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Treasury Laws Amendment (2021 Measures No. 7) Bill 2021

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2019-2020-2021

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (2021 Measures No. 7) Bill 2021

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

 

 



Table of contents

Glossary............................................................................................................. 1

General outline and financial impact........................................................... 3

Chapter 1 ........... Sharing economy reporting regime................................. 9

Chapter 2 ........... Transitional provisions relating to the repeal of the Superannuation (Resolution of Complaints) Act 1993.................................................. 17

Chapter 3 ........... Removing the self-education expenses threshold.... 25

Chapter 4 ........... Statement of Compatibility with Human Rights.......... 31

Attachment A .... Extracts from the final report of the Black Economy Taskforce     35

Attachment B .... Ramsay Review - regulation impact analysis........... 53

 

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

AFCA

Australian Financial Complaints Authority

AFCA Act

Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018

ASIC

Australian Securities and Investments Commission

ATO

Australian Taxation Office

Bill

Treasury Laws Amendment (2021 Measures No. 7) Bill 2021

CIO

Credit and Investments Ombudsman

Commissioner

Commissioner of Taxation

EDR

external dispute resolution

FBTAA 1986

Fringe Benefits Tax Assessment Act 1986

FOS

Financial Ombudsman Service

GST Act

A New Tax System (Goods and Services Tax) Act 1999

ICCPR

International Covenant on Civil and Political Rights

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

Legislation Act

Legislation Act 2003

MEC Group

Multiple Entry Consolidated Group

Ramsay Review

2017 Review of the Financial System External Dispute Resolution and Complaints Framework

SCT

Superannuation Complaints Tribunal

Superannuation Complaints Act

Superannuation (Resolutions of Complaints) Act 1993

TAA 1953

Taxation Administration Act 1953

TPRS

Taxable Payments Reporting System

 



Schedule 1 - Sharing economy reporting regime

Schedule 1 to the Bill amends Schedule 1 to the TAA 1953 to require electronic platform operators to provide information on transactions made through the platform to the ATO. This measure implements a recommendation of the report of the Black Economy Taskforce.

Date of effect The amendments made by Schedule 1 apply from 1 July 2022 for transactions in relation to the supply of taxi travel and short-term accommodation, and from 1 July 2023 for all other transactions.

Proposal announced Schedule 1 implements the measure Black Economy - introducing a sharing economy reporting regime from the 2019-20 MYEFO.

Financial impact The measure was estimated to have a cost to the budget of $5.1 million, in fiscal balance terms, over the forward estimates period at the time of the 2019-20 MYEFO.

2019-20

2020-21

2021-22

2022-23

0.0

0.0

-7.2

+2.1

This measure also includes an estimated increase in GST payments to the States and Territories by $4.1 million over the same period.

Human rights implications :  Schedule 1 does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 4.

Compliance cost impact The measure in Schedule 1 is estimated to result in a total average annual regulatory cost of $0.022 million.

Schedule 1 - Summary of regulation impact statement

Regulation impact on business

Impact The measure is estimated to result in a total average annual regulatory cost of $0.022 million.

Main points :

•        The Government is implementing a reporting regime for the sharing economy that will require operators of electronic distribution platforms to report information to the ATO relating to transactions facilitated through their platform.

•        The sharing economy has grown significantly in Australia over recent years and is often conducted through electronic platforms. Some sellers on these platforms may not be aware of the tax obligations flowing from this activity and consequently, are not meeting these obligations.

•        The reporting regime enhances Australia’s tax reporting requirements to help ensure these sellers are meeting their tax obligations and that an unfair advantage, compared to similar activity elsewhere in the economy, cannot be gained due to poor tax compliance .

•        Consistent with the Government’s regulation impact statement requirements, the Black Economy Taskforce Final Report has been certified by the Department of the Treasury as meeting the requirements of a regulation impact statement. [1]

•        The reforms are expected to result in an overall compliance cost to business, arising from changes to platforms’ systems to collect and report the required information.  

•        The executive summary of the report and relevant chapter in relation to the sharing economy reporting regime is at Attachment A.

Schedule 2 - Transitional provisions relating to the repeal of the Superannuation (Resolution of Complaints) Act 1993

Schedule 2 to the Bill amends the AFCA Act to facilitate the closure and any transitional arrangements associated with AFCA replacing the SCT. 

Schedule 2 provides for the transfer of records and documents from the SCT to ASIC, the remittal of matters on appeal by the Federal Court, and introduces a rule-making power to allow the Minister to prescribe other matters of a transitional nature.

Date of effect :  Schedule 2 will come into effect on the commencement of Schedule 3 to the AFCA Act. Commencement of Schedule 3 of the AFCA Act will be following a proclamation by the Treasurer or the day after 4 years of the commencement of the AFCA Act. This latter date is the 5 March 2022.

Proposal announced Schedule 2 partially implements the measure ‘Superannuation Complaints Tribunal­­ completion of casework’ from the 2019-20 Budget.

Financial impact Nil.

Human rights implications :  Schedule 2 does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 4.

Compliance cost impact : The estimated compliance costs impact for the specific measures contained in Schedule 2 to the Bill are nil.

Schedule 2 - Summary of regulation impact statement

Regulation impact on business

Impact The package of reforms to the external dispute resolution framework in response to the Ramsay Review, including the measures enacted through the Treasury Laws Amendment (Putting Consumer First - Establishment of the Australian Financial Complaints Authority) Act 2018, are estimated to have a compliance cost impact of $43.85 million each year. The estimated compliance costs impact for the specific measures contained in Schedule 2 to the Bill are nil.

Main points :

•           The Government has been informed of the regulatory impacts of various reform options by the Ramsay Review. The Ramsay Review was commissioned by the Government in May 2016 and led by an expert panel, chaired by Professor Ian Ramsay.

•           Extensive consultation with both industry and consumer stakeholders was undertaken as part of the Ramsay Review.

•           The review panel found that the framework that existed at the time was a product of history rather than design and that reform is needed. The panel identified that the existence of multiple external dispute resolution schemes with overlapping jurisdictions means that:

o    it is difficult to achieve comparable outcomes for consumers with similar complaints;

o    it is more difficult for consumers to progress disputes involving firms that are members of different schemes; and

o    there is an increased risk of consumer confusion.

•           Alternative reform options were considered and included having targeted reforms to the SCT and establishing a statutory tribunal.

•           The review found that the dispute resolution arrangements for superannuation were not effective and that superannuation disputes should be resolved by an ombudsman scheme, rather than a statutory tribunal (such as the SCT).

•           The Ramsay Review [2] has been certified as being informed by a process and analysis equivalent to a regulation impact statement. [3] Additional analysis is at Attachment B.

Schedule 3 - Removing the self-education expenses threshold

Schedule 3 to the Bill removes the $250 non-deductible threshold for work-related self-education expenses by repealing section 82A of the ITAA 1936.

Removing the $250 non-deductible threshold reduces compliance costs for individuals claiming self-education expense deductions and simplifies the tax return process.

Date of effect : Schedule 3 commences on the first 1 January, 1 April, 1 July or 1 October to occur after the Bill receives Royal Assent.

T he amendments to the ITAA 1936 and ITAA 1997 apply to assessments for the 2022-23 income year and later income years. The amendments to the FBTAA 1986 apply to the FBT year starting on 1 April 2023 and to later FBT years.

