Monday, 17 September 2018
Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018; In Committee
On behalf of Senator Cameron, I move the opposition amendment on sheet 8442:
(1) Page 2 (after line 11), after clause 3, insert:
4 Review of operation of amendments
(1) The Minister must cause a review of the operation of the amendments made by Schedule 1 of this Act.
(2) The review must start as soon as practicable after 2 years after Royal Assent.
(3) The Minister must cause a written report about the review to be prepared.
(4) The Minister must cause a copy of the report to be tabled in each House of the Parliament within 15 sitting days of that House after the day on which the report is given to the Minister.
(5) The report is not a legislative instrument.
Labor is moving this amendment due to some relatively minor concerns about enforceability of measures in schedule 1. We believe a post-implementation review is warranted. Some stakeholders have raised concerns about defence provisions and strict liability for administrative penalties, including for people who may reasonably be in complete ignorance. Whereas criminal offences have overarching general defences for genuine mistakes, administrative civil penalties do not. However, in practice, the Commissioner of Taxation is only likely to impose civil penalties in genuinely gross cases. The Commissioner of Taxation has scope to remit penalties in cases of genuine mistakes.
Stakeholders have also raised concerns about the ATO's ability to enforce the provisions. The Treasury has said that the commissioner is presently undertaking live investigations into alleged sales suppression software. Neither Treasury nor the ATO have estimates on how prolific such software is. As Senator Cameron noted in his speech on this bill, the expansion of the TPRS and the rise of contractors and gig-economy work warrant greater inspection of the interaction effects of the measures of schedule 2.
As the amendment Labor is putting forward states, Labor would like a review of the operation of the amendments in this bill. The amendment requires:
(1) The Minister must cause a review of the operation of the amendments made by Schedule 1 of this Act.
(2) The review must start as soon as practicable after 2 years after Royal Assent.
(3) The Minister must cause a written report about the review to be prepared.
(4) The Minister must cause a copy of the report to be tabled in each House of the Parliament within 15 sitting days of that House after the day on which the report is given to the Minister.
(5) The report is not a legislative instrument.
This is a responsible amendment that strikes the right balance between evidence based policymaking transparency and ensuring that the measures before us are passed by parliament in a timely fashion.
I thank Senator Polley. The government doesn't believe that this amendment is necessary, though it will be supporting it to facilitate the passage of this bill and this very important legislative change. The amendment as outlined by Senator Polley would, of course, force a review after two years and cause the minister to cause a written report about the review to be prepared and tabled in each house of parliament within 15 sitting days of the report being given to the minister. We will be supporting the amendment, though, as I mentioned, we don't believe that this review is necessary as there is no legitimate reason to possess and use sales suppression software. However, we do want to see the important measures in this bill go through.
We thank the opposition for its support of the bill as a whole. In order to make sure that what is a very important bill is able to go through, with very important measures for dealing with the black economy and ensuring that we don't have people able to simply dodge taxes or, in some cases, use very sophisticated means to dodge taxes through sales suppression technology, we will be supporting this amendment. We look forward to the hopeful passage of this bill.
I have a slightly different approach to this than the minister. I appreciate the minister's contribution to the debate. Can I congratulate Senator Polley on one of the more useful and positive speeches that I've heard from the opposition for some time. Senator Polley has a very sensible approach and I think that qualifies her for greater things and perhaps she should be part of Australia's delegation to some international forums, where she could make an equally positive contribution. But the idea of having a review after a couple of years, I think, is a very valid one because not always does legislation get it 100 per cent right. As I understand the amendment—and I want to ask some questions about that shortly—the review proposed has some merit in letting the parliament have a look at it again, having an independent group look at it and make recommendations.
It is pleasing to see support across the chamber for this approach to dealing with the black economy. Over my long years, I have seen examples of people trying to avoid paying taxation, people thinking they're clever in somehow avoiding tax by being part of the black economy. Whilst those who participate in it might consider themselves clever and, indeed, fortunate—and a lot of people, I suspect, would think that they're beating the system so therefore it has to be good—of course, what that means is that the rest of us who pay tax religiously, on time and without any sort of reduction, end up paying those additional taxes which the black economy deprives the country of. And while, like death, tax is inevitable, we do need taxes to actually make Australia work the way we want it to.
