beneficial ownership. We have worked closely with these reviews, contributing ideas to them and seeking their views on matters we have examined.

Any effective response to the black economy must be genuinely whole-of-government in nature. In addition to tax, it must involve workplace relations, human services, immigration (and home affairs, when that department is established), education, our financial regulatory community and our law enforcement and intelligence communities. We also recognise the transformation the ATO is undergoing and its willingness to embrace new technologies, processes and methods of operation which can better deliver efficient outcomes. This is necessary, as its traditional enforcement and audit approaches are unable to deal, in all cases, with the trends we identify in this Report. We also note that the ATO is significantly bound by resource constraints.

High priority recommendations

We recommend that consideration be given to the following.

1.

A time-limited amnesty with a bias for people in the cash economy rather than those engaged in criminal conduct. This should be followed by an enforcement blitz.

2.

Australian Business Number (ABN) integrity reforms. The Government should adopt a number of measures to strengthen the ABN system, including: banning people on certain visas and apprentices from getting ABNs; requiring periodic renewal of ABNs (which would be conditional on meeting tax obligations); and providing for real-time verification of ABNs.

3.

Individual identity. To counter the risk of identity fraud, we recommend that the Government introduce a plan that allows individuals to use a digital credential, biometrically secured to an individual's own smartphone or connected device, for people to use in all their interactions with public agencies. Individuals would 'own' this credential, which should not be used to create government databases or to collect individual biometric data.

4.

Taxable Payment Reporting System extension. Apply the Taxable Payments Reporting System to additional high-risk sectors, including security contractors, road freight transport, IT contractors, owner-builders and home improvements from 1 July 2018 (reporting to start 1 July 2019).

5.

Sharing Economy. A reporting system for sharing or gig economy operators should be put in place.

6.

Tougher and more visible enforcement. New and strengthened penalties for phoenixing, ABN fraud, sham contracting and illegal tobacco, making more use of civil law provisions. There should be more high-profile prosecutions, more visible and efficient prosecutions and fewer confidential settlements.

7.

Small business incentive. In addition to the current instant asset write-off, small businesses that adopt (or have already adopted) entirely non-cash business models should receive tax instalment timing relief, benefitting their cash-flows. Further, small businesses that fulfil a set of core compliance activities should benefit from a regulatory safe-harbour, which means they will be treated as low-risk. We also recommend that further downward pressure be put on card interchange fees, which will benefit both small businesses and consumers.

8.

Moving to a near cash free economy. A $10,000 economy-wide cash limit should be introduced.

9.

Payment of wages into bank accounts to increase transparency.

10.

Non-deductibility of undocumented contractor payments and cash wages.

11.

Hardwiring government. Better sharing of data across agencies and the application of leading-edge analytics to more effectively enforce existing laws. Further funding for the National Criminal Database.

12.

Changing social norms and education. An initial, focussed public awareness campaign designed to raise consumer awareness of the costs and risks associated with the black economy, including the reminder that this is not a victimless crime. Education must also play a role.

13.

Commonwealth Procurement. We recommend that the Government limit procurement opportunities to firms with a good tax record. Bidders for contracts over a certain size would obtain a certificate of tax compliance from the ATO and issue a tax transparency report.

14.

Tackling illegal tobacco. An enforcement blitz following the passage of the Tobacco Control Act which consolidates offence provisions. Co-locating enforcement officers from a number of Commonwealth agencies and giving them new powers to provide a one-stop shop and single point of accountability with a stronger focus on the retail and distribution parts of the problem.

15.

Illegal gambling. Better use of existing enforcement tools and information exchange to disrupt illegal gambling and other actions including blocking offshore websites offering services to Australians and prosecuting providers and participants.

16.

Phoenixing. Tougher and better targeted promoter penalties, better early detection and asset clawbacks.

Institutional legacy

Our Review has highlighted the scope to strengthen, streamline and better focus our institutional arrangements for countering the black economy.

At present, we do not have a single policy and strategic home for the black economy within government; no central body examines emerging trends and vulnerabilities from a whole-of-economy perspective. On the operational front, we need to develop our capacity to tackle high-value, complex and cross-cutting black economy abuses, including criminal involvement in labour exploitation. Third, there is no obvious focal point for public complaints, concerns and allegations about the black economy.

In light of this, we recommend that the Government consider the following:

1.

A central agency-led advisory board, including both public and private sector representatives, to monitor trends and risks in the black economy and prepare a five yearly report on these. The board would meet twice a year. It would consider evidence on the overall size of the problem and the factors which may be contributing to its growth (or reduction). The reports would be made public as part of the Intergenerational Report.