Proposal announced Schedule 3 fully implements the measure ‘Reducing compliance costs for individuals claiming self-education expense deductions’ from the 2021-22 Budget.

Financial impact Schedule 3 is estimated to have a negligible impact on receipts over the forward estimates period:

2020-21

2021-22

2022-23

2023-24

2024-25

-

-

-

..

..

-           Nil         

..     Not zero, but rounded to zero

Human rights implications :  Schedule 3 does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 4.

Compliance cost impact : Schedule 3 is expected to reduce compliance costs for individuals claiming self-education expense deductions.

 



Chapter 1          

Sharing economy reporting regime

Outline of chapter

1.1                   Schedule 1 to the Bill amends Schedule 1 to the TAA 1953 to require electronic platform operators to provide information on transactions facilitated through the platform to the ATO.  This measure implements a recommendation of the report of the Black Economy Taskforce.

1.2                   All legislative references in this Chapter are to Schedule 1 to the TAA 1953 unless otherwise stated.

Context of amendments

The sharing economy and tax

1.3                   The Australian economy has fundamentally changed in recent decades. Traditional employment models have shifted in favour of more flexible options including contracting, self-employment and use of labour hire. Consumers are increasingly paying to ‘use’ rather than ‘own’ assets, creating new income opportunities for the owners of assets. These two trends have led to the emergence of the sharing economy, also sometimes known as the gig economy.

1.4                   There is no universally accepted definition of the term ‘sharing economy’. The sharing economy involves two parties entering into an agreement for one to provide services and/or loan personal assets to the other, for a payment. Traditionally this kind of activity would occur between related parties and take place informally. The internet has helped to formalise this activity and created opportunities for parties to earn a regular income through these activities by making it easier for otherwise unrelated parties to identify one another and to facilitate these types of transactions. Many of these types of transactions are now facilitated through an electronic platform.

1.5                   Australia’s sharing economy continues to grow and develop at a significant pace. However, this growth has resulted in a transparency gap because tax reporting systems currently do not adequately capture information about transactions in this part of the economy. This creates the risk of sellers not paying the right amount of tax. Lack of knowledge and understanding about tax and associated obligations, recent formalisation of this income generating work, the electronic platform-seller relationship, and lax record keeping contribute to this problem.

1.6                   On the other hand, non-compliance can also be deliberate. In this case it allows the black economy to thrive. Poor tax compliance, whether deliberate or unintentional, provides an unfair advantage against those who undertake similar activities in the economy and comply with their tax obligations, leading to an uneven playing field.

The Black Economy Taskforce

1.7                   Treasury’s Black Economy Taskforce (the Taskforce) was established in 2016 to develop an innovative, forward-looking, multi-pronged policy response to combat the black economy in Australia, recognising that these issues cannot be tackled by traditional law enforcement measures alone.

1.8                   To combat the tax compliance risks posed by the sharing economy, the Taskforce’s final report (the Report) recommended that a compulsory reporting regime be implemented. A regime where the operators of electronic platforms are required to report payments made to their users, to the ATO and other government agencies as appropriate.

1.9                   The Report found that without a reporting regime in place, it would be difficult for the ATO to gain information on compliance of sharing economy participants unless targeted audits were used. It found that formalising reporting requirements would also send a clear signal to sharing economy participants that in most cases payments would be taxable. It also found that this would align Australia with international best practice, as working with sharing economy electronic platforms operating across multiple jurisdictions to bring them into domestic tax and regulatory frameworks was identified as a matter of international cooperation.

1.10               In response to the Report, the Government agreed to implement measures to ensure the integrity of the tax system, including introducing a third-party reporting regime requiring electronic platforms to report information to the ATO for data-matching purposes. The measure Black Economy - introducing a sharing economy reporting regime was included in the 2019-20 MYEFO.

The Taxable Payments Reporting System

1.11               The sharing economy reporting regime will be implemented by applying the TPRS to certain transactions undertaken through electronic platforms.

1.12               The TPRS is located in Subdivision 396-B and is a data matching framework that requires entities to report to the ATO information about transactions that they are a party to that may have tax consequences. The TPRS covers transactions in the building and construction industry, supplies of cleaning, security or surveillance services, supplies of information technology services and other transactions outlined in the table in section 396-55.

1.13               The information about certain transactions provided to the ATO under the TPRS helps identify entities that may not be meeting their tax obligations.

Summary of new law

1.14               Schedule 1 to the Bill makes amendments to Subdivision 396-B so that the TPRS applies to electronic platforms that facilitate supplies from an entity to another entity.

1.15               Generally, if an electronic platform facilitates a supply connected to Australia for consideration between two entities, then the operator of the platform is required to report information about the transaction to the ATO. The requirement will generally not apply if the transaction only relates to a supply of goods where ownership of the goods permanently changed, where title to real property is transferred , or the supply is a financial supply. The requirement will also not apply if the transaction occurs within the same consolidated or MEC group. Platforms will also not be required to report transactions subject to another reporting or withholding obligation where those transactions are reported to the ATO.

Comparison of key features of new law and current law

New law

Current law

Entities that operate electronic distribution platforms are required to report details about transactions relating to supplies made through those platforms, to the ATO. 

No equivalent.

Detailed explanation of new law

Entities required to report

1.16               The amendments require an entity that is the operator of an electronic distribution platform to report information to the Commissioner about certain transactions that are made through that platform. [Schedule 1, item 1, item 15 in the table in section 396-55 in Schedule 1 to the TAA 1953]

1.17               For the purposes of the reporting regime, electronic distribution platform is defined by section 84-70 of the GST Act, disregarding paragraph 84-70(1)(c) of that Act.

1.18               This means that an electronic distribution platform is a service delivered by means of electronic communication (defined by the Electronic Communications Act 1999 ). It includes platforms operating over the internet; including through applications, websites, or other software.

1.19               To meet the definition of an electronic distribution platform, a platform must allow entities to make supplies available to an end-user consumer through the platform. A service is not considered an electronic distribution platform if it only advertises or creates awareness of possible supplies, operates as a payment platform, or serves a communications function.

1.20               The definition of an electronic distribution platform for the purposes of the sharing economy reporting regime carves out paragraph 84-70(1)(c) of the definition in the GST Act. This paragraph is carved out as it could have the effect of removing an entity (that would otherwise be an electronic distribution platform) from the regime if that entity supplies any inbound intangible consumer supplies and none of those supplies are made by means of electronic communications. The reporting regime is intended to apply to a wide range of entities and therefore the definition of an electronic distribution platform for this purpose carves out an otherwise limiting factor that may undermine the intent of the measure.

1.21               In the sharing economy context, an electronic distribution platform can facilitate a transaction between two otherwise unrelated parties. These platforms, at the most basic level, play the role of an intermediary between the buyer and the seller. At a more complex level, the platform operator can assume much of the inherent risk in the transaction between the buyer and the seller, play a quality assurance role, and ensure a seamless experience for the buyer and seller. In some cases, the platform will also process the payment, however a platform will still meet the definition of an electronic distribution platform if it uses a third-party payment services provider for processing payments made in connection with the platform. In most cases, there is no employer-employee relationship between the seller and the platform operator.