We'd never have a National Disability Insurance Scheme if we didn't have sufficient taxes to pay for that scheme. I'm conscious that when the Labor Party first thought of the NDIS, they had no idea of how it was going to be paid for and, fortunately, a change of government brought forward a government that not only endorsed the National Disability Insurance Scheme but actually started work for the first time on how the nation would pay for it and that's an important part of the process. It's alright having great ideas if there's no suggestion of how it's going to be paid for, and you see that all too often. Dare I say, with some political parties in this chamber, you see politicians making these grandiose promises that look good to the average voter. They might say, 'Yes, that sounds like what we want,' but, unfortunately, very often the ordinary voter doesn't understand that these promises, whilst they're fine, have to be paid for by someone and the only way that you can pay for them is by increasing taxes or by deferring payments to other very worthwhile projects. We have lots of examples of that. I know, in North Queensland, Mr Shorten breezes in there on a FIFO visit, announces some grandiose policy that is populist, will be immediately accepted and will get a headline in the local paper, but rarely does he ever say where the money is going to come from and, regrettably, some of the minor parties are very much like that as well. If you read some of the Greens political party policies—and you'd only do that if you were suffering insomnia—you'd see that whilst, superficially, they're not bad and they would attract some populist support, when you ask the question: 'Well, how are we going to pay for that?' Rarely, do you get a sensible answer. You do get an answer, which is, 'Tax everybody more.' But that's said by a party who will never be in government and will never have the responsibility of actually paying for the promises they make.
I must say, just diverting ever so slightly, up my way we have a former parliamentarian, Mr Palmer, in and around the north at the moment, and very often—like every five or six minutes on a TV ad in the local TV media in Townsville—he's talking about a couple of things, one of which is a zone taxation policy. I always say that repetition and plagiarism is a great form of complement, and I'm delighted that Mr Palmer is talking about a zone tax system after I've raised it quite a number of times in this chamber. I've made a very detailed submission to the Prime Minister and the Treasurer about upgrading the zone tax rebate scheme. But Mr Palmer has a proposal, which he does in a very clever 10-second grab in an advertisement. He wants a zone tax payment so that everybody who lives more than 200 kilometres from a capital city pays 20 per cent less tax. That's a great initiative. I have to say, lest my words be misconstrued at some time in the future, that I say that cynically and ironically. Twenty per cent less tax for people living, for example, in Noosa, a beach resort north of Brisbane in my home state. It was a very interesting thing. Of course, it's easy to say to all Australians who live more than 200 kilometres from a capital city, 'Your tax is going to be 20 per cent less.' It sounds like a great policy. Why wouldn't you vote for a man who was promising that? But then the question remains: who pays for it? Does that mean that people who live within the 200 kilometre radius that Mr Palmer is currently talking about pay 20 per cent more? Or do we cut back on our defence forces? Do we cut back on our border security? Do we limit the National Disability Insurance Scheme? Do we limit some of the extensive taxpayer contributions that have gone into developing northern Australia? Do we limit the contribution the Commonwealth government is making to the Rookwood Weir near Rockhampton? All of these questions come up. We have to ensure that the revenue is protected and that the revenue authorities get what is justly and lawfully theirs.
That brings me back to this bill, which is an attempt by the government, with the support of the Labor Party, I see, to try to address the black economy to make sure that all those that are paying tax or that should be paying tax do actually pay tax on their earnings. Having said that, I do want to ask Senator Polley about the idea of the review. I don't have the amendment in front of me, unfortunately, but the review, as I understand it, was to be by an independent group. I'm wondering if Senator Polley might be able to explain to the Senate what the Labor Party has in mind? Will it be one of the major finance firms? Will it be a departmental investigation? Will it be an independent investigation? Who will the people be? As I say, I think the idea is a good one, but I'm wondering what the implementation process of this review might be? Will submissions be sought from the Australian public and from particular stakeholders?
How will this actually happen? I repeat: I think it's a good idea, but I would just like a little bit more information on how Senator Polley suggests that the review might be conducted. Who will be consulted and what sort of professional or technical input will be made into the review?
It's envisaged that there will be the normal sorts of processes that would be determined around a review like this. We haven't gone into the detail as to who would undertake that review, but we do see it as being advantageous to ensure that there is a review after a two-year period. I would expect that the government would carry out that review with somebody independent, as they normally do in ascertaining who would be best served to do that review.