2.

Establishment of a standing Taskforce (modelled on the Serious Financial Crime Taskforce) to identify, respond to and prosecute serious, complex black economy fraud. The taskforce model, which has proven successful in Australia, brings agencies together for a specific, mutually-agreed purpose, allowing them to 'pool' data, staff, powers and operational capabilities. After consulting with the law enforcement community, we have opted against recommending a new agency (like the United Kingdom's Serious Fraud Office), which could further silo and fragment our efforts.

3.

A dedicated program of cooperation with the states and territories. This would focus, in the first instance, on better data sharing, small business red-tape reduction and joint enforcement efforts. While cooperation takes place in some areas, we are a long way short of fully exploiting the variety of tools and resources (licencing, tax information and enforcement) governments, separately, possess.

4.

Establishment of a Black Economy Ombudsman's Office and hotline. The Ombudsman would be the public face for this issue and play a proactive role both within government and in the community. The black economy hotline should replace the plethora of existing agency hotlines with the exception of the National Security Hotline. It would triage incoming calls, referring them to the right agency and, where possible, publicly report on follow-up actions taken.

Chapter 6: A reporting architecture for a new economy

Our reporting systems need to be better

Key Points

The bed-rock of any tax system must be reporting arrangements which capture, efficiently and seamlessly, all taxable economic activities. Reporting should not stifle activity and entrepreneurism; just relate the payments that have been made. The STP initiative, which will take effect in 2018, will streamline and improve the transparency of PAYG reporting.

In the new economy, labour, goods and services are being delivered in new ways often outside the PAYG reporting net. The sharing economy is one such area. Innovation in business models should be supported, but regulation needs to adapt. Home-based services (such as nannies and dog walking services) and independent contractors are other examples of this.

This transparency gap allows the black economy to proliferate, creating an uneven playing field for those (including traditional employees) who are subject to current reporting requirements.

A modern, comprehensive and low compliance reporting architecture is a better approach than options like withholding, which introduce greater compliance burdens and substantially affect cash-flows. Withholding should not be ruled out as a last resort for particularly problematic sectors.

Observation: Building a hot-house

Master Builders Australia informed us that the building and construction industry:

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is the second largest in the country, after the financial sector, with revenues of over $300 billion in 2016-17;

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accounts for approximately 9.4 per cent of total economic growth (Gross Value Added) on average per year since 1996;

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employs more than 1.1 million people; and

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includes more business entities than any other industry (approximately 360,000 as at June 2016).

They also told us, 'The size and nature of the building and construction industry, as well as the nature of how construction projects are delivered, creates an inherent expansion of circumstances in which opportunities to display avoidance are present. This is a risk to the sector, the economy, and Master Builders' members. It is a circumstance where those who do the right thing are undermined and disadvantaged.'

The Construction, Forestry, Mining and Energy Union (CFMEU) told us that black economy behaviours like the below have long been a part of the building and construction industry, noting that 'On one view, the construction industry is less a microcosm of, and more a hot-house for, the 'black economy':

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Cash-in-hand payments

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Non or under-reporting of income

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Poor or false records

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Phoenixing

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Sham contracting

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Underpayment and exploitation of workers

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ABN fraud and abuse

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Using interposed entities to avoid tax

CFMEU also noted that 'One of the few measures that appears to have had some impact on cash-in-hand payments and other black economy practices in the construction industry is the introduction of the taxable payments reporting system...'.

The economy is changing...

The face of the Australian economy has fundamentally changed in recent decades. We have seen a shift away from traditional employment towards contracting, self-employment and use of labour hire firms. We have become a more services-based economy, parts of which are dominated by contractors. And in recent years, the so-called sharing economy has risen to prominence and alongside a rise in freelancing. These changes are set to continue. Independent contracting and the sharing economy are attractive to many. They offer flexibility, independence and the prospect of rewards which traditional employment may lack. Contracting is spreading to new parts of the economy, including a range of personal and domestic services. ^[2] Sharing economy platforms have established a foothold. As governments remove or scale back regulatory barriers which limit them, they will continue to grow. Technology, including the rise of labour market matching sites, is giving these changes greater impetus.

Observation: Sharing Economy Participants

People participate in the sharing economy for a range of reasons. For some, the sharing economy can be a pathway to transition from unemployment and underemployment into the full-time workforce. For others, it is a stepping stone from receiving welfare payments to regaining financial independence.