Transactions that are required to be reported

1.22               Generally, the amendments require transactions to be reported to the Commissioner if they involve the provision of consideration (within the meaning of the GST Act) by a buyer to a seller for a supply made through the platform by the seller. [Schedule 1, item 1, item 15 in the table in section 396-55 in Schedule 1 to the TAA 1953]

1.23               Consideration includes any payment, act or forbearance that is connected to a supply (see section 9-15 of the GST Act). In the sharing economy platform context, consideration will usually be in the form of a monetary payment made to the seller via the platform.

1.24               A supply is any form of supply whatsoever, including the supply of goods, services, real property, or advice and information (see section 9-10 of the GST Act). Transactions that only involve the sale of goods or real property (the transfer of legal title to the goods or real property) or financial supplies are not captured by the reporting regime. Transactions that involve the rental of goods or real property that are made through an electronic distribution platform are captured by the reporting regime.

1.25               The supply must be a supply connected to the indirect tax zone to be covered by the reporting regime. For the purposes of the reporting regime, the meaning of indirect tax zone includes Australia’s external territories. 

1.26               Among other examples, a supply of goods is connected to the indirect tax zone if, broadly, goods are delivered in, made available in or removed from the indirect tax zone (see subsections 9-25(1) to (3) of the GST Act). A supply of goods is also connected with the indirect tax zone if it is an offshore supply of low value goods to a consumer (see subsection 9-25(3A) of the GST Act).

1.27               Similarly, cases where supplies of things other than goods or real property are connected with the indirect tax zone include where the supply is done in the indirect tax zone or the supply is made through an enterprise a supplier carries on in the indirect tax zone, or the supply is made to an Australian consumer (see subsection 9-25(5) of the GST Act). Supplies a non-resident makes through an enterprise it does not carry on in the indirect tax zone are generally not connected with the indirect tax zone if they are made to a GST-registered Australian resident.

1.28               A supply must be made through the platform for the related transaction to be captured within the scope of the TPRS. This ensures that the requirement only applies to a transaction when the platform has a greater level of involvement in the transaction than merely advertising the opportunity, referring the buyer to the seller, or processing a payment.

1.29               Similar to other items in the table in section 396-55, transactions where the seller and the operator of the platform are members of the same consolidated or MEC Group, or where a portion of the consideration has been withheld in accordance with the withholding regime in Division 12, are not required to be reported. In the case of consolidated or MEC Groups, intra-group transactions are generally disregarded for tax purposes. In the case of payments of consideration subject to Division 12 withholding obligations, these payments have existing reporting obligations within the TAA 1953, so there is no need to include those in the TPRS.

1.30               Transactions that only involve the supply of goods to a consumer are not captured by this reporting regime. This includes supplies that are composite supplies of goods (where the dominant part of the supply is a supply of goods but the supply includes some other incidental or ancillary elements). The platform will only be required to report details about services provided in relation to those goods if the service was performed through the operator’s platform and constituted a separate supply.

Reporting transactions

1.31               Operators are required to report information in the approved form to the Commissioner either annually, or at such other times as the Commissioner determines by legislative instrument. Operators must give the report to the Commissioner on or before the 31 st day after the reporting period ends, or at another time as the Commissioner determines by legislative instrument (see section 396-55).

1.32               The Commissioner may inform an operator in writing that it is not required to report transactions made through its platform under the third-party reporting regime, or that it is not required to report specified classes of transactions (see subsections 396-70(1) to (3)). An operator who is dissatisfied with a decision of the Commissioner to exercise or not exercise this discretion may object under the procedures set out in Part IVC of the TAA 1953. Merits review is available under Part IVC. Any notice of a decision to exempt an operator generally or for a class of transactions is not a legislative instrument. The Commissioner may also, by legislative instrument, exempt a class of entity from reporting, either generally or in respect of a specific class of transaction (see subsection 396-70(4)).

1.33               The Commissioner may specify the information required to be reported in the approved form, but all such information must relate to the identification, collection, recovery, or reduction of a possible taxation liability. It is expected that the Commissioner will typically request the identifying information of the seller and the details of their transactions made through the platform.

1.34               The general rules that apply to information that must be reported under Division 396 will apply to the operators of electronic distribution platforms. This means that if an operator has given the Commissioner a report and they subsequently become aware that it contains a material error, they must give the Commissioner an updated report within 28 days of becoming aware of the material error (see section 396-75). A material error includes omitting or misstating information where this would lead to the incorrect calculation of an individual’s tax liability.  Similarly, if an operator has failed to give a report, or a corrected report, to the Commissioner by the time required, an administrative penalty applies (see subsection 286-75(1)).

1.35               An administrative penalty also applies if a report includes any false or misleading statements (see subsection 284-75(1)). A statement in this case includes submitting information about transactions required to be reported under the TPRS framework in the approved form. However, an administrative penalty will not apply where the operator can show it took reasonable care to ensure the accuracy of the information provided (see subsection 284-75(5)). An operator taking reasonable care must generally give the appropriate serious attention to complying with their obligations under taxation law. The Commissioner has published guidance on how the ATO applies these terms.

Application and transitional provisions

1.36               The amendments contained in Schedule 1 apply from 1 July 2022 for transactions in relation to the supply of taxi travel (within the meaning of the GST Act) and short-term accommodation; and 1 July 2023 for all other transactions. [Schedule 1, item 2]

1.37               The different application dates are warranted because data matching protocols already exist between the ATO and the operators of platforms that commonly facilitate taxi travel (this includes ride sharing services see Uber V.B. v  Federal Commissioner of Taxation [2017 FCA 110]) and short-term accommodation transactions. Therefore, these entities do not need a lengthy lead time to ensure compliance.

 

 

 



Outline of chapter

2.1                   Schedule 2 to the Bill amends the AFCA Act to facilitate the closure and any transitional arrangements associated with AFCA replacing the SCT. 

2.2                   Schedule 2 amends the AFCA Act to provide for the transfer of records and documents from the SCT to ASIC, includes an express power for the Federal Court to remit cases back to AFCA instead of the SCT, and introduces a rule-making power to allow the Minister to prescribe other matters of a transitional nature.

Context of amendments

2.3                   The SCT is a statutory tribunal established under the Superannuation Complaints Act which considers complaints about superannuation.

2.4                   In 2017, the Ramsay Review found that the existence of multiple financial services external dispute resolution schemes with overlapping jurisdictions means resulted in difficulties in achieving comparable outcomes for consumers with similar complaints. The Ramsay Review also found long-standing problems with the arrangements for resolving superannuation complaints in the SCT.

2.5                   In the Government’s response to the Ramsay Review, the Government announced the creation of a new framework for dispute resolution with a ‘one stop shop’ external dispute resolution scheme which will be known as AFCA. The purpose is to improve outcomes for consumers in the financial system.

2.6                   With the introduction of the AFCA Act, AFCA replaced the SCT, as well as other bodies such as the FOS, and the Credit and Investments Ombudsman. Since 1 November 2018, AFCA has been the external dispute resolution body for complaints against financial firms, as well as superannuation disputes. It is a company limited by guarantee. The AFCA Act received Royal Assent on 5 March 2018.

2.7                   Under Schedule 3 to the AFCA Act, the Superannuation Complaints Act along with consequential amendments are to be repealed following a proclamation by the Treasurer or the day after 4 years of the commencement of the AFCA Act. This latter date is the 5 March 2022.

