Untapped $1 billion revenue pot hiding in shadows

Friday 4 May 2018

Government pointed toward untapped $1 billion revenue pot hiding in shadows

The Government is sitting on a potential $1 billion untapped revenue source, says Chartered Accountants Australia and New Zealand (CA ANZ) and ministers should be looking to fully exploit this opportunity before introducing new taxes or raising tax rates.

In its submission to the Tax Working Group, CA ANZ recommends the Government target tax compliance in the ‘shadow economy,’ the unreported economic activities such as cash trade jobs, crime, wages paid under the table and undeclared property sales.

The submission says Inland Revenue should be given more resources to boost its efforts to bring the shadow economy into the light. “This would ensure that the effect of the shadow economy is minimised and taxation due from this sector is collected.”

John Cuthbertson, New Zealand Tax Lead for CA ANZ said the shadow economy’s potential tax gap is equivalent to the Government’s annual commitment to the Provincial Growth Fund which will invest in regional development.

He said dealing with the shadow economy will require a long-term commitment and an attack on many fronts. “Top of the list is a change in attitude by Kiwis.
“Under-reported income, manipulating your expenses and slipping a tradesman some bank notes, is not okay.

“It’s not a victimless crime. There’s a cost to this behaviour and that cost is less money for health and education, social housing and the huge range of government services in need of more money.

“It’s an added burden on people who fulfil their duties as taxpayers.

“That message needs to come out loud and clear from the Tax Working Group.”
As well as an attitude change to combat unreported economic activity, the CA ANZ submission suggests:

• Making registration for tax and payment of tax easier
• Inland Revenue having a strong and visible presence in the shadow economy
• Introducing a very simplified basis of taxation for micro businesses
• Introducing a one-year amnesty for people who earn cash “under the table” to encourage them to enter the tax system.

Since 2010, Inland Revenue has been given additional funding of $83 million to combat the shadow economy. The CA ANZ submission says “this has proven to be money well spent as Inland Revenue uncovered $159 million in tax in the 2016 year alone and significant amounts in all years since 2010”.

The government tax collector’s main focus has been on the hospitality and construction sectors – industries shown by research to have the greatest risk of tax evasion.

Internationally popular ways of dealing with the shadow economy include educating taxpayers, making compliance simpler, reducing opportunities, increasing detection and reinforcing social norms.

The CA ANZ submission supports these strategies, but adds none “will, in themselves, provide a solution to non-compliance in the shadow economy. They are inter-dependent and will need to form part of a comprehensive cross-government strategy if meaningful change is to be achieved.”

Latest research from Victoria University and Inland Revenue suggests that undeclared self-employed business tax is worth approximately $800 million.

Cuthbertson said that when other legal structures available to do business, such as companies, are included, the amount of undeclared tax from the shadow economy is likely to be in excess of $1 billion a year.

Other CA ANZ recommendations for the Tax Working Group include:

• Simplify tax and tax compliance for small businesses
• Identify strategies to manage or reduce the risk of relying heavily on taxes on individuals (40.2% of the tax base) and other potential risks (for example, advances in technology and the future of work) to the broader New Zealand tax base
• Forming a free independent Taxpayer Advocate Service to protect taxpayers’ rights and act as a circuit breaker for taxpayer disputes with Inland Revenue
• Retaining the status quo regarding taxes on capital. Extensions to the taxation of speculative investments should be included within the Income Tax Act framework
• Not introducing additional corrective taxes such as a ‘sugar tax’ – corrective measures could be better addressed through regulation.

The CA ANZ submission is here

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