Splend provides people with a rental car so they can earn a flexible income with sharing economy platforms such as Uber. Additionally, Splend provides members with ongoing coaching, training and mentoring to ensure they become a successful small business owner.

Splend's platform has been supporting people involved in the Government's New Enterprise Incentive Scheme (NEIS) and Job Active Pathways. The flexible working hours of the sharing economy are attractive to a wide range of individuals, including the increasing number of over 40-year-old job seekers who are finding it hard to re-enter the workforce.

...but our tax reporting arrangements are not.

Our tax reporting systems are based on the old economy. The PAYG reporting and withholding regime was designed for traditional wage labour and bricks and mortar businesses. While it continues to capture a large proportion of the workforce, its coverage has been falling. In the contracting economy, by contrast, services are delivered outside this reporting net.

This transparency gap is not desirable for a number of reasons. It denies the tax authorities basic information which they can use when checking tax returns. Their ability to focus their audit and compliance efforts is limited. When transparency is lacking, some taxpayers will be tempted not to declare or fully disclose their earnings. Indeed, in a self-assessment tax system like ours, the absence of a comprehensive reporting framework poses serious risks.

'Third-party reporting has proven to be an effective measure of ensuring taxpayer compliance with their taxpayer obligations.' The Tax Institute

Sham contracting, which we discuss in Chapter 10, becomes more attractive in these circumstances. When employers fail to report wage and salary payments, they are in clear breach of their obligations. At present, few such obligations apply to payments to contractors.

Tax reporting arrangements can obviate the need for more stringent responses to tax evasion, including tax withholding. Tax withholding is a reliable way to improve compliance, but imposes compliance costs and adversely affects the payee's cash flows. If applied across the tax paying population, regardless of compliance risk, withholding would be seen by many as excessive.

Any tax reporting arrangements must be easy and inexpensive for businesses to comply with. The information asked for must be clear and limited to key data. Where possible, systems should be automated and able to be integrated into business software products.

What should a new reporting system look like?

Australia already has a contractor payment reporting system in place (the TPRS), but it only covers a small number of high-risk sectors. It initially applied only to the building and construction industry, where it has had promising results. In the 2017-18 Budget, the Government announced it would be extended to contractors in the couriers and cleaning industries. Other reporting schemes include third-party reporting for major government entities and reporting of business transactions through payment systems.

We think the TPRS should be extended to other high-risk sectors of the economy. Security providers, road freight transport, and IT contractors should be covered, as well as owner-builders and home improvements. Reporting exemptions provided to some public sector agencies should also be removed.

Observation: Success of TPRS in the construction industry

When TPRS was introduced in the building and construction industry it raised an additional $2.3 billion in tax liabilities in its first year alone (the 2012-13 year). ^[3]

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$265 million from outstanding returns being lodged - 249,000 contractors were found to have outstanding returns

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$506 million GST - a 6.1 per cent increase in net GST from the industry in a single year

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$1,128 million PAYGW - demonstrates significant under-reporting of wages and concomitant underpayment of personal income tax

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$357 million pay as you go (PAYG) instalments - an additional 50,306 taxpayers were identified as payees

This will not be the total increase as at the time the ATO report these results there were 76,000 contractors who had not lodged returns for that year, 53,000 who had lodged but TPRS reports indicated they had underreported, and 84,000 contractors without an active GST registration that TPRS reports indicated had received payments likely subject to GST.

The ATO notes that while increases cannot be attributed solely to the impact of the TPRS, it is likely that the majority of the increase flows from the introduction of the system, the communication and education program together with acceptance of the system by reporting businesses.

As at the time of writing, the ATO was analysing the data in preparation for publishing figures for the 2013-2014 and 2014-2015 years. The additional liabilities for future years are expected to reduce because the first year of operation has an element of 'catching-up' with past years, not least from bringing some people into the system.

The success of TPRS could be magnified by using the data it generates to identify those contractors who receive all or vast majority of income from a single source, which is an indicator of sham contracting.

In our consultations we have been told that TPRS reporting, although only required annually, can be time consuming. Many businesses lodge paper-based forms. The modernisation of the TPRS should emulate the STP initiative, which while still in its early stages, promises benefits for taxpayers (simpler compliance) and the ATO (real-time and more accurate information).

We also recommend the adoption of a reporting regime for sharing or gig economy platforms. This could be linked to the TPRS or undertaken on a stand-alone basis or possibly aligned with STP.

Any changes to reporting arrangements, including the introduction of new ones, should avoid imposing overlapping burdens on taxpayers. If a firm is already reporting under the TPRS, it should not have to duplicate this under a sharing economy or other reporting initiative. Consideration will need to be given to how duplication can be avoided.