2.8                   In the 2019-20 Budget, the Government announced it would provide an additional $2.3 million over three years from 2020-21 to ASIC for the SCT to resolve outstanding complaints by 31 December 2020, after which the SCT is intended to cease operations. This funding would also assist ASIC with any other administrative requirements needed to facilitate the wind down of the SCT.

Summary of new law

2.9                   Schedule 2 to the Bill amends the AFCA Act to assist in the closure of the SCT and to efficiently facilitate any transitional arrangements associated with moving the handling of superannuation complaints from the SCT to AFCA. 

2.10               Schedule 2 amends the AFCA Act to insert a provision dealing with the transfer of records and documents from the SCT to ASIC following the commencement of the Schedule 3 to the AFCA Act. These records and documents are taken to be protected information for the purposes of section 127 of the ASIC Act.

2.11               Schedule 2 also includes a power for the Federal Court to remit cases back to AFCA, where ordinarily, these would be remitted to the SCT.

2.12               Schedule 2 also introduces a rule-making power to the AFCA Act to allow the Minister to prescribe matters of a transitional nature.

Comparison of key features of new law and current law

New law

Current law

The AFCA Act includes a rule-making power for prescribing matters of a transitional nature relating to the closure of the SCT.

No equivalent.

Records and document previously held by the SCT are transferred to ASIC. Such records and documents are protected information.

No equivalent.

In making an appeal determination, the Federal Court may remit cases back to AFCA to remake a decision, where originally, these would be remitted back to the SCT.

No equivalent.

Detailed explanation of new law      

2.13               Schedule 2 to the Bill amends the AFCA Act to assist in the closure of the SCT and to efficiently facilitate any transitional arrangements associated with moving the handling of superannuation complaints from the SCT to AFCA. 

Transfer of records and documents to ASIC

2.14               The repeal of the Superannuation Complaints Act will occur from the commencement of Schedule 3 to the AFCA Act. These provisions are inserted into Schedule 3 and therefore will commence in line with repeal of the Superannuation Complaints Act. This will signify the closure of the SCT.

2.15               Upon the closure of the SCT, ASIC becomes the administrator of any document in possession of the SCT at the time of closure. [Schedule 2, item 2, subsection 33(2) of Schedule 3 to the AFCA Act]

2.16               In their role as administrator, ASIC will respond to any freedom of information requests, as well as prepare and disclose relevant documents to AFCA or the Federal Court where necessary for the purposes of AFCA or the Federal Court undertaking their functions.

2.17               Prior to the SCT’s closure, outstanding cases that are not able to be resolved will be transferred to AFCA for resolution. Subsequent disclosure from ASIC to AFCA may be as a result of a request by AFCA for information relating to those outstanding cases following the closure of the SCT.

2.18               Under the Superannuation Complaints Act, a party may appeal to the Federal Court on questions of law from a determination made by the SCT. Disclosure to the Federal Court from ASIC will be in the course of this appeal process. Where the request for information would have previously gone to the SCT, it will now be directed to ASIC for information regarding that original determination. 

2.19               In disclosing this information, ASIC must comply with the principles contained in the Privacy Act 1988 and section 127 of the ASIC Act . Under this section, disclosure to AFCA and the Federal Court for the purposes of their role and function is considered to be an ‘authorised disclosure.’

2.20               In practice, the transfer of records or documents will not include the physical transfer of documents from the SCT to ASIC. These documents are already physically held by ASIC as the SCT is staffed by members of the staff of ASIC who have been made available to the SCT under section 62 of the Superannuation Complaints Act. The systems and storage used by the SCT for their documents and records are the same systems and storage as ASIC. Therefore, the existence of these provisions are operational for ASIC to be transferred legal responsibility of these documents or records following the closure of the SCT.

2.21               This applies to any record or document that was in the SCT’s possession immediately before the closure of the SCT. Possession applies broadly to include any:

•        member of the SCT; or

•        member of the staff of ASIC who had been made available to the SCT under section 62 of the Superannuation Complaints Act.

[Schedule 2, item 2, subsection 33(1) of Schedule 3 to the AFCA Act]

2.22               In considering what information is to be transferred to ASIC, the phrase ‘records or documents’ is an intentionally broad phrase to capture all electronic and physical documents currently held by the SCT. These may include historical documents. However, nothing in the transfer of document is intended to amount to disclosure for the purposes of waiving legal professional privilege.

2.23               The words ‘record’ and ‘document’ are defined in section 25 of the Acts Interpretation Act 1901.

2.24               Record is defined to include information stored or recorded by means of a computer.

2.25               Document is defined in as any record of information, and includes:

•        anything on which there is writing; and

•        anything on which there are marks, figures, symbols or perforations having a meaning for persons qualified to interpret them; and

•        anything from which sounds, images or writings can be reproduced with or without the aid of anything else; and

•        a map, plan, drawing or photograph.

2.26               Despite the transfer, these documents or records continue to be Commonwealth records for the purposes of the Archives Act 1983 . Therefore, following the transfer, ASIC will have responsibility for the disposal and archiving of these documents in line with their responsibilities under the Archives Act 1983. This position is clarified in the note to section 33 of Schedule 2.

Protected information

2.27               Schedule 2 to the Bill ensures that the transferred records or documents will be considered ‘protected information’ for the purposes of section 127 of the ASIC Act . [Schedule 2, item 2, subsection 33(3) of Schedule 3 to the AFCA Act]

2.28               This provision safeguards against any unauthorised disclosure of sensitive and personal information that may be contained in the transferred documents and records. These safeguards reflect the privacy and confidentiality provisions contained in the Superannuation Complaints Act which prohibit disclosure of sensitive information.

2.29               Section 127 of the ASIC Act requires that ASIC will take all reasonable measures to protect information that has been classified as ‘protected information’ from unauthorised use or disclosure. Disclosure to the Federal Court and AFCA are considered to be an ‘authorised disclosure’.

2.30               However, a document or record that has already been lawfully made available to the public will not be covered by section 127 of the ASIC Act. [Schedule 2, item 2, subsection 33(3) of Schedule 3 to the AFCA Act]

2.31               The effect of this is that a document that is already public (such as an annual report) will not have the same confidentiality requirements as personal or sensitive information.

Federal Court power

2.32               Schedule 2 includes an express provision for appeals of SCT determinations to the Federal Court following the repeal of the Superannuation Complaints Act. [Schedule 2, item 2, subsection 34(1) of Schedule 3 to the AFCA Act]

2.33               Under the Superannuation Complaints Act, a party may appeal to the Federal Court on questions of law from a determination made by the SCT. The Federal Court may hear and determine the appeal and make an order as it thinks appropriate. The same appeal process is available for determinations made by AFCA under the AFCA Act.

2.34               The orders that may be made by the Federal Court on an appeal include an order affirming or setting aside the determination of the SCT or an order remitting the matter to be determined again by the SCT in accordance with the directions of the Federal Court.

