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Cashed up

By Mark Revington

Tuesday 1st March 2005

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There's nothing surer than death and taxes, so the saying goes. You might as well add tax evasion to the list because wherever there's a tax system, there's inevitably someone cheating it.

It might be the mate who paints your kitchen on the weekend, or the guy who offers a cut-rate deal to put a new radiator in the car - for cash of course - or the horticultural contractor running some kind of systematic racket. It's all tax-free cash.

And whatever you call it - black economy, hidden economy, cash economy (as Inland Revenue commissioner David Butler prefers to call it) - there's an estimated $12 billion of it slipping through the tax net every year. Butler himself doesn't like to put a figure on the cash economy. Too hard, he says, and he should know. He chaired a task force on Australia's hidden economy which found estimates ranging from 3.2% to 13% of GDP.

"We would rather spend our time helping those who want to comply to do so and bringing to account those who don't," says Butler.

The only serious attempt to calculate New Zealand's black economy was in the 1990s when economist Professor David Giles estimated it to be $9 for every $100 worth of goods and service produced in the official economy.

In the next few weeks, associate revenue minister David Cunliffe will present a proposal to Cabinet, which will probably recommend some form of limited amnesty in an effort to encourage errant non-tax payers back into the fold. He told Unlimited he favours a trial amnesty in a particular industry, accompanied by an intensive audit, to see if the idea works in practice.

Carrot and stick? "Yes, but the stick would have to be a very big one. The amnesty would be a limited window for people to come forward knowing that otherwise they would get caught as part of an intensive crackdown."

In a discussion document late last year calling for submissions on the amnesty proposal, Cunliffe suggested that tax evasion could become ingrained in an industry and the pragmatic approach would be a limited amnesty in exchange for repaying taxes over a set number of years while Inland Revenue applied the blowtorch to that industry to catch those who had no intention of paying tax.

No one knows how much extra tax could be generated by such a move, but it could be worth 150 hip replacements or a hospital or school or two. Or perhaps enough extra revenue to encourage a tax cut across the board, says PricewaterhouseCoopers chairman and tax expert John Shewan. Although $12 billion is the figure bandied about as a crude estimate of the black economy, Shewan reckons it could be more. If the Giles estimate is adjusted for inflation, the figure is more like $14 billion, he says.

"Even if you collected 10% of that, that's $1.4 billion. By my calculation that would enable us to reduce tax rates down to 30% for both individuals and companies without cutting spending in any other direction."

Cunliffe's amnesty proposal stirred up vitriolic criticism among some business groups, notably the Employers and Manufacturers Association (Northern) which argued that any form of amnesty was unfair on those who did pay taxes.

"Simply because 9% of net earnings are not declared is no reason to let tax cheats off the hook," thundered the EMA. "Instead of giving tax amnesties to cheats, the government should recognise its regime is overtaxing and overloading small business with high legal and liability compliance costs."

Chief executive Alasdair Thompson now takes a slightly more temperate line. If a tax amnesty will work, then fine, says Thompson. But people would be less inclined to cheat the system if it was more equitable, he says, pointing out that Britain allows small business operators to earn their first £10,000 tax free. "If you had that kind of regime here, why would anyone want to evade tax?"

Ray Barbara, general manager of the Electrical Contractors Association of New Zealand (ECANZ), also backs the amnesty despite some reports which said his organisation didn't believe it would work.

"We think they've got a big job ahead but we will be pleased to see them start it," says Barbara. "If an amnesty forms part of the logic to get people to comply with the rules, we don't have a problem with that. It's no different to the gun laws - you want people to license their guns, [so] you say 'bring them in and we won't nail you'. It's just another tool you can use to get people to comply."

Don Fraser, executive director of the Master Painters Association, is doubtful that an amnesty would work, "but you can't rubbish the initiative".

Shewan, however, is still livid over the roas-ting the amnesty proposal got in some quarters. "I take my hat off to the government for being bold enough to put forward a proposal. The response they got to it was so vitriolic that there's a real prospect they might not proceed with it. That would be a real shame and I think some of the industry associations that opposed it should be ashamed if that happened."

But should we care about tax cheats? Austra-lian research found that 56% of those surveyed thought tax evasion was a trivial offence. It depends on whether you call it cheating or avoidance, but it's not just semantics. It's hard to argue against the vigorous pursuit of systematic tax cheats, but what's wrong with the odd cash transaction among friends?

"I wouldn't have thought that in an open transparent economy, which is always looking down the barrel of huge pressures on the spending side - health, education, social welfare - that anyone could or should be relaxed," says Shewan. "I've always been slightly puzzled that people are aggrieved over someone walking into a shop and stealing a bike or anything off the shelves, yet they're relaxed about the theft of tax dollars. There's an interesting distinction there in a psychological sense. The question is, is it realistic to tackle it?"

So, given that your tax dollars may help educate your child, or save someone's life in a well-equipped hospital, wouldn't you feel guilty about not paying tax? Well, yes and no. On a macro level, we tend to think that everyone should pay tax as long as it's spent wisely by the politicians. On a personal level, we don't have a problem with the guy who pays taxes all week and then does a job for some quick cash in the weekend.

Says Butler: "The research that I've seen shows that when asked, 'should everyone pay their tax?' the answer is yes. 'Should everyone pay a tax on cash income?' Yes. 'Is it okay that someone comes and paints your room and charges $50 less for a cash job?' People think that's okay too. So it's quite a complex issue. But I think overwhelmingly the key issue is that people should meet their obligations under the law."

But that argument simply won't wash with some groups, like career criminals who can't pay tax even if they want to, simply because their transactions are illegal. Or the middle class households that would grind to a halt if not for the squadron of nannies, cleaners and gardeners that are routinely paid "under the table". Or the systematic cheats like Manjit Singh who earlier this year was sentenced to two years' jail for tax evasion of $176,046.93. Singh had been employing his own staff while falsely claiming subcontractors' costs to reduce his tax bill.

With David Butler in charge, Inland Revenue has been both cajoling and waving a big stick. Industry groups like ECANZ and the Master Painters Association, which have been working with Inland Revenue to target tax evasion within their industries, argue that cash operators drag standards down and are a blight on the industry as a whole because they're less accountable and undercut reputable members.

Don Fraser says the most noticeable change since the master painters began working with Inland Revenue two years ago has been the attitude of the department, which used to be notoriously difficult to deal with, but has become more friendly and helpful. When he first told his members that Inland Revenue wanted to work with the association, they were suspicious, but the department set up an 0800 number and provided a contact group for his members to consult if they had any tax problems.

"The department tells us it reduced the outstanding tax by a significant amount and our members felt markedly better that they were able to solve their problems in an amicable way."

In Christchurch, says Butler, Inland Revenue staff found that many taxi drivers just had poor record-keeping skills so the department deve-loped a cash book. "We offered to put that in place nationally and we've now seen a doubling in the registration of GST for taxi drivers and owners across the nation over the past two years."

And there's always the big stick. Last year Inland Revenue put 30 extra staff to work poring through newspaper ads and the yellow pages to catch those operating outside the law. And the painter in Napier or Nelson with a well-run business knows who is out there trying to undercut him, says Butler.

"The ones who don't disclose any income and don't file, they're the ones we would target straight away. Those who are running a business, keeping good records, and are part of an industry group, we are quite happy to work with them to get it right."

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