We are not recommending the introduction of tax withholding for contractors. However, Governments should not rule out withholding in cases of serious and persistent non-compliance.

We also note that overseas experience indicates that withholding systems are more effective than reporting regimes in improving compliance in cash industries.' BDO

Observation: Potential high-risk industries

Stakeholders told us that non-compliance is a significant problem in other industries including traffic management, nail salons, scaffolding, removalists, car repair, milk bars and car washes. We encourage the ATO to review these industries and if they are found to be high-risk, advise government of options to tackle the problem, including potentially extending reporting to these industries.

Recommendation 6.2: A sharing economy reporting regime

Operators of designated sharing ('gig') economy websites should be required to report payments made to their users to the ATO, DSS and other government agencies as appropriate. The Government should also continue to raise users' awareness about the potential tax obligations from participation in sharing economy activities.

Description

Reporting income information

Operators of sharing economy platforms should be required to submit at least annual data on income received by their users based in Australia to the ATO. ^[4] The information should be comprehensive enough to allow the ATO to match the information to individual taxpayers, that is, it should contain at a minimum the full name of users, address and date of birth. Extending the requirement to ABNs should also be explored (for those who have, or should have ABNs), but the detailed set standard for reporting can be agreed on implementation. The ATO should use this data to pre-fill tax returns. The data should also be available to other agencies such as DSS. We are aware that some platforms already provide information to the ATO, or they withhold and remit PAYG. Additionally, many of these platforms already provide a summary of this data to their participants and the platforms have sophisticated and intelligent data and modelling capabilities that can provide meaningful data to regulators.

The options for more regular reporting of such data should be explored; more regular reporting would allow more real-time analysis and use. Whether the sharing economy reporting regime can be incorporated to comply with TPRS obligations, immediately or later, should also be explored.

Consideration will need to be given to determine which platforms the scheme should extend to given the variety of business models in use. As a guide, reporting should apply to payments to users who offer their labour as services (rather than goods) and are not classified as employees (in which case other reporting obligations already apply). Difficulties may exist where platforms are a mere matching service without the payment going through the platform itself.

Relevant overseas located platforms should be included in the scheme. Where platforms are not participating voluntarily, options may need to be developed to ensure they comply. For example, reporting obligations could be included as a condition for operating in Australia, such as being a condition of obtaining a licence (where applicable), and the Government should work with States and Territories to consider such options. The Government should also work in close cooperation with other countries to find ways to cover global sharing platforms in domestic tax and regulatory frameworks. Internet Service Provider (ISP) level blocking may need to be considered as a final resort for non-compliant platforms. Working with banks to prevent payments to or through non-compliant platforms could also be considered as a final resort for non-compliant platforms.

Education

Users of sharing economy platforms need to be made aware that income earned from participation in the sharing economy is likely taxable income. Their activities could also give rise to capital gains tax obligations, and could impact welfare and other payments.

The ATO already provides guidance. However, it is important that sharing economy participants receive information even if they do not look for it, as many may not be aware that even small or intermittent income could be taxable. Operators of sharing economy websites should also be encouraged to highlight the need to consider tax obligations to their users, and refer them to ATO information.

Objective

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For the ATO and other agencies to receive information on income received by sharing economy users to enhance voluntary compliance and provide data for income information matching, including for social security purposes.

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Ensure that sharing economy users are aware of their tax obligations, further driving voluntary compliance.

Observation: Labour hire and the sharing or gig economy

Some newer models of what could be considered labour hire use the sharing or gig economy model. The labour hire firm operates as an online platform, workers and businesses seeking workers are matched through the platform. The labour hire platform may just match staff to jobs, with the business paying users directly, or may provide users with the business paying the platform. The same platform may operate both models, with it varying between what the business chooses, either generally, or for particular workers.

Discussion

Problem this recommendation seeks to address

The sharing economy has grown strongly over the past few years and platforms have evolved from a place where people could share their existing assets on a casual basis and do some work on the side to a more substantial form of income generating work.

'...most existing policy and legislative instruments would have been designed for a world that predominantly traded on physical goods or in-person services relying heavily on paper-based business process ...' COSBOA

The number of users is growing strongly, and is supporting a rise in freelancing. Users selling their services through sharing economy platforms may be employees or may be contractors, depending on the particular arrangements for that platform. If they are independent contractors no tax is withheld from the income they generate on the platform, and platforms do not have to report information on payments made to users to the ATO, unless asked to do so under the ATO's information gathering powers, or through voluntary participation by the platform.