2.35               Without limiting the powers of the Federal Court, the provision provides that the Federal Court may make an order remitting the matter back to AFCA where this would have ordinarily been remitted back to the SCT. The determination will then be made by AFCA in accordance with the directions of the Federal Court. [Schedule 2, item 2, subsection 34(2) of Schedule 3 to the AFCA Act]

Transitional Rules

2.36                Schedule 2 provides that the Minister may, by legislative instrument, make rules of a transitional nature (including prescribing any saving or application provisions) relating to the repeal of Schedule 3 to the AFCA Act. [Schedule 2, item 2, subsection 35(1) of Schedule 3 to the AFCA Act]

2.37               A broad rule-making power provides flexibility for the Government to address any additional issues that emerge to accommodate the closing of the SCT, and the repeal of the Superannuation Complaints Act.

2.38               The rules will provide for transitional issues such as providing appropriate operational requirements that will assist AFCA with the handling of the SCT cases and may provide further specificity of ASIC’s role as administrator following the closure of the SCT.

2.39               Any such rules would be a legislative instrument under section 8 of the Legislation Act. Therefore, these rules will be subject to the disallowance process which will allow for appropriate parliamentary oversight and scrutiny (section 42 of the Legislation Act). The rules will also be subject to sunsetting (section 50 of the Legislation Act).

2.40               To avoid doubt, the rules may not do the following:

•        create an offence or civil penalty ;

•        provide powers of:

-       arrest or detention; or

-       entry, search or seizure;

•        impose a tax;

•        set an amount to be appropriated from the Consolidated Revenue Fund under an appropriation the AFCA Act;

•        directly amend the text of the AFCA Act.

[Schedule 2, item 2, subsection 35(2) of Schedule 3 to the AFCA Act]

Application and transitional provisions

2.41               The transitional measures in Schedule 2 commence on the day after the Bill receives Royal Assent.

2.42               The provisions will be inserted into the AFCA Act on the commencement date. After they are inserted into the AFCA Act, they will only commence when Schedule 3 to that Act commences.

2.43               Commencement of Schedule 3 will be following a proclamation by the Treasurer or the day after 4 years of the commencement of the AFCA Act. This latter date is the 5 March 2022.



Outline of chapter

3.1                   Schedule 3 to the Bill removes the $250 non-deductible threshold for work-related self-education expenses by repealing section 82A of the ITAA 1936.

3.2                   Removing the $250 non-deductible threshold reduces compliance costs for individuals claiming self-education expense deductions and simplifies the tax return process.

Context of amendments

3.3                   In December 2020, the Government consulted on the removal of the $250 non-deductible self-education expenses threshold as part of a discussion paper, Education and training expense deductions for individuals (p. 10).

3.4                   Stakeholders unanimously supported the removal of the $250 threshold as it no longer serves its original purpose and adds regulatory costs and complexity for individuals.

3.5                   The Government announced the removal of the $250 work-related self-education expense threshold in the 2021-22 Budget.

Operation of existing law

3.6                   Self-education expenses are deductible under section 8-1 of the ITAA 1997 where they have a sufficient connection to the individual’s current income-earning activities. A sufficient connection exists if the study enables the individual to maintain or improve required skills or knowledge for their employment or is likely to lead to an increase in the individual’s income from their current income-earning activities.

$250 self-education expense threshold

3.7                   In certain circumstances, section 82A of the ITAA 1936 requires individuals to reduce their claim for self-education expenses by $250.

3.8                   Where section 82A of the ITAA 1936 applies, the total allowable deduction for self-education expenses under section 8-1 of the ITAA 1997 cannot be greater than the amount by which the net amount of ‘expenses of self-education’ exceeds $250. In practice, this means only the excess of the self-education expenses over $250 may be considered for deduction under section 8-1 of the ITAA 1997.

3.9              Section 82A of the ITAA 1936 applies to expenses of self-education necessarily incurred by an individual for or in connection with an organised course of education provided by a school, college or university, on a full or part time basis.

3.10               An individual may have expenses that are not deductible under section 8-1 of the ITAA 1997 that are still considered ‘expenses of self-education’ for the purpose of the section 82A calculation (e.g., childcare costs related to attendance at self-education activities). These self-education expenses count towards (reduce) the $250 threshold but cannot reduce the amount by more than $250.

3.11               ‘Expenses of self-education’ do not include student contribution amounts or amounts in repayment of a debt specified in subsection 82A(2) of the ITAA 1936. These same amounts are also not deductible under the ITAA 1997 (see section 26-20 of the ITAA 1997).

Self-education expenses and fringe benefits tax

3.12               Where an employer provides a fringe benefit comprising work-related self-education expenses to an employee, the employer can reduce the taxable value of the fringe benefit by applying the relevant ‘otherwise deductible’ rule for the fringe benefit in section 19, 24, 37, 44 or 52 of the FBTAA 1986.

3.13          The ‘otherwise deductible’ rule allows the employer to reduce the taxable value of the fringe benefit by the amount of the income tax deduction the employee would otherwise have been entitled to claim had the employee incurred (and not been reimbursed for) the relevant costs.

3.14          The ‘otherwise deductible’ rule disregards section 82A of the ITAA 1936 for the purpose of calculating an employee’s hypothetical deduction to determine any reduction in the taxable value of the fringe benefit.

3.15                     An employee cannot claim a deduction for work-related self-education expenses where their employer pays or reimburses the expense (i.e., provides an expense payment fringe benefit) (see section 51AH of the ITAA 1936).

Background to the existing law

3.16               The $250 non-deductible threshold for self-education was introduced in 1975 alongside a concessional tax rebate for expenditure on self-education. As the concessional rebate was $250, the non-deductible threshold was set at $250 to ensure only education expenses above that amount could qualify for a deduction. This approach was designed to prevent individuals from claiming both the tax rebate and a tax deduction for the same expenses.

3.17               The concessional rebate was repealed in 1985 but the $250 non-deductible threshold was retained. As a result, the $250 threshold no longer serves its original purpose of preventing overlapping claims.

Summary of new law

3.18               Schedule 3 to the Bill removes the $250 non-deductible threshold for work-related self-education expenses. Individuals must determine the deductibility of their self-education expenses by reference to section 8-1 of the ITAA 1997, as affected by other general deduction limitations and any relevant specific deductions.

Detailed explanation of new law

3.19               Schedule 3 to the Bill removes the $250 non-deductible threshold for self-education expenses. The removal of this threshold reduces compliance costs for individuals calculating their work-related self-education expense deductions . [Schedule 3, item 26, section 82A of the ITAA 1936]

Determining the deductibility of self-education expenses

3.20               Following the amendments, individuals continue to determine the deductibility of their self-education expenses by reference to section 8-1 of the ITAA 1997, as affected by other general deduction limitations and any relevant specific deductions.

3.21               Individuals can claim deductions for self-education expenses under section 8-1 of the ITAA 1997 if:

•       the expense is incurred in gaining or producing assessable income;

•       the expense is not private, domestic, or capital in nature; and

•       the deduction is not prevented by a provision of that Act.

3.22               The repeal of section 82A of the ITAA 1936 does not affect the types of self-education expenses that are deductible under section 8-1 or other provisions of the ITAA 1997. For example, the costs of textbooks, stationery, and professional journals (among other expenses) are still deductible, while certain student contributions and debt repayment amounts referred to in section 26-20 of the ITAA 1997 are still not deductible (see paragraph 3.10). This is because, prior to the repeal, the tax law limited the amount (not the type) of deductions that could be claimed for self-education expenses.