I rise today to argue against the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018. This bill creates a new offence relating to so-called electronic sales suppression tools, by which the government means hardware and software which can be used to falsify electronic sales records. Specifically, these new offences are for the production, supply, possession or use of these devices.
I know that. It's an amendment to an amendment. But, after the division, I won't have a chance to speak on it.
The TEMPORARY CHAIR: Go ahead.
I do not oppose this bill because Katter's Australia Party disagrees with the government seeking to clamp down on the black economy. We fully support the government's right to do this. I oppose this bill because the philosophical approach that it takes to the problem is wrong and runs roughshod over the rights of innocent people. This bill is bad because it removes the assumption of innocence for owners of software by imposing a strict liability associated with mere possession of something which can be used to break a law. Once again, this government shifts the line of criminality away from a criminal act to the capacity for a criminal act. I'm afraid to say that this kind of 'deemed offence' is becoming a hallmark of governments in recent times. Deeming people to be guilty simply because they have the capacity to do something unlawful makes for sloppy policing, because, instead of actually having to prove that an offence has occurred, you can just round up everyone who might do so in the future.
This is presumably the reason that the government has framed the legislation this way. However, this lazy approach to an easy enforcement has a cost, which is to criminalise otherwise innocent people who had no intention of subsequently committing a crime. Apparently unwittingly, just to make lazy law enforcement easy, the government is undermining the rights of the innocent. Like assigning collective guilt, the deeming of guilt of those who have taken no action for which they could be charged was a hallmark of the oppressive Soviet justice system, and its increasing incidence in Australia is alarming. In the Soviet legal system, the subject of deemed offences was central, because once accepted as a principle technically anyone might do anything, and, thus, the arrest of anyone in society is justified. That was, of course, exactly what the Communist government wanted.
Today in Australia, in creating deemed offences, this bill will represent a totally unnecessary, draconian measure that has a whiff of totalitarianism about it. I urge the government to appreciate the insidious nature of deemed offences, such as those created by the bill, and desist from the practice of creating these in future. Instead of this bill, I urge the government to commit more resources to law enforcement and to crack down on those who have actually broken the law and evaded taxes.
In addition to the insidious list of deemed offences and the discarding of the need to establish criminal intent, the cornerstone of our legal system is being undermined. Because of this, the government needs to understand that this bill isn't simply cracking down on the black economy; it is actually following the same oppressive principles as the former Soviet justice system. What this means is, in the words of Joseph Stalin, 'If you only punish the guilty, what will the innocent have to fear?'
I might just briefly respond to Senator Anning's contribution. Senator Anning, the government and I obviously disagree with a number of the points that you are making. It is disappointing that you won't be supporting what I think is a very important piece of legislation.
What you are seeking to address, as I understand it, is in relation to particularly the strict liability offences that are contained within the bill. Senator Anning, you would be well aware that strict liability is used in a number of cases where it is reasonable to assume that a person has a duty, and knows that they have a duty, to comply with the law. For instance, it's used in all sorts of offences. It's used in things like traffic offences where, even though we may not have meant to go 90 in that 80 zone, we had a responsibility to make sure we stayed under the speed limit. It is used in a range of key regulatory areas where the idea of proving the mental or default element would be particularly difficult. If you look at the black economy and what is identified, there are some existing provisions about tax avoidance and the like. However, in many cases being able to prove the mental or the fault element, as it's known, is actually quite challenging. So, if we look at things like sales suppression software, it is difficult to mount an argument as to why someone would have sales suppression software installed for any other purpose other than to avoid paying their fair share of tax.
So, while I understand the arguments you are making, Senator Anning, I think it is an incorrect conclusion, and to use some of the language that you used in your contribution, when what we are talking about is getting to the heart of what is a very, very dangerous thing and a growing part of the economy, the black economy. We're talking estimates of around $50 billion. Things like sales suppression software could potentially facilitate a significant expansion of the black economy. The government's view is that, where it is very, very difficult to mount an argument as to what possible circumstances—other than for the purposes of avoiding tax—anyone would have for possessing or distributing this kind of technology, a strict liability offence isn't reasonable in those circumstances.
