A deeper interpretation of the ATO’s black economy measures
11 September, 2019 | Steve Burnham
A deeper interpretation of the ATO’s black economy measures
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Steve: Hello listeners. Welcome to the Tax Wrap podcast, episode 200. It’s a special episode. I’m your host, Steve Burnham and, as a special guest for our special episode, we have in the studio Bill Mavropoulos, from VT Advisory. Good morning Bill.
Bill: Good morning Steve, how are you?
Steve: I’m very well thanks and I’m glad to have you here in the studio.
Bill: Yes, it’s good to see you again. Listeners should note that I do know Steve.
Steve: Yes we do, Bill and I know each other from a few years ago. Bill was a Tax Technical Operative at Tax & Super Australia and did a very good job at that, and has now branched out. You’re a partner in a firm now?
Bill: VT Advisory.
Steve: Tell us a little about that.
Bill: So, look, Steve, because of my tax specialist background, largely gained here, part of the practice is a tax specialist practice where we do pre-insolvency, pre-litigation work. As well as obviously tax advisory work. On the other side of the business, my business partner Tom Palmieri does a lot of business valuation sort of things and business optimization and automation. So, we try and be as agile as we can.
Steve: Yeah, OK.
Bill: I’m the older member, or older partner of the firm. Sometimes we struggle, but, but we try.
Steve: So a bit of law, tax law, is obviously in that mix.
Bill: It is a big focus yes.
Steve: Right. Okay. So Bill you’ve come into the studio today to talk to Tax Wrap listeners, and I think you were going to elucidate a little about the black economy, and moves the ATO have been making?
Bill: I am, but I’m going to approach this from a slightly different angle from most commentators, because I think most commentators just take the ATO’s pronouncements and say OK, black economy, this is what’s happening at the ATO. What I want to do is delve a little bit deeper.
Bill: At the risk of putting on a tinfoil hat — and I’m not doing that, I’m trying not to do that. I’m going to highlight a couple of other initiatives that are related, that speak a bit more to what the ATO’s strategy actually is, by, by sort of attacking this area, or looking at this area more closely.
Steve: So, do you mean, is there some kind of using the black economy as an excuse to make some wider changes? I’m getting that feeling.
Bill: Yes? And also, not necessarily, publicising some of what is means to actually attack that black economy, what that black economy actually is. Because, I think, look, if you aren’t a tax professional, a lot of these changes that are in the environment, and the landscape — you won’t necessarily link the two.
Bill: So look I think where I would like to start is with the Director Penalty Regime, and changes in that area that are on the horizon. And potentially, you know, are meant to start in October, but we’ll see in terms of whether or not Royal Assent is given to this measure.
Steve: I remember there was the Super Guarantee obligations that were brought within the Director Penalty Regime.
Steve: Is that law now?
Bill: Yes that is law now. But what the proposal is, is to actually expand the Director Penalty Regime to encompass GST, which has historically not been part of that.
Steve: No, no. But that’s a big thing.
Bill: It is a big thing. It will ultimately mean that all taxes, aside from obviously income tax, can be the subject of a Director Penalty notice — in other words, shifting those liabilities, those tax liabilities, from a company to an individual.
Steve: That’s true. Or to ultimately the individual.
Bill: Yes, ultimately to the individual…
Steve: …if the company doesn’t take care of it. Yeah.
Bill: So the reason why I wanted to bring that up… and look for people in terms of a reference for people to follow this up, the bill in question is the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019.
Steve: Yeah, I’ve heard of that.
Bill: So, if any of your members want to look that up, I encourage you to. And just be aware that, that bill is broader than what I am talking about today. It also involves various insolvency matters, and also, you know, topically, potentially offenses for advisers that might be giving tax advice, in terms of, for example, Director Penalty Notices. And may actually be caught up with new offenses in terms of phoenixing, inadvertently.
Steve: I see, OK.
Bill: So just be aware that’s probably a good bill to be across anyway. Because as accountants we should also be across corporate law as well as obviously tax. The two interact, considerably.
Bill: But look, for our purposes today, in terms of black economy, this measure is really the ATO trying to shift all of the tax obligations on to individuals. And look, you know, there’s the basic (concept of) the corporate veil.
Steve: Ah yeah.