There is a risk that people selling their services through sharing platforms are not paying the right amount of tax as there is no reporting and withholding and many users may not be aware of or understand their obligations. Lack of knowledge about tax, the novelty of this type of income generating work and platform-user relationship, as well as poor record keeping all contribute to the problem. While there is no reliable data available yet, it may also be the case that some of the non-compliance is deliberate. While payments are electronic, without a reporting regime in place it is difficult for the ATO to gain information on compliance of sharing economy users unless targeted audits are used.

Observation: Day in the life of a 'gigger'

Spend the morning dog sitting through 'madpaws' app.

Spend the afternoon putting furniture together from Airtasker apps.

Deliver food in the evening with 2 or 3 food delivery apps (Uber eats, Menulog, Foodora, Deliveroo).

Drive for Uber on Friday night when demand is high.

Rationale

Streamlined reporting and pre-fill of tax returns will reduce individuals' compliance costs and make it easier for sharing economy participants to meet their obligations. It would help individuals by providing them with information on their sharing economy income through the tax return pre-fill service, and allow the ATO (and other agencies through data sharing) to undertake compliance activities.

Formalising the reporting requirements would also send a clear signal that income from sharing economy platforms is in most cases taxable income. It would level the playing field between traditional operators and new economy operators.

'As digital technology is adopted across the economy, segmenting the digital economy is increasingly difficult. In other words, because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy.' COSBOA

Other options considered

Sharing economy platforms to withhold tax

This option would require sharing economy platforms to deduct income tax from payments made to users and remit this money to the ATO. This would either be topped up or refunded as part of the tax return process. The withholding tax could be at various rates, for example a flat 20 per cent or based on an individuals' prior year income.

Applying withholding would substantially reduce non-compliance by sharing economy participants and may raise additional revenue through increased compliance. However, such an approach is relatively onerous and may be criticised as discriminating against transactions which occur on sharing economy platforms. As discussed above, there are various reasons for treating independent contractors differently to employees, and this extends to those sharing economy suppliers who are independent contractors (and not all necessarily are). As discussed above, withholding should be considered as an option if non-compliance remains a problem despite a reporting obligation.

Bright-line test for business-hobby distinction

In connection with the sharing economy, we also examined whether the hobby-business distinction remains suitable. It was put to us that current test creates a lot of uncertainty and is difficult to apply.

After consultations and considering various alternative options for a bright-line test, we came to the view that the current distinction remains appropriate. Overwhelmingly the activity on sharing economy platforms is likely to be business related, with users generally using the platform to generate income, provide services to strangers and undertake regular rather than once-off activities. A bright-line test could also be seen to interfere with the current tax free threshold and rather than simplify compliance, introduce further complexities. A bright line test just for sharing economy activity would also create a distorting disparity between different business operating models. While there may be instances where it could be considered a hobby, there should be a general presumption that sharing economy users are conducting a business, and the current test and guidance are sufficiently clear. A reporting regime, including pre-filling of tax returns, as well as education of sharing economy users will further provide clarity.

Stakeholder views

Feedback from consultations has overwhelmingly backed applying a reporting regime to sharing economy platforms. A well-known Australian sharing economy platform has told us that they would support a formalised reporting regime and that the suggested data (name, address, DOB) could easily be provided. They, and other similar platforms, already collect this information about their users. ABNs could also be supplied.

International experience

Many other jurisdictions (India, France, Spain, and the USA) require sharing economy websites such as Airbnb to withhold tax, mostly local hotel/accommodation taxes. Uber withholds tax for drivers in Estonia.

Working with global sharing economy platforms to bring them into domestic tax and regulatory frameworks has been identified as an important matter for international cooperation.

Implementation considerations

Overseas platforms will not easily be covered by Australian legislative change. Consideration will have to be given to how they can be compelled to participate if voluntary cooperation is not sufficient.

Consideration will also need to be given to determine at what point sharing economy platforms come under this scheme. While this is an issue that applies more broadly if TPRS is implemented across the economy, it may be particularly difficult for businesses in the 'new economy' and the need to avoid imposing large compliance costs on start-ups, and the potential for very rapid change.

The recommendation should also be considered in conjunction with our views on contracting, outlined in Chapter 10.

These organisations are sophisticated and have significant data holdings which can assist with valuations, intelligence and industry trends. For example, a particular sharing economy operator told us that the ATO income benchmark for taxi drivers in capital cities was 40 per cent below what drivers were actually earning.