I would also make the point, Senator Anning, that strict liability offences of course are not absolute liability. There are defences where there is a reasonable excuse—for example, where software was uploaded without someone's knowledge or consent—but strict liability offences place an evidentiary burden on the individual who is faced with the claims or the charges being brought against them, and if that evidentiary burden can be met then the prosecution has to respond to that.
I understand, philosophically, strict liability offences have been with us for a long time. I think they are used cautiously, but in this case, where we are looking at the proliferation of technology which has the potential to rip off Australian taxpayers to the tune of billions—perhaps tens of billions of dollars—over time and dealing with technology where it would be very difficult to design a circumstance where someone would have it innocently other than in circumstances where there is some form of sabotage which, of course, strict liability offences enable someone to make that argument, I think that this is a very reasonable use of strict liability offences. I don't agree with your assertions, and I think that what this will fundamentally be doing is ensuring that a class of people who are very difficult to prosecute at the moment—those who are deliberately and systematically rorting the tax system—would be captured in this net. Strict liability offences are one very legitimate way of doing that.
I'm not sure you understood what I was saying. There are many things that you could possess that you could use to break the law, but that doesn't mean you have broken the law. Making a person guilty for possessing such an item is infringing on individual rights. I think a law has to be broken before that person is found guilty and he should not have to prove his innocence just because he possesses that particular piece of equipment, the hardware or the software. Just like a baseball bat could be used to bash somebody in the head, if the person hasn't used it for that purpose, he can't be found to have possessed an item and be guilty before he is proven innocent.
Thank you, Senator Anning. I will respond in a moment, but, if you go to the details of the bill, you find that if the person does produce, supply or provide a service providing such a tool, they will not commit an offence if they can show they have made an honest mistake of fact, satisfying the requirements under the defence under section 9.2 of the Criminal Code. That is the way that the Criminal Code is established.
But to respond specifically to your point, if we compare the baseball bat, as you say, which of course could be used to commit an offence—but in most cases a baseball bat of course has the very legitimate use of being used for baseball—that is a very different thing from technology that effectively only has one purpose, and the one purpose is to avoid Australia's taxation laws. If it were for simply the possession of something which, in and of itself is lawful and has a legitimate use—as per your example of the baseball bat, and I'm sure you could come up with many, many other examples—I think I would be in agreement with you, Senator Anning, on how this could be an unjust law.
But what we are talking about here is technology that is developed simply for the purposes of avoiding Australian law. Because of the very nature of the thing that is being possessed, the software in this case, we have to have laws against it because, if we don't, it will make it very, very difficult to deal with this problem. But, from a justice point, as I say, a person innocently possessing something which may or may not be used to breach other laws—such as your example of a baseball bat—is categorically different to something that is specifically designed to breach the law, to get around laws and to facilitate the rorting of potentially billions of dollars over time. I think that is categorically different and I think it should be seen as different. I think it's important that we have debates around things like strict liability, but I think this is a very clear-cut case of where strict liability is just and right—and, of course, there are legitimate defences for where a person has acted honestly and there is an honest mistake involved.
I didn't get an opportunity to make a contribution to the second reading debate on this bill, the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018, but I would have liked to; so I want to take the opportunity while we are considering Senator Polley's amendment now before the committee to share a few reflections and observations about the bill. Firstly, I think it's important that we reflect on why it is important that we address the black economy. Particularly following Senator Anning's contribution, I think that's an important question to consider. Some might argue that it is self-evident why a black economy is a bad thing and it's obvious why this should be tackled, but I don't think any question should go unexamined. So I think it's worth stepping through carefully why it is that the government is taking the action that it is to address the black economy.
The first and most obvious reason that a black economy is of concern to any government is the impact that it has on taxation revenue. I and all my Liberal and National colleagues strongly and passionately believe in lower taxation and less taxation for Australian businesses and citizens, and we've demonstrated that very strongly in recent times with a series of initiatives to reduce the tax burden on small business, on medium-sized business—on all businesses—and of course on individuals.
As other colleagues of mine have observed in this debate, what we don't believe in is a self-help approach to reducing the taxation burden. It is not up to individual businesses or individual citizens to go outside and go around the law to reduce their own personal taxation burden in a way that is not consistent with the law. We don't believe in, don't support, don't endorse and don't encourage avoiding lawful taxation. The black economy and the growth of the black economy is a big problem from the point of view of tax revenue. If Australians are illegally evading taxation, then they are, in effect, helping themselves to a lower personal or company tax rate that is not afforded to their fellow citizens and their fellow businesses. That is obviously unfair, and we don't want to encourage that kind of risk-taking behaviour.