3.23               The amendments reduce compliance costs for individuals because they no longer need to reduce their self-education expenses by $250 before claiming a deduction under section 8-1 of the ITAA 1997. In practice, this means individuals must continue to maintain records of their deductible self-education expenses. However, they no longer need to keep records of any non-deductible self-education expenses for tax purposes that, prior to the amendments, were first offset against the $250 non-deductible self-education threshold ( Example 3.1 ).

Example 3.1 Deduction for self-education expenses

Anna is a part-time social worker who is undertaking additional training related to her employment. Anna is eligible to deduct expenses associated with her training, including tuition fees and textbooks, which total $5,000 for the income year. Anna has also incurred $150 in non-deductible childcare expenses and $150 in non-deductible travel expenses while attending her training activities.

With the repeal of the $250 non-deductible self-education threshold, Anna is able to claim a deduction of $5,000 but does not need to calculate or keep records of her non-deductible expenses to offset the $250 reduction to complete her income tax return.

Prior to the repeal of the threshold, Anna was required to reduce the amount of her deduction by $250. As her non-deductible expenses fully offset the $250 reduction, Anna would still have been able to claim a deduction of $5,000 but would also have had to calculate and keep records of her non-deductible expenses for the required period after receiving her assessment.

Consequential amendments

Income Tax Assessment Acts 1936 and 1997

3.24               Schedule 3 to the Bill repeals references to section 82A and ‘of this Act’ in other provisions of the ITAA 1936. These references are redundant following the repeal of section 82A of the ITAA 1936 . [Schedule 3, items 18 to 25 and 27, paragraphs 21A(3)(b), 26AJ(2)(b), 26AJ(2)(d) and 26AJ(3)(b) and subsection 109CA(5) of the ITAA 1936]

3.25               Schedule 3 to the Bill also repeals references to section 82A in the ITAA 1997 as they are no longer needed . [Schedule 3, items 28 to 32, section 12-5 of the ITAA 1997]

Fringe Benefits Tax Assessment Act 1986

3.26               Schedule 3 repeals references to section 82A in the FBTAA 1986 as they are no longer needed. [Schedule 3, items 1, 4, 6, 8 to 10, 12, 14, 16, paragraphs 19(1)(b), 24(1)(b), 24(1)(ba), 37(b), 37(c), 44(1)(b), 44(1)(ba), 52(1)(b) and 52(1)(ba) of the FBTAA 1986]

3.27               Consequently, Schedule 3 reinserts a reference to the ITAA 1936 into sections 19, 24, 44 and 52 of the FBTAA 1986 to ensure they continue to refer to deductions otherwise allowable under the ITAA 1936 or 1997 . [Schedule 3, items 2, 3, 5, 7, 11, 13, 15, 17, paragraphs 19(1)(b), 19(1)(ba), 24(1)(b), 24(1)(ba), 44(1)(b), 44(1)(ba), 52(1)(b) and 52(1)(ba) of the FBTAA 1986]

3.28               The repeal of the $250 non-deductible self-education expenses threshold does not affect the operation of the ‘otherwise deductible’ rule in sections 19, 24, 37, 44 and 52 of the FBTAA 1986. Prior to the repeal of section 82A of the ITAA 1936, employers would calculate the amount ‘otherwise deductible’ by reference to the amount of the deduction allowable to the employee but for that section (see paragraph 3.12). Accordingly, with the repeal of section 82A of the ITAA 1936, the references in the FBTAA 1986 to that section become redundant.

Application and transitional provisions

Commencement

3.29               Schedule 3 commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent. [Clause 2, table item 1]

Application

3.30               The amendments to the ITAA 1936 and 1997 in Schedule 3 apply to assessments for the 2022-23 income year and later income years. [Schedule 3, subitem 33(1)]

3.31               The amendments to the FBTAA 1986 in Schedule 3 apply to the FBT year starting on 1 April 2023 and to later FBT years. [Schedule 3, subitem 33(2)]

3.32          The amendments to the FBTAA 1986 remove redundant references to section 82A of the ITAA 1936 following the repeal of that section. These amendments apply from the start of the first full FBT year following the application of amendments to the ITAA 1936 and 1997 to prevent unintended practical impacts or compliance costs for employers.

 



Chapter 4          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Sharing economy reporting regime

4.1                   This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.2                   Schedule 1 to the Bill amends Schedule 1 to the TAA 1953 to require electronic platform operators to provide information on transactions facilitated through the platform to the ATO.  This measure implements a recommendation of the report of the Black Economy Taskforce.

Human rights implications

4.3                   The amendments made by this Schedule engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the ICCPR, as operators of electronic platforms will need to provide a range of personal information to the Commissioner about individuals that they collect in the course of their business.

4.4                   The obligation for operators to report this information is compatible with the prohibition as it is neither arbitrary nor unlawful. The objective of the requirement to report this information is to ensure that sellers on these electronic platforms are paying the correct amount of tax by gathering information about potential tax liabilities.

4.5                   Further, reporting regimes such as this provide more certainty and consistency of treatment for entities than the alternative, where the Commissioner collects information under his or her general information gathering powers on an ad-hoc basis.  The information reported by operators would typically be limited to information that they already hold having collected it in the ordinary course of their business. Taxpayer information held by the ATO is subject to strict confidentiality rules that prohibit tax officials from making records or disclosing this information unless a specific legislative exemption rule applies.

4.6                   The Commissioner may only require platforms to report information that relates to the identification, collection or recovery of a possible tax related liability as well as the identity of the taxpayer to which the tax related liability may arise.

4.7                   The Commissioner retains flexibility to exempt certain entities from the reporting regime, for example to avoid double reporting or where reporting would be impractical. The Commissioner can also vary timeframes for reporting to ensure the compliance burden on operators of platforms is minimal.

Conclusion

4.8                   This Schedule is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful nor arbitrary. To this extent, this Schedul complies with the provisions, aims and objectives of the ICCPR.

Schedule 2 - Transitional provisions relating to the repeal of the Superannuation (Resolution of Complaints) Act 1993

4.9                   Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.10               Schedule 2 to the Bill amends the AFCA Act to facilitate the closure and any transitional arrangements associated with AFCA replacing the SCT. 

4.11               Schedule 2 to the Bill amends the AFCA Act to provide for the transfer of records and documents from the SCT to ASIC, includes an express power for the Federal Court to remit cases back to AFCA instead of the SCT, and introduces a rule-making power to allow the Minister to prescribe matters of a transitional nature.

 Human rights implications

The right to protection from arbitrary or unlawful interference with privacy and reputation

4.12               This Schedule engages, or may engage, the right to privacy which is contained in Article 17 of the ICCPR.

4.13               Article 17 of the ICCPR contains the right to protection from arbitrary or unlawful interference with privacy and reputation. The United Nations Human Rights Committee has not defined ‘privacy’ but it is generally understood to comprise of a freedom from unwanted and unreasonable intrusions into activities that society recognises as falling within the sphere of individual autonomy. The collection and sharing of information (public or otherwise) may be considered to engage and offend the right to privacy.

4.14               The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirement of ‘reasonableness’ to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

4.15               Where records and documents are transferred to ASIC following the closure of the SCT, these records and documents may contain personal or sensitive information relating to individuals who bought complaints to the SCT. This information is received as ‘protected information’ under section 127 of the Australian Securities and Investments Act 2001 which prohibits disclosure and unauthorised use unless in specified circumstances.

