- Michael Andrew has been listening to people exposed to aspects of the black economy.
- His report to government calls for an economy with almost no use of cash and he’s working on implementing recommendations.
Michael Andrew FCA has been a consistent presence at the top levels of Australian business for many years. The chief exception is the time he spent in Hong Kong, from 2011 to 2014, as KPMG’s global chairman – the only Australian ever to head a Big Four accounting firm globally.
Andrew, above all, is straightforward. He doesn’t seem to do power games; he has no airs and graces. He just keeps listening intelligently and employing what he hears. Those skills are on display in his most recent project, the Black Economy Taskforce, which he chairs and for which he continues to speak. Its final report was released to the Australian public with the 2018 Budget.
Hearing the problem
The term “black economy” covers all sorts of payments on which people decide not to pay tax, from café workers’ wages to untaxed tobacco. The final report got buried in the budget details, but Andrew is pushing on, working part-time for the government on implementing its recommendations.
Andrew had picked up on the black economy issue through business contacts. They told him they were getting outbid on contracts in various industries because they didn’t make cash payments to their workers and contractors. He’d heard from Steve Vesperman, a deputy commissioner at the Australian Taxation Office (ATO), about the need for a fresh look at the black economy problem. He believed his experience outside Australia had given him some ideas to address the problem; European nations had needed to address black-economy payments when the global financial crisis shrank their tax bases.
He recalls taking a proposal to Kelly O’Dwyer, then the minister for financial services. “I just said, ‘I think you’ve got a massive tax leakage happening here’.” He pitched the international lessons as a starting point. By late 2016, he was heading Australia’s official Black Economy Taskforce.
Making the case
As Andrew acknowledges, the biggest problem with shrinking the black economy may be its very familiarity. Everyone knows about it, and not many think it’s a big deal. When people think about tax avoidance, they think of giant corporations such as Apple.
Andrew himself was quickly struck by the estimates of the black economy’s size. “It’s 3% of our economy,” he says. “It’s A$50 billion.” Corporate tax losses from multinationals, in contrast, may be around A$3 billion a year. “If you want to build a National Disability System and you want to implement Gonski and you want to cut corporate taxes and personal taxes, you have to tackle this issue.”
Of course, Andrew has sometimes battled to convince people that the guy who ran KPMG – a firm that advises multinationals on reducing their tax bills – has all the right answers for café workers. To his credit, he has done talkback radio confronting the sceptical public, the ones who ask: “If the multinationals aren’t paying tax, why the hell should I?” He says he enjoys it.
That’s in part because he is campaigning to change a culture, and his campaign has a moral edge. He doesn’t like cheats. Law-abiding taxpayers shoulder a greater burden to make up the missing black economy revenue, he notes. And there’s “rampant exploitation of those who are not in a good bargaining position”. He says the inquiry took evidence from “honest tradespeople and workers or industry associations” who were “completely frustrated that their ability to earn their income was being undermined by people who were just aggressively under-pricing and cheating.”
In Tasmania, restaurateurs complained to him of food trucks taking cash payments. Sellers at fruit and vegetable markets told him of competitors who dealt in cash. Horticulturalists reported entrepreneurs were buying grapes and apples and oranges and exporting them to China without paying industry levies or going through quality checks. Painters said Korean painting firms were bringing people into Australia on 457 visas and under-cutting domestic firms by 30% or more. The Construction, Forestry, Maritime, Mining and Energy Union (CFMEU) gave him examples of Irish backpackers being given Australian Business Numbers (ABNs) to work at low wages.
“The people ... who do the right thing are at a commercial disadvantage,” he says, “and I think that’s abhorrent to everything we stand for in a free enterprise economy.”
Most tradesmen don’t want to do cash jobs but the householders say, ‘Okay, well what do you do for cash?’
The household problem
Andrew has especially harsh words for those who claim not to be in the black economy while paying cash for household services. “The householder’s a bigger problem than tradesmen. Most tradesmen don’t want to do cash jobs but the householders say, ‘Okay, well what do you do for cash?’”
He describes some of his conversations with company directors and CEOs:
They say, “Oh Michael, I don’t do anything in the black economy.”
I say, “Yeah, that’s interesting. What do you pay your personal trainer? What do you pay your gardener? What do you pay your window cleaner?”
“Oh, I pay them cash, they’ll only take cash.”
“Well,” I say, “you’re part of the problem. Do you get an ABN invoice? Do you actually get something that’s a record?”
“Well, no I don’t.”
So I say, “Well, you’re the cause of the problem … You’re actually perpetrating the very behaviours that are resulting in this distortion in the economy.”
Acting on the report
Andrew’s final report argued for “a near non-cash world”, where non-cash payment is cheaper than banknotes and non-cash business is encouraged. Releasing it, the government didn’t quite embrace that concept. But it did say it would act on many of his key recommendations:
* an economy-wide cash payment limit of A$10,000
* a ban on electronic sales suppression tools that let businesses hide transactions
* making businesses report payments to contractors in high-risk industries such as in courier services and cleaning
* an illicit tobacco taskforce
* extending ATO audit and compliance programs
* changes to the ABN system and development of a Director Identification Number scheme
* stronger rules to deter “phoenixing”, where a firm deliberately goes out of business to dodge its employee, creditor, customer and tax obligations, only to reappear soon after in another guise.