The second reason why governments seek to crackdown on the black economy is on the question of corruption. Globally, Australia ranks very high on transparency indexes and on anticorruption indexes. We are a relatively corruption-free jurisdiction. But no jurisdiction is completely free from corruption, and the existence of the black economy is something which contributes to the potential for corruption in any jurisdiction. The greater and larger the economic incentives that exist in a black economy, the greater the risk that government officials and representatives of police forces or other arms of the state will become implicated and involved in that black economy. So keeping the size of the black economy as small as practical limits the opportunity and limits the risks for corruption.
Finally, and I think in some ways most importantly, tackling the black economy is in part about fairness. It's about ensuring that, as far as the law is concerned, all businesses and all individuals have operated on a level playing field and have an equal opportunity to compete. Let's think about if we were a small business operator in an industry where there are problems of the black economy and where people do illegally evade their taxation obligations as just one example. What are the kinds of incentives that that puts in place for an ethical and honest small-business operator who wants to pay the tax that they're required to pay, who wants to pay their employees the pay that they're entitled to receive and who wants to abide by and comply with the law? They're faced with an unenviable situation. Some of their competitors are not as honest and not upstanding citizens like they are, and they are taking advantage of an opportunity to break the law, which will give them an unfair competitive advantage over their honest competitors.
That gives those honest participants in the market a very bad set of incentives. They're encouraged, too, to participate in the black economy and to evade the law, whether it is on the question of taxation or whether it's on the question of a lawful rate of pay for their employees. It encourages good people to do bad things in order to stay competitive, and we don't want that to be the case. We don't want people to prosper by breaking the law. We don't want good people to suffer by abiding by the law. So it is the duty of the government not just to pass laws, have them on the books and hope that all citizens comply with them but also to ensure that those laws are rigorously, appropriately and evenly enforced and that reported instances of evasion of that law are aggressively prosecuted to ensure that there is that fair and equal playing field.
The evidence is that the black economy in Australia, regrettably, is large and that it has been growing in recent years. In 2012, the Australian Bureau of Statistics estimated that the black economy equated to about 1½ per cent of GDP. That was not including the illicit drug trade, which added an estimated further 0.4 per cent of GDP, taking the total black economy, by the ABS's measure in 2012, to 1.9 per cent. My advice is that this estimate is now out of date, and it is considered, in fact, that the black economy could be as large as three per cent of GDP, equating to roughly $50 billion, today.
That's a very significant growth. That's a very significant size of the black economy in Australia, and it's broken down into a number of different categories that were identified by the Black Economy Taskforce report, which was delivered in October 2017. They identified, on the one hand, illicit activities, like drug trade, to be between $7 billion and $10 billion; identity fraud to be approximately $2.2 billion; motor vehicle fraud to be about $300 million; the underpayment of GST, including GST fraud, to be about $3.8 billion; border crime to be up to $1 billion; and money laundering to be up to $16 billion. On the other hand, it also identified understated business income in the range of $10 to $20 billion; the payment of wages in the form of cash, to avoid taxation obviously, at $8.5 billion; illicit tobacco at $4 billion, and this has been a particular concern and a growing concern; unregulated offshore gambling at an astonishing $2 billion; counterfeit goods, $2 billion; phoenixing, $3 billion; and the underpayment of wages and superannuation at $3 billion. So it's very clear. As the report itself says, the black economy is a significant, pervasive, damaging and growing economic and social phenomenon. I think it demonstrates very clearly why action by this government is necessary and why this government takes the issue of the black economy as seriously as it does.
Turning now to the bill that the committee is considering, the government have obviously responded to the Black Economy Taskforce's interim report and we did so in the 2017-18 budget. We announced a range of measures to address this growing economic and social problem. Firstly, as we've heard, this bill bans the manufacture, distribution, possession, sale and use of sales suppression technology. This is the technology which allows businesses to unlawfully conceal their income. We're extending the taxable payments reporting system to two industries that present particular tax-compliance risks, and that includes the cleaning industry and the courier industry. The purpose of this is to ensure that payments made by businesses to contractors in these industries are reported to the Australian Taxation Office, as they should be. Effectively, this bill delivers on our 2017-18 budget decisions. They are obviously part of a much broader suite of reforms that the government is progressing through our response to the taskforce's final report that I mentioned earlier.
