The Turnbull government is expected to announce some interim measures in the May federal budget aimed at beginning a long journey to claw back up to an estimated $15 billion in lost federal tax revenue and illegitimate welfare payments due to widespread cash economy activity.
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The man heading the federal government's "Black Economy Taskforce", Board of Tax chairman Michael Andrew, told Fairfax Media he was shocked by the scale of the problem, with exploitation of vulnerable workers such as students and temporary visa holders rife.
The black economy was hard to tackle because Australians viewed taking cash-only payments and not declaring it as "almost a national sport", Mr Andrew said.
"It's a huge problem," he said. "It's really large and unfortunately it's going to take a significant amount of work to turn around societal attitudes."
He said there were different types of cash-economy participants. Some were trying to comply but did not understand the law.
Others were outright tax dodgers, who did not care, or were students or temporary work visa holders who are only allowed to work a certain amount of hours and so cash payments are used to hide income.
"A lot of them are innocent parties, but a lot of it is outright cheating as well," he said.
Billions of dollars lost
In Australia, the Australian Bureau of Statistics estimates that the cash economy accounts for about 1.5 per cent of GDP, or about $21 billion.
Of that Mr Andrew estimated about $10 billion is untaxed and another $4 billion to $5 billion is money that should not have been paid out as welfare payments because people did not correctly report their income.
Hidden cash-only payments were widespread across cafes and restaurants, hair and beauty industries and building and construction, but Mr Andrew said the worst sector for black economy activity was labour-hire companies.
The taskforce had also uncovered cases of local government agencies denying legitimate businesses contracts because their wages were too high in comparison to businesses that were operating in the cash economy.
Mr Andrew has delivered his interim report to government for consideration as part of the May federal budget, and will hand down his final report to the government in October. It's unclear what budget measures will be immediately implemented.
Some of the recommendations in his interim report include education programs aimed at helping the public better understand their tax obligations and greater co-operation between local, state and federal government agencies to avoid having duplicate and confusing regulation stifling business.
Complexity in regulation and modern awards had made it hard for ordinary Australians to comply with the law, he said. "The system is beyond the capability of the average person," Mr Andrew said.
"You have to fill out 48 different government forms and have 72 licences just to set up a restaurant in NSW ... that's causing people to lose confidence in the system."
Mr Andrew referred to the case of almost 200 staff at celebrity chef George Calombaris' restaurants being underpaid $2.6 million over the past six years, due to the "poor processes in classifying employees" as an example of modern awards being too complex.
Ban cash payments
Long-term the federal government could consider putting a limit on cash transactions, as other countries have, he said. For example, France has banned citizens making payments of more than ???1000 in cash, partly as way to fight financing of terrorism.
While eftpos and credit card usage is climbing, cash remains the most important payment method for low-value transactions in Australia - 70 per cent of payments under $20, and is widely used for payments around $50.
Mr Andrew said the popularity of sharing economy services such as Uber and Airbnb had pushed more traditional industries to cut wages, and seen a rise in labour-hire services operating under the radar.
"I am really worried about them," he said.
"They have mobile workforces turn up for jobs such as cleaning, fruit picking and on abattoirs and they are undercutting everyone."
"We have a terrible situation with 457 visa recipients being taken to farms and charged extortion rates for accommodation so that their take-home pay ends up being virtually wiped out."
Another area where cash-economy activity was rife was for child care services, with backpackers increasingly taking on jobs as nannies, he said.
Phoenix companies rife
The problem of phoenix companies was also growing and resulting in lost revenue. This occurs when a company's directors strip cash and assets from it that they hide, liquidate the company and then restart it, usually under a different name. This is done to deny creditors, often the Australian Taxation Office, money.
Mr Andrew said the ATO often wasn't aware until 18 months later when it was too late. "It's costing us about $2 billion to $3 billion in lost revenue," he said.
Businesses incorrectly claiming GST credits and those classifying workers as contractors rather than employees to avoid paying them superannuation entitlements were other areas of concern, he said.
The majority of referrals about suspected tax evasion to the ATO from members of the public relate to businesses paying cash-in-hand wages to avoid paying tax and super.
Mr Andrew said today 17 per cent of Australia's workforce were independent contractors, up from 8 per cent five years ago. That equates to more than one million people working as independent contractors.
The ATO last year hit hundreds of thousands of building industry contractors who may have dodged their GST or income-tax obligations with $2.3 billion in tax bills.
Mr Andrew said technology would be significant tool in tackling the problem. The ATO is already using data-matching to try and catch tax cheats.