Bill: If a $2 company has tax debts. You know, it used to be, before the Director Penalty Regime, if the directors were to walk away from that company, provided they weren’t trading whilst insolvent, or doing anything, you know, naughty, effectively, the liability stayed with the company in question. Rather than the individuals.
Steve: That’s why all the ‘bottom of the habour’ things happened in the 70’s etc.
Bill: Exactly. And part of, part of the reason why was there was no mechanism to sort of enforce those debts on to the actual individuals who, you know, who were really responsible for causing those liabilities.
Steve: Yeah. Right.
Bill: So I think that’s the first, I guess, link I would like to draw to the black economy, in terms of potentially widening the net of taxes that can be shifted on to the individual.
Bill: So the ATO sort of, the way that I read this is, the ATO is looking at the black economy and saying, ‘you know, look there’s a lot of this, for example in the building industry, or potentially retail’ or what have you. Directors that are, you know, could potentially, run into a lot of really heightened risks and then walk away from their tax liability in terms of GST.
Bill: When, yeah, everything goes pear shaped. So the ATO is trying to close that off as part of the black economy and say, ‘you know what? In terms of your lodgment and reporting, we’re going to shift the onus on to the individual’. So you have got be really, really careful about what you are reporting.
Steve: It’s funny, because I think of GST in terms of retail. I mean, that’s where my mind goes…
Bill: …everyone does…
Steve: …but not, I suppose, construction and all that. It’s all involved. And that’s when the millions of dollars get involved and not the thousands of dollars, I suppose.
Bill: Well, well I guess the thing is, because of, I guess, the scale of transactions that we’re talking about, it’s like a multiplier, on the tax liability. It means that those tax liabilities are significantly higher.
Bill: Then potentially other industries. Fun fact, the building industry actually has one of the highest insolvency rates.
Steve: Does it?
Bill: Yes. And other fun fact? The ATO is one of the largest creditors, that actually winds up companies.
Bill: So I guess that’s kind of why I’m saying hey, “black economy”, lets give it context!
Bill: So what are some of the tools that the ATO would like to have? This is definitely one of them. So that’s kind of why I brought that one up.
Steve: Sorry, Director Penalty Notice changing to encompass GST. Is that on the table?
Bill: Yes, currently on the table. It is slated to begin in October.
Bill: Yes. Having said that however, it went to second reading speech and off to a sub committee, so who knows what could potentially happen.
Bill: Look, the way that I look at it is, if any of your clients are distressed, or potentially in pre-insolvency where, you know, maybe they’re struggling to pay creditors, maybe they’re falling behind on their BASs or income tax returns… it is within your interest to understand that GST will form part of that net, potentially.
Bill: So you may want to sort of go, ‘OK, we’re really struggling, we could potentially fall over, potentially, so is it better if you fall over before October?’ Who knows?
Bill: So I’m not, obviously, advocating entering into voluntary administration, or anything like that.
Bill: But, look, it’s a useful piece of information, I think, in terms of the black economy. It certainly is one of the tools in the toolkit that the ATO is trying to obtain.
Bill: There is a lot of outcry on this measure, in Parliament. So there is opposition to this in terms of, you know, whether or not it gets up. It’s anybodys guess.
Steve: Yeah. Yeah.
Bill: So the other matter that I wanted to talk about in relation to the black economy was, and this is an interesting measure, is outlawing cash payments above $10,000.
Steve: That’s right. That’s been in the news a bit lately.
Bill: That has been in the news.
Steve: Yeah. Very contentious. So, $10,000, no cash transactions. Now we’re not talking about an ALDI bag full of notes are we, it’s more…
Bill: Ha ha; well we could be. This is the thing. A lot of accountants hold cash in their trust account for various taxpayers, or their clients.
Bill: You know, look, be aware that if you go into a bank and draw $10,000, and it is part of a transaction… but look, I will quote the bill as well. It’s the Currency (Restrictions on the Use of Cash) Bill, 2019.
Bill: So, yeah, look. Effectively, and I guess to sort of link this back to the black economy… The best way to sort of think about this is to imagine a profit & loss (statement), and say, you know, if you’ve got your sales and your purchases, effectively the ATO does not want any sort of ‘good faith’ from the taxpayer to say, hey, I made $10,000 as a sale in cash, or I purchased $10,000 worth of items.