Electronic sales suppression tools are banned under schedule 1 of this bill. This schedule creates new offences for the manufacture, distribution, possession, sale and use of electronics sales suppression tools for the purpose of not disclosing business income. That's important: 'for the purpose of not disclosing business income'. The truth is that there is no legitimate reason for possessing these tools; there's no legitimate purpose for using these tools. All that they do is remove transactions from electronic record-keeping systems. They change transactions to reduce the amount of each sale and they can even modify GST taxable sales to GST non-taxable sales. In all instances, as we've heard already in this debate, no audit trail of the changes made can exist. I think it very clearly demonstrates the nefarious intent of these software tools and the fact that there isn't a legitimate purpose to use them. The government is introducing offences that are subject to strict liability, as we've heard from the minister, and significant penalties to deter the use of such technology across the software supply chain. The technology is used solely for the purpose of tax evasion, and the new offences will help restore some integrity to the tax system.
Recent reports from the OECD have highlighted that this software is in fact spreading globally and its use has been identified in a number of jurisdictions, including Canada, the United States, Germany and Sweden, and many of these jurisdictions have, in response to the proliferation of this technology, implemented measures to address this risk, as Australia is now doing. The ATO has in fact already uncovered instances of this software in operation in Australia.
Schedule 2 of the bill relates to third-party reporting. From 1 July 2018, businesses in the courier and cleaning industries will be required to give an annual report to the ATO regarding the payments they make to businesses for them to provide courier or cleaning services. That is, the reporting obligation will apply from 2018-19 income year and the reports will be required by 28 August 2019. This measure is estimated to result in a gain in taxation receipts of $132 million over the forward estimates period. Business-to-business payments for courier and cleaning services are within the scope of this reporting requirement. Implementation of the taxable payments reporting system in the building and construction industry resulted in improved contractor tax compliance and reporting of income. What the government is effectively doing with this measure is extending this reporting system to other industries which have been identified as high-risk, in the same way that the building and construction industry had been previously identified.
The ATO has prepared guidance material to assist businesses in these industries to comply with their new reporting requirements. The information reported to the ATO will be used for the pre-filling of tax returns or activity statements, which should actually make it easier for contractors to lodge their individual income tax returns, and also used for data-matching purposes to ensure that contractors comply with their tax obligations, such as correctly lodging their income tax returns and BAS obligations.
In the time remaining, I want to turn briefly to the OECD report on electronic sales suppression and the reason why it presents a threat to tax revenues globally. Modern cash registers in the retail sector effectively operate as a comprehensive sales and accounting system. They often use standard business software and they are relied on as effective business accounting tools for managing the whole enterprise. They're not simply there to take payments from customers. Consequently, they are expected to contain the original data, which tax auditors need to inspect, including those auditing value-added sales tax—like our GST—compliance. What's now apparent is the fact that such systems can be manipulated to permit skimming of cash receipts, just as manual systems like a cashbox or operating two tills have in the past. Once equipped with sales suppression software, they facilitate far more elaborate frauds through the ability to reconstitute records that match the skimming activity. What this means is that the sales suppression software allows businesses to effectively automatically cook the books without needing any significant accounting expertise, and it's one of the reasons why this software is of such concern to the government.
Internationally, it's been an issue that other jurisdictions have tackled. Revenu Quebec in Canada, for example, has estimated that they've had tax losses of C$417 million in the 2007-08 year because of the use of such software. In Sweden, they were able to recover €115 million in over 2,000 audits over four years. From 2006 to 2010, Sweden carried out 2,000 audits. The audits covered restaurants, hairdressers, clothing stores and food stores. The audits showed that between 20 to 40 per cent of the turnover was underreported. What that amounted to was effectively €150 million lost in income taxes, VAT and employment taxes. This underreported turnover is feeding the grey or underground economy and, in some areas, also supporting organised crime. Other jurisdictions like South Africa identified a single case of €22 million being expatriated. In Norway, a single case involved €7 million underreported. These are significant global problems the OECD has identified as a growing issue internationally, and it's entirely appropriate that the Australian government is responding in kind to address this issue.