The government has also agreed in principle to encourage businesses to pay salary and wages into bank accounts (Andrew’s report asked for it to be made mandatory). And the ATO has also been cracking down on cash-only businesses.
Four black economy surprises
As the former KPMG chief dug into the black economy, four aspects particularly surprised him.
1. The sophistication of organised crime
Australians, says Andrew, have a naïve view that organised criminals are traditional, a bit thick and mostly interested in traditional property theft. In fact, he says, they’ve shifted into white-collar activities such as identity fraud and money laundering activities, competently using technology and complex legal structures that make their crimes difficult to trace.
He suggests that about 10 “significant criminal groups” operate in Australia, often through gangs, engaging in crimes such as drug dealing, money laundering, illegal gambling and counterfeiting. Some of the organisations are ethnically based, with operations in the Middle East, China, Vietnam, Mexico or Eastern Europe.
2. Motives beyond tax
Not everyone in the black economy, it turns out, is simply looking to avoid paying tax. Many people, he says, want to receive cash for non-tax reasons. Andrew uses the example of international students, who underpin a thriving education industry. Their visas restrict them to working 40 hours a fortnight, often not enough to keep them going. “They’re very happy to work more than 20 hours,” he says, “but they don’t want to disclose because it would impact their visa requirements.” Refugees and people on tourist visas are not allowed to work at all.
3. Illegal tobacco
Andrew says the extent of Australia’s illegal tobacco trade shocked him. Excise increases have made a gram of tobacco more valuable than a gram of silver in Australia. Though tobacco growing has been illegal since 2006, the report says the illicit tobacco industry could be worth A$3.8 billion a year. “If you’re a smart criminal, why would you import cocaine and heroin and all this stuff?” he asks. Tobacco has bigger margins – perhaps as high as a startling 2000% – and if you get caught, you’ll probably cop a fine and a good behaviour bond.
4. Modern slavery
Andrew recalls his surprise at the inquiry’s first hearing when a nun told him she was speaking about modern slavery. “I thought, ‘Gee, you must be at the wrong meeting’.” But he says he was convinced of the size of the problem by repeated examples, particularly in the agricultural sector – “people having their passports seized, people being put out onto farm sites, being paid A$10 a day and then having A$5 deducted for accommodation and transport ... I just couldn’t believe the examples I came across there.”
Following are some examples of areas of the black economy, as detailed in the report.
The restaurant game
From the Black Economy Taskforce report’s section on overhauling incentives and benefits comes this extract from a letter by a restaurateur:
Good chefs and baristas all insist on some cash in hand. If I don’t pay it, they can get it from my competitors. Many waiting staff make similar demands. So many are on visas where they have work restrictions. Centrelink and student loan issues are also common excuses. Really some of the staff are more worried about the Fair Work man than the employers.
Of course I have to fit within the Small Business tax office benchmarks. My real purchases are 40% of my sales so like everyone else I pay some of my purchases in cash so I fit within the benchmarks. Restaurant meal prices have hardly moved up for years but costs of fruit, vegetables and meat has gone through the roof. Often I am working my books to a lower benchmark than my actual cost of purchases. The suppliers are all onto this and they offer to take some cash so everything looks OK for the tax office. The tradies and builders all know to pay for some of their materials in cash.
It’s all got beyond a joke. The restaurant game is all I know. It would suit me if we became a cashless society, it would create a new level playing field where I didn’t have to become a crook to compete with crooks.
The unanswered question: sham contracting
Ask Michael Andrew what he felt remained unanswered at the end of the inquiry process, and he says he worries most about a problem called “sham contracting”. It affects people who have an ABN or even a company, but depend on one source of work – people such as Uber drivers. He calls the issue “incredibly grey” and wants the rules clarified. Apart from the issues of a two-speed tax system, he worries that these workers are outside the superannuation system. “You’ve got a whole class of people coming through at the moment who are not contributing to that system, but ultimately will be drawing upon the pension system, and you’re not funding it at the moment.”
How to fix it
Andrew is proud of the report finally unveiled in May, even if the budget-time unveiling was rather swamped by other news. Not only has it applied new thinking, he says, but it addresses the cultural issues. “Because you can put rules in and you can change processes. But ... it’s the classic change management process: how do you actually get people to think differently about their behaviours and what they do?”
The New Zealand government, he discloses, faces the same challenges and has asked for a copy of his report and briefings. It’s looking at many of the same measures he has recommended for Australia.
Having discovered and described the problem, Andrew now heads a permanent advisory board on the black economy – which means he confronts the issue of how to actually fix the problem. He has realised, for instance, just how many unintended consequences his fixes might have. For instance, banning cash wages will mean rewriting some industrial awards. Remote farmers may be unable to do internet payments.
“Obviously I’ve fought through a lot of the issues and I want to make sure that the report is actually implemented,” he says. “There’s a significant opportunity to break the back of this and really change the culture here and get us into a situation where the competitive environment is fair to everyone.”
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