Bill: They want it on the electronic record, so that they can audit it. And basically reduce the number of transactions that are in what colloquially they call the black economy.
Steve: OK. OK.
Bill: Because you know, there’s a lot of legitimate transactions that are in cash. No one’s sort of saying that they’re not legitimate.
Bill: But I guess what the ATO is saying is, if they can restrict the number of cash transactions, effectively, the pool of transactions that they need to audio, or review, significantly decreases.
Bill: And then they can allocate resources to it, you know, in an easier manner.
Steve: Do you have a feeling, what’s your guess, about that figure? $10,000? Why not $20,000? Why not $5,000?
Bill: Look I think what they’re trying to do is align it with Austrac’s ability in terms of cross-border payments coming in and out. So you know, where it’s above $10,000, and I think a lot of accountants would be aware of this, it is automatically reported to Austrac.
Steve: I see…
Bill: …if it’s cross-boarder. So look, I think to some extent its aligning that with cross-boarder measures. And I guess also, this would shift a lot of onus on to banks as well, the bank that is allowing you to withdraw more than $10,000 is going to have some serious questions to answer.
Steve: Ahh yep, yep. And with banks wanting to actually toe the line I suppose, these days, after the Hayne Report.
Bill: Well they have to.
Bill: So I think, you know, the implications on the wider community, I don’t think have been thought through necessarily. I mean look, there has been discussion around it, but practically, how will these measures impact upon taxpayers?
Steve: Hard to say.
Bill: That’s the question.
Steve: Especially one’s clients, if you’re a practitioner. I mean, again, look I just had a thought. Construction? I mean, there’s a lot of cash transactions.
Bill: There are! And I guess, look, you know everyone loves to paint the caricature, and do the cartoons.
Bill: So you know, the Gatto’s of this world, you know with, like you said, the ALDI bag full of cash.
Bill: But look, often, and I guess this is a subsidiary sort of issue where, you know, banks are unwilling to lend to small businesses.
Steve: Are they? Do you get that feeling?
Bill: Well that’s it, you know, practically speaking. That is how the industry is at the moment. Now whether or not that will change with the advent of this measure.
Bill: Or, I guess, look, the danger here is that you’re restricting the ability of these businesses to trade. You’re effectively saying, you know, your industry has, over many many years, traded in one manner, and we’re saying that you can no longer do that.
Steve: Yep. Yep.
Bill: I guess the risk is, that, potentially, you know, that change may not necessarily be adopted, or not in a manner that the Tax Office and regulators would like it to be.
Bill: I guess the other risk here is that banks themselves may potentially not feel comfortable, you know, with certain businesses as clients.
Steve: Yeah, I suppose.
Bill: They will just shift them off their books.
Steve: Yeah. Yeah.
Bill: In which case, how do you get access to capital? How?
Steve: Well that’s true.
Bill: How do you continue to trade?
Steve: Well that’s right. What do you do? It just makes it harder, it seems. But I can see on the surface, you know, your average mum and dad in the street hears about $10,000 cash transactions outlawed and they’ll think, oh good! That’ll take care of all the dodgy people out there, but there’s more to it.
Bill: Well, here’s the thing. Let’s say they go to buy a car, and there’s a $10,000 deposit. They could get caught up in it.
Steve: Wow. Yeah.
Bill: Look, those life events, those large life events, I mean, think about divorce.
Steve: Ahh! Yeah.
Bill: How would you generally transact, I mean obviously you’re not going to, you know, there won’t be an ALDI bag in a divorce, generally a cheque or something like that, but there’s scope. Any time large amounts of money transactions, there’s cope that it could potentially be a cash transaction, and could get caught up in this measure.
Steve: So you’re saying the ATO wants to kind of have more of a record, wants to see more transactions.
Steve: Does this tie up? I know there’s another development about e-invoicing.
Steve: Does that tie up with that push as well?
Bill: It does. And I guess the reason why I sort of want to speak about e-invoicing is because I think it’s a blind spot for a lot of practitioners. Look, there’s probably a lot of really savvy people that are across what e-invoicing is. At its simplest, it is an electronic invoice. So if…
Steve: …right. Sounds plan and simple.
Bill: Pretty easy isn’t in. I mean you could send, for example, via email, a PDF of an invoice. That’s an e-invoice.
Steve: Right, OK.