To add to my earlier answer to Senator Anning's contribution—and it does follow on slightly from earlier contributions as well—on the rationale for strict liability, it's worth briefly extracting a little bit from the explanatory memorandum. To follow on from Senator Patterson, the issue around organised crime is an important part of the context for the necessity of strict liability offences. We are increasingly dealing with pretty sophisticated crime networks, and this is one of the tools that can be used. This is from the explanatory memorandum:
Currently, the taxation law contains a variety of offences as well as civil and administrative penalties relating to record keeping and tax evasion. These include penalties for providing false or misleading information to the Commissioner … and incorrectly keeping records with the intent of misleading the Commissioner …
Although these offences may apply to entities that use electronic sales suppression software to incorrectly keep records, the current maximum penalties for the offences under the TAA 1953 are not high enough to adequately reflect the seriousness of using a tool with a principle function of misrepresenting an entity's tax position.
It goes on:
The Criminal Code contained in Schedule 1 to the CCA 1995 also contains offences relating to forgery and providing false documents to the Commonwealth. The manufacture of electronic sales suppression tools may be captured by the Criminal Code under the offence for possessing, making or adapting a device for making forgeries …
However these provisions require either an intention that the device will be used to commit an offence of forgery or only apply to Commonwealth documents. These requirements can be difficult to satisfy in the case of electronic sales suppression tools.
Just finally, from the explanatory memorandum, Senator Anning, even where an electronic sales suppression tool was developed overseas to falsify records that are kept for Australian tax purposes, it may be difficult to demonstrate the tool was made or supplied specifically with the intention of defrauding the Commonwealth rather than other jurisdictions. So it is just a further piece of evidence as to the background: (1) you're dealing with organised crime; (2) you're dealing with very sophisticated areas; (3) currently, there could be someone who clearly had malicious intent but you're still not able to prove it because of the complexity of some of these crimes. Therefore I would say to you again, Senator Anning, that the use of strict liability in these circumstances is absolutely justified.
Minister, I'm wondering if you could tell us what this suppression software is and who would be creating it, who would be distributing it, not necessarily by name of the individual person or company, but I am curious as to the type of people or groups. Is it the criminal elements that you have just been speaking about around the world or within Australia? Are there any Australian entities that we know are involved in the manufacture—I don't think 'manufacture' is the right word—but the creation of the software and its distribution? Bikie groups are often referred to when it comes to illegal activities and drugs elsewhere. But I am somewhat curious just as to how this software came into existence. Was it ever legal? Was it ever available for a purpose that was not illegal? I'm just curious as to the background of all this and I'm sure many Australians would be.
Just briefly, before I answer the more detailed part of your question, you asked at the outset what it is. Simply, it is a device or program or other thing capable of manipulating or destroying records that an entity is required to keep or make by taxation law. The primary function for sales suppression software is to understate a business's income and facilitate the non-compliance of businesses to their tax obligations. As I stated earlier, there is no legitimate use for this technology, as it is used solely for the understatement of income, leading to the purposes of tax evasion, and this new offence would restore integrity to the tax system.
But it is worth, in addition, pointing out that—and part of this is in the explanatory memorandum—a critical element of each of the new offences and administrative penalties is the term 'electronic sales suppression tools'. So the starting point for the definition of electronic sales suppression tools is a device, software program, or other thing or any part or combination of such things. For example, the modification to a device or standard business software can fall within the definition of 'electronic sales suppression tool' even if the device or program as a whole is not. So in such cases a modification is a tool for the purposes of the amendments, and prohibited conduct undertaken into relation to the modification can constitute an offence, even though the overall software or device may also function to complete normal business reporting activity. So the tool must be capable—this is very important—of:
… falsifying, manipulating, hiding, obfuscating, destroying, or preventing the creation of a record that:
(i) an entity is required to keep or make by a taxation law;
Importantly also for the defences:
Although 'capability' is a necessary condition, for a tool that has such capability to be an electronic sales suppression tool, a reasonable person must be able to conclude that one of the tool's 'principal functions' is to 'falsify, manipulate, hide, obfuscate, destroy, or prevent' the creation of certain records.