4.16               Prior to the SCT’s closure, outstanding cases that were not able to be resolved were transferred to AFCA for resolution. Disclosure from ASIC will generally be from a request by AFCA for any information relating to these outstanding cases.

4.17               Under the Superannuation (Resolutions of Complaints)

Act 1993
, a party may appeal to the Federal Court on questions of law from a determination made by the SCT. Disclosure to the Federal Court from ASIC will be in the course of this appeal process. Where the request for information would have previously gone to the SCT, it will now be directed to ASIC for information relating to the original determination. 

4.18               Where ASIC does disclose this information, either to AFCA or the Federal Court, ASIC must comply with disclosure and retention principles contained in the Privacy Act 1988 and section 127 of the Australian Securities and Investments Act 2001. Under this section, disclosure to AFCA and the Federal Court for the purposes of their role and function is considered an ‘authorised disclosure’.

4.19               Based on the above factors, if there is interference with the right to privacy this is considered to be permissible as it is reasonable, proportionate and necessary to achieve the legitimate objective of maintaining consumer confidence in the financial services and consumer credit industry. Therefore, to the extent that Schedule 2 engages the right to privacy, it is consistent with Article 17 of the ICCPR as it subject to limitations that are authorised by law and are not arbitrary.

Conclusion

4.20               This Schedule is compatible with human rights as it does not raise any human rights issues

Schedule 3 - Removing the self-education expenses threshold

4.21               Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.22               Schedule 3 to the Bill reduces the compliance costs for individuals claiming work related self-education expenses by repealing the $250 non-deductible threshold for work-related self-education expenses in section 82A of the ITAA 1936.

4.23               Individuals must determine the deductibility of their self-education expenses by reference to section 8-1 of the ITAA 1997 , as affected by other general deduction limitations and any relevant specific deductions.

Human rights implications

4.24               Schedule 3 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

4.25               Schedule 3 to the Bill is compatible with human rights as it does not raise any human rights issues.

 

 



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:

•             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.

•             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.

•             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.

•             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.

•             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:

•             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.

•             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).

•             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.

•             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:

•           Is the second largest in the country, after the financial sector, with revenues of over $300 billion in 2016-17.

•           Accounts for approximately 9.4 per cent of total economic growth (Gross Value Added) on average per year since 1996.

•           Employs more than 1.1 million people.

•           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’:

•           Cash-in-hand payments

•           Non or under-reporting of income

•           Poor or false records

•           Phoenixing

•           Sham contracting

•           Underpayment and exploitation of workers

•           ABN fraud and abuse

•           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. [4] 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). [5]

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

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

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

•              $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. [6] 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

•             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.

•             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.

 



On 9 May 2017, the Government announced its response to the Ramsay Review, which was the first comprehensive review of the financial system’s EDR framework. The Ramsay Review was commissioned by the Government in April 2016 and led by an independent, expert panel comprising Professor Ian Ramsay, Ms Julie Abramson and Mr Alan Kirkland.

Treasury has certified that the Ramsay Review and subsequent consultation as a process and analysis equivalent to a regulation impact statement.

Policy objective

The Government’s reforms to the EDR framework are intended to address problems with the dispute resolution arrangements in the financial system, primarily EDR. EDR is used when a consumer or small business has a complaint with a financial service provider and wishes to use an impartial out-of-court process to settle the dispute. EDR should provide low cost, fast and flexible access to redress to consumers.

The current EDR arrangements in the financial system consist of FOS, CIO and the SCT. In 2015-16, FOS, CIO and SCT received 41,223 disputes in total, with FOS receiving 34,095 disputes (83 per cent), CIO receiving 4,760 disputes (12 per cent) and SCT receiving 2,368 disputes (6 per cent).

The Ramsay Review was the first comprehensive review of the financial system’s EDR framework. It found that the current framework is the product of history rather than design and a number of features of the current system mean that it is not producing the best possible outcomes.

Firstly, the Ramsay Review found the existence of multiple EDR schemes with overlapping jurisdictions means: it is difficult to achieve comparable outcomes for consumers with similar complaints; it is difficult for consumers to progress disputes involving firms that are members of different schemes; and there is an increased risk of consumer confusion. The Ramsay Review also found that multiple EDR bodies resulted in duplicative costs for industry and for the regulator.

The Ramsay Review also found that allowing competition between schemes, as currently occurs between FOS and CIO, creates the risk that schemes compete in relation to benefits provided to Financial Firms, rather than on achieving better outcomes for consumers.

The Ramsay Review found that the monetary limits and compensation caps of the schemes have fallen behind what is required to ensure access to justice for consumers and small business. FOS and CIO’s current monetary limit of $500,000 and compensation cap of $309,000 are no longer fit-for-purpose and bear little relationship to the value of some financial products (for example, mortgage balances, home insurance policies and some investments), which results in a gap in EDR coverage.

The Ramsay Review also identified that small businesses do not have adequate access to EDR because the existing monetary limits of $500,000 for the value of the claim under dispute, and $2 million in relation to credit facilities and the existing compensation cap of $309,000, preclude many small business disputes from being able to be brought to the schemes.

Finally, the Ramsay Review found that the dispute resolution arrangements for superannuation require improvement. Although SCT has a highly professional staff and Chairperson, the Ramsay Review found it was unable to resolve disputes quickly, in contrast to FOS and CIO. For example, in 2015-16, for disputes that reached determination, it took an average of 796 days for the dispute to be resolved.

The Ramsay Review found that the problems facing SCT could be attributed to a lack of flexibility in its funding there is no link between SCT funding and the level of complaints it receives as well as outdated governance arrangements and limited flexibility to determine its dispute resolution processes. Additionally, there was a lack of focus on achieving system-wide improvements and the existing accountability mechanisms were passive and indirect. The Ramsay Review considered that these issues could not be addressed through retaining and reforming the SCT and a shift to an ombudsman scheme was required.

The Ramsay Review found that these problems of the existing framework are significant and cannot be seen as self-correcting. Market forces will not resolve the above problems, necessitating Government action.

Implementation options

Alternative Option: Maintain the status quo

This option would essentially maintain the current arrangements of multiple EDR bodies.

The Ramsay Review found that the pressures on SCT would increase as the superannuation system matures and an increasing proportion of the population moves from the accumulation to the drawdown (retirement) phase.

In addition, the Ramsay Review found that this option would not address problems arising under a multi-scheme framework with overlapping jurisdictions (consumer confusion, inconsistent outcomes for comparable disputes and duplicative costs). Therefore, this was not one of the recommendations of the Ramsay Review and was not one pursued by Government.

Alternative Option: Reform SCT only

Under this option, there would be some targeted reforms to the SCT to increase the way the SCT is funded (for example, volume based funding) and improved governance arrangements.

However, the Ramsay Review found that there was inherent inflexibility in retaining a tribunal structure, which could only be addressed through migrating superannuation disputes from a tribunal to an ombudsman structure.

In addition, reforming only the SCT would also not address the problems with other aspects of the EDR framework.

