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Living in the Shadow Economy

Published on Jun 13, 2017

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The ‘shadow economy’ might affect your business more than you think.

 

The shadow economy is a large and unruly beast. Whether it’s a customer paying cash for a job, a business altering sales dockets, right through to the sale of illegal goods, or the sale of legal goods in an illegal fashion, it is all part of the shadow economy.

 

Paying less tax means that businesses engaged in the shadow economy can lower their prices and charges, making it more difficult for businesses doing the right thing to compete.

 

Paying cash wages means that employees don’t need to declare their wages. That can be a strong incentive to avoid working for those businesses that pay wages according to the regulations set out by the Australian Taxation Office.

 

Individuals and businesses operating outside legal avenues will not be counted in government statistics, and that means the statistics the government gathers will not be complete.

 

You might wonder if that is a significant problem. As the International Monetary Fund (IMF) points out, it means that government funding and initiatives may be based on incorrect data. That affects the way policy and programs are run.

 

The IMF points out that more tax evasion can lead to higher tax rates as governments attempt to balance the books.

Why is the Shadow Economy Growing?

The shadow economy is less likely to occur in countries with lower tax, less regulation and laws and a rule of law that is established.

Countries with higher taxes and social security payments and complex or poorly administered laws add to the cost of labour, and this can drive the shadow economy.

Countries with restrictions of who can enter the official labour market also have larger shadow economies.

What is being done?

 

The shadow economy (black economy, underground economy) is on the agenda for the Federal government. The 2017-18 budget includes measures that will be undertaken to gain control of tax evasion.

 

Below are the key points in the budget overview:

 

  • Banning the technology that gives businesses the ability to falsify sales records and reduce their tax.
  • Pursuing money generated by criminal activity.
  • Reduce tax evasion by multinational companies, including banks and insurance companies, foreign partnerships and foreign trusts.
  • Capital gains tax will be applied to all foreign owned property sales.
  • Keeping a close eye on GST avoidance.
  • Removing the ability to claim deductions for travel costs incurred from ownership of a residential investment property.

 

Together, the government hopes these measures will target the shadow economy.

 

Q: Do you think the shadow economy affects your business?

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