Bill: What I’m talking about though is an underlying software language, that would allow business to entirely have their invoices be just electronic communications between two software packages. So in other words, you know, I might have a sale, and I might enter that into my system, and automatically it pops up in the customer’s system or the client’s system. That’s the best way to sort of describe it. But here’s the issue. The spearhead of these e-invoicing measures is again, guess who, Steve?
Steve: Not the ATO?
Bill: It is the ATO. They are the driving force behind the software language, that will allow businesses to do this. Why is that?
Steve: So it’s not software companies? B2B specialists etc, it’s the Tax Office?
Bill: Correct. So, in terms of the legislation and regulation behind how to actually do this, and to allow it, both cross-boarder, and within Australia…
Bill: The ATO is consulting and developing, in consultation obviously with Treasury and Parliament, laws to allow e-invoicing between businesses. My sense and my feel is that it would be a hop skip and a jump for them to open up a backdoor, so that they get that data as and when it’s produced.
Steve: Okay, OK. Yeah.
Bill: So, can you imagine if the ATO had transactional level data? As and when, it’s created.
Steve: As people do business?
Bill: …in real time, in real time. They would know what the GST liability of that individual is, on that invoice.
Bill: In terms of payment information as well, it would be hop and a skip and a jump, to get that from the bank.
Bill: Because remember, they’ve closed the loop in terms of all transactions above $10,000.
Steve: Ahh! Hang on, yes yes. A little lights going on in my mind. Yeah.
Bill: Do you see how these are all interrelated?
Steve: Yes! Especially the GST part, when you mentioned that under the Director Penalty change. So they know what liabilities the business has…
Bill: …and then they can shift them on to an individual as well, to make sure they get paid.
Steve: Yeah, yeah.
Bill: And this is where I put my tinfoil hat on.
Steve: Ha ha, okay.
Bill: The black economy is effectively eliminated in Australia. They know everything you do. Look, it’s very 1984.
Steve: That’s it, yeah. Big Brother.
Bill: So very George Orwell. But I guess, look, I want people to sort of think a little bit differently about how the ATO develops tools to move their compliance.
Steve: Yeah. Well, look at STP. That’s the latest one.
Bill: Exactly! So I mean, talking about Single Touch Payroll, one of the greatest areas of frustration for the Tax Office was superannuation. Has superannuation been paid? Has PAYG Withholding been paid?
Steve: And then they’ve got to wait until someone reports it!
Bill: That’s right! And look, you know, another frustration and something that, you know, I was involved in when I was at Tax & Super, when you look at contractors. Is there an obligation to pay superannuation for contractors? Or PAYG Withholding? Often the distinction between an employee and a contractor is really important. And there’s a lot of businesses that make those tax judgements and may not get it right.
Steve: OK, yeah.
Bill: So, it gives the ATO an unprecedented amount of information, to focus their audit activity on those businesses.
Steve: What’s that other, the new reporting mechanism? Um… Taxable payments?
Bill: Taxable payments annual reporting.
Steve: Annual reporting, that’s it.
Steve: Which is being expanded into more industries.
Bill: That’s right. So you know, bit by bit, I think, and look, imagining that profit & loss statement again. You’ve got your sub-contractor label in your profit & loss. You’ve got your salary and wages, your super, your Pay As You Go. So every part of the P&L, if that’s provided to the Tax Office before you even lodge a tax return, effectively we’re moving to a system where in real time, rather than lodge a tax return, in real time, the ATO gets your information.
Bill: And then potentially, once a year, sends you a bill, and says ‘here, this is what you have to pay’.
Steve: And they know it’s right. They’ve got it.
Bill: …or once every three months, or once every week, depending on the type of business.
Steve: Yeah, yeah.
Bill: So, I mean, look — the ATO is sort of moving, and I guess it’s part of their digital strategy, and something that I’ve actually written on when I was part of Tax & Super — what is their vision, in terms of where they want to ultimately go?
Steve: Right, yeah.
Bill: And where they’ll want to ultimately go is, if they didn’t have a black economy? And if they didn’t have to necessarily spend resources interacting with taxpayers reporting their obligations? And they could just levy an assessment and say, hey you owe X. That would be, that’s their Nirvana.
Steve: So you see less and less interaction with ordinary taxpayers?
Bill: The better for them.
Steve: Business with individuals.
Bill: The better for them.