Recommended Option: Establish the AFCA as an industry based scheme based on Ramsay Review recommendations

This option would switch to a single EDR body to replace the FOS, CIO and SCT with a one stop shop dispute resolution body based on an industry ombudsman model.

The shift to a single EDR body will address a number of problems with the existing framework. It will improve outcomes for consumers by:

(i)      increasing consistency in processes and outcomes for similar complaints;

(ii)     making it easier to pursue disputes involving multiple Financial Firms; and

(iii)  decreasing consumer confusion.

A single EDR body will also eliminate duplicative costs for industry, the regulator and other stakeholders.

The Ramsay Review found that an ombudsman model carried advantages over the existing framework. For superannuation disputes in particular, a single EDR body based on an ombudsman model carries large benefits as it will provide flexibility and increase responsiveness to improve the timeliness of superannuation disputes. Ombudsman schemes provide complainants with an alternative to the judicial system. The traditional court system, which relies on lawyers, the rules of evidence and specific processes and procedures can be complex and intimidating for consumers. In this regard, a benefit of ombudsman schemes is that they provide claimants with a relatively simple process, led by the ombudsman, negating the need for formal legal representation. Furthermore, ombudsman services are not restricted to resolving legal issues; rather, they have scope to consider a broader range of factors.

Where there is a general problem in an industry affecting multiple consumers and a number of similar complaints are received about a particular issue, ombudsman schemes have the capacity to instigate and conduct investigations to identify systemic issues.

Ombudsman schemes are also able to promote access to justice through their ability to adapt and innovate in response to changes in the external environment. This has been particularly relevant in the financial system, which has seen rapid changes in the types of products being sold and the types of consumers purchasing them.

Assessment of impacts

Consumers and small businesses will be the primary beneficiaries of the new framework. The primary benefits will be increased access to justice and easier access to dispute services.

Increased limits and decreased confusion caused by multiple schemes will mean that consumers and small businesses will save more time and be able to bring higher value disputes to the schemes. Having a single dispute resolution body will also promote consistency of outcomes, which will provide industry and consumers with greater certainty as to what the outcome of a complaint will be when it is lodged with AFCA.

For superannuation complaints, the new scheme will reduce the time taken for complaints to be resolved. This will benefit both consumers and industry.

The Ramsay Review noted that a single dispute resolution scheme would have a greater ability to shift resources from those areas experiencing a reduction in dispute volumes to those areas experiencing higher dispute volumes.

There will be a number of costs associated with the transition to the new scheme. Impacts on industry include paying membership and dispute resolution fees to AFCA, having to update disclosure documents, and having to account for increased IDR reporting to ASIC. The increased monetary limits will also likely result in more disputes being lodged with AFCA, which will require additional funding from industry.

Superannuation funds will also need to be members of AFCA, meaning they will need to pay membership and dispute resolution fees and will also incur costs to update disclosure documents.

Treasury considers that the benefits to consumers, small businesses and industry will outweigh the costs associated with implementing the new framework.

Regulatory burden

Treasury has estimated the costs for business using the governments Regulation Impact Framework as required by the Office of Best Practice Regulation. The costs are shown below.

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

$43.85 million

$n/a

$n/a

$43.85 million

Consultation

In the course of the Ramsay Review, the Panel conducted multiple rounds of consultation:

•        The Ramsay Review published an Issues Paper, which was released for public consultation for a period of four weeks from 9 September 2016 to 7 October 2016. The Panel received 127 submissions to the EDR Review Issues Paper, 33 of which were marked as confidential and 1 anonymous.

•        The Ramsay Review published an Interim Report, which was released for public consultation for a period of seven weeks from 6 December 2016 to 27 January 2017. The Panel received 56 submissions to the EDR Review Interim Report, four of which were marked as confidential.

•        The Ramsay Review invited parties to make submissions by 3 March 2017 on Recommendations 11 and 13 of the Australian Small Business and Family Enterprise Ombudsman’s report on the Inquiry into small business loans. The Minister for Revenue and Financial Services wrote to the Ramsay Review Panel asking them to take particular account of these recommendations as they prepared their final report. Four submissions were received on these recommendations.

•        The Panel held many roundtables and meetings with individual stakeholders as part of these consultation processes. The Panel also undertook site visits of each of the bodies: CIO (14 September 2016); FOS (16 September 2016) and SCT (16 September 2016).

Following the release of the final report and Government response, the Government consulted on exposure draft legislation (draft Bill and regulations) from 17 May to 14 June 2017. As part of this consultation, a range of consultation materials were published including a consultation paper on the new dispute resolution framework, draft explanatory memorandum, fact sheet and consultation note on the Ministerial authorisation process.

In the course of finalising the regulatory costings, Treasury has undertaken targeted consultation with key stakeholders to inform the parameters and assumptions used.

Conclusion and recommended option

The recommended option will involve:

•        establishing a new one-stop-shop dispute resolution body AFCA which will replace FOS, CIO and SCT and handle all financial complaints, including superannuation complaints;

•        ensuring AFCA will be overseen by a board comprising an independent Chair and equal numbers of directors with consumer and industry backgrounds;

•        requiring AFCA to be industry funded;

•        requiring all Financial Firms (including superannuation funds) to be members of AFCA; and

•        making ASIC responsible for overseeing AFCA to ensure that it meets the standards set out in the legislation. To fulfil this role, the legislation will provide ASIC with the ability to set regulatory requirements that AFCA must adhere to and also provide ASIC with a general directions power to compel AFCA to comply with standards in the legislation and in regulatory requirements.

Implementation and evaluation

AFCA will be established as part of the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Bill 2017. Following passage of the legislation, a not-for-profit company will be authorised as AFCA by the Minister. AFCA will commence operations on 1 July 2018 and will receive all financial disputes, including superannuation disputes.

ASIC will be responsible for ongoing monitoring of AFCA to ensure that it meets the standards set out in legislation. In addition, AFCA will be subject to periodic independent reviews. AFCA will also be required to establish an independent assessor who will assess the processes by which AFCA makes decisions.

As an industry body, key elements of AFCA’s operations will be set out in its operating rules or ‘terms of reference’. The Minister for Revenue and Financial Services established a transition team, chaired by Dr Malcolm Edey, to lead the creation of AFCA. Dr Edey will provide advice to the Minister on the terms of reference, governance and funding arrangements, as well as transitional arrangements and the authorisation process. The transition team will consult extensively with ASIC, the existing EDR bodies, industry and consumer groups, thereby ensuring a smooth transition from the existing framework to AFCA.

The SCT, as a statutory body, will continue operation for an additional two years to resolve all legacy complaints. The legislation also makes provisions to allow FOS and CIO to continue operations for up to an additional 12 months to resolve legacy complaints.




[2]     Details of the Ramsay Review and the final report are available at: https://treasury.gov.au/review/review-into-dispute-resolution-and-complaints-framework/

[4]     There are roughly one million independent contractors in Australia: Australian Bureau of Statistics, 6333.0 — Characteristics of Employment, Australia, August 2016.

[5]     Australian Taxation Office, Taxable payments reporting — Effectiveness measurement, May 2015.

[6]     For the purpose of this discussion, sharing economy websites are online services which operate as platforms for the sale or hire of goods/services or operate as a labour market intermediary and, in providing such services, capture the payments or require payments of fees or wages to an individual or entity to pass through an entity controlled by the online service.