Steve: Yeah, yeah.
Bill: Because, from their prospective, they’re spending money on resources to sort of interact with those taxpayers.
Bill: As opposed to, you know, spending that money on actual verification and audit. So if the verification and audit can be done by computers. Look, typically it costs money to audit taxpayers. If the dollar figure of what it costs comes down, it means that they can audit more and more people. It means more and more revenue in the coffers of the ATO.
Steve: Right, right.
Bill: So this, look, and I guess what I’m trying to do is sort of challenge those assumptions for practitioners to go, ‘hey, talk to your clients about this sort of thing’.
Steve: I was going to say, from a practitioners point of view, because that’s who we’re talking to, I mean what do they do with this information? I mean, how does it help one’s clients?
Bill: Well the first thing that I would say, to any practitioner, is be very, very diligent about bringing all of your clients on to STP TPAR etc. Look, all of those reportings are often left to your bookkeeper. So a lot of tax agents and accountants will say, ‘you know what, no, I do the income tax. That’s it’.
Bill: It’s a restricted sort of engagement. What I would encourage practitioners to do is, to have a think about looking at a whole-of-client compliance approach. So almost like a 360 approach.
Bill: To say, OK, I’m going to list what the obligations are, and I mean look, this even goes so far as to, you know, consider Workcover, and things that people don’t often associate with an accountant at all. To go, ‘you know what, all of these government departments are talking. All of them have this vision and this focus. In order to de-risk my liability for my clients…’ because obviously, you know, the accountant is the one who is on the hook… ‘I’m only going to accept clients that assure me that they comply with Single Touch Payroll, with TPAR, with all of these measures’. You know, potentially, if they are in a cash type industry, that make sure their record keeping is spot on, second to none.
Bill: Yeah. Make sure that they have software that assists them in managing their cash, so that, in the event that they are outside of the bell-curve and the ATO does knock on the door, that they have the records to basically push back.
Steve: Right, yeah, OK.
Bill: And look you know, another thing that, that I sort of suggest to practitioners is to think really, really hard about potentially forming a relationship with insurance providers who offer a tax audit product.
Steve: OK. Yeah, yeah.
Bill: Because often, you know, what happens is a client gets audited and the tax practitioner throws up their hands and says, ‘oh it’s going to cost, you know, an extreme amount of money for me to look after this audit’. When in actual fact, if the client had an insurance broker…
Steve: Some cover yeah, yeah.
Bill: …who had a policy, it could support, you know… Obviously that’s not advice to go out and get tax audit insurance.
Steve: No, but.
Bill: It’s to consult those professionals in the insurance industry who have those products. Because I think look, you know, unfortunately, audits are going to become more and more prevalent in today’s operations.
Steve: Yeah, yeah.
Bill: It’s just how it is.
Steve: Yeah. I see, of course, because all the records are there, to look at… why not.
Bill: That’s it.
Steve: I was going to ask you about insurances with the DPN expanded to GST. I mean, are there insurance products that cover that sort of thing?
Bill: Well there are. And this is the thing. If there aren’t, what I would encourage tax practitioners to do is form a relationship with these insurance brokers, especially ones that have the ear of these insurers, to design products that would cover that sort of thing.
Bill: Because it’s going to be a risk across the economy. You know, it is already. But it will become more and more prevalent, so, you know, is there an insurable event there? You know, I’m not an expert in terms of insurance, but you know, speak to a broker.
Steve: It’s a question to ask.
Bill: Potentially, they could give further guidance on it.
Steve: Bill, a few lights just went on above my head when we were talking. That’s just something I hadn’t thought about.
Bill: ‘I’m here all afternoon.’ No no Steve, look whatever you’d like…
Steve: Yeah. We’ve sort of probably come to the end of time for the podcast. Just a reminder listeners, I’m speaking with Bill Mavropoulos from VT Advisory, who’s been very generous with his time and his advice and his intelligence today. Thanks very much Bill.
Bill: And always a pleasure Steve.
Steve: We’d love to have you back. Listeners, thank you listening. That’s episode 200 at an end. Please tune in again next time.
Tax Wrap 200: Steve Burnham speaks with Bill Mavropoulos, partner at VT Advisory, about whether we’re in tin foil hat territory or not (regarding DPNs including GST, cash transaction limits, and e-invoicing)