There is an example that's given where there are modifications. It's an important example. It's an example in the explanatory memorandum that uses a hypothetical where there is an individual operating a restaurant who uses a standard POS software to record her sales transactions. Each transaction is stored in a database and is automatically allocated a sequence number. The software has a pre-installed training mode and transactions made in training mode are stored in a separate database. The individual uses a training mode to teach new staff how to enter sales transactions into the POS system and modify or delete transactions that are inadvertently made in error.
The individual contacts a local software supplier to enquire about upgrading her POS software. The supplier offers her two versions of the same software. One is the standard software upgrade developed by the manufacturer, while the other has an additional function which allows the individual to modify or delete sales transactions data from the main database, without trace, by rearranging the sequence numbers.
In this case, the additional function to delete and resequence sales transactions can be isolated from the standard POS software program and a reasonable person would conclude that its principal function is to manipulate and hide sales transaction records and under declared income. As such, this additional function is an electronic sales suppression tool. It could be the software that's designed specifically for this or, in addition, it could be a specific modification that is made specifically for that purpose, which a reasonable person would look at and say, 'This is for the purpose of falsifying records so that you can understate income so that you don't have to pay your fair share of tax.' Therefore, it would fall within the legislation.
I have two questions from the point of view of a business which might be affected by this legislation. First of all, I'm interested in how they will become aware of the passage of this legislation and how the new offences may apply to them. Second of all, I'm interested in what the penalties are, or will be, for these businesses, should this legislation be passed and should they contravene the new law.
In terms of how businesses would become aware of new offences, I'm advised that the ATO has prepared guidance material. I understand that is ready to go, but, obviously, it can't go out until this legislation is passed through the Senate. It is ready to go. I'd encourage businesses, after the passage of this bill, to consult the ATO website. They can get an understanding of whether it would apply to them in the cleaning and courier industries and of the thresholds that would apply to them. I understand that will be available as soon as the legislation is passed. Obviously, if there is any need for assistance, the ATO will be able to assist.
In terms of the penalties, there is a rationale. We've had some discussion with Senator Anning about the strict liability nature of those offences, and I won't go over that ground, but they are very high penalties. The maximum is 5,000 penalty units. There are other offences that have lower penalties, including 1,000 penalty units for another offence. For those 5,000 penalty units, if you look at the wrong that we are seeking to counter and the potential for massive fraud upon the Commonwealth and therefore the taxpayer, I would say, and the government believes, that those very strong penalties are justified. When you are dealing with a $50 billion black economy and it's potentially, if we don't get hold of it, a growing black economy, there are some people who make an amazing amount of money from their activities in that black economy. The incentives against wrongdoing and the incentives against people to facilitate some of this wrongdoing—through, for instance, developing this type of software—need to be very, very strong in order to send the message. The disincentives need to be very, very strong. So, yes, 5,000 penalty units, at $210 a penalty unit, is a very significant penalty.
We do see other areas where there are very strong penalties. For instance, we know that under division 290 of the act the promoters of tax exploitation schemes attract a civil penalty of 5,000 penalty units as well. And we know that penalties in the range of 4½ thousand penalty units are imposed on breaches of directors' duties under the Corporations Act 2001. And the Criminal Code Act also imposes a 10-year maximum term of imprisonment for the offence of manufacturing devices for the creation of making forgeries. Again, that would be a very similar act. It is done for very, very similar purposes, so obviously when the government looks and does its consultation and goes through its processes and looks at other similar penalties, it obviously looks at similar offences and what types of penalties they have. We consider the deterrence effect that is needed, and when you are talking about the billions of dollars that are washing around in the black economy then it is very important that we have pretty substantial penalties for dealing with that wrongdoing.
Thank you, Minister; I appreciate that comprehensive answer to my question. Given that we're considering an amendment from Senator Polley, I wanted to take the opportunity to reflect on an amendment that was moved in the House of Representatives. The government moved an amendment to the legislation—this is to schedule 2 of the act—and, in doing so, it was acting on the concerns raised by stakeholders that a mixed business that provides perhaps some courier or some cleaning services might be disproportionately affected by the compliance burden in this legislation, because the provision of those services are merely a small part of their overall activity of the business. They might provide a range of services, including courier and cleaning services, but it might not be the principle purpose of their business and they could effectively be caught by this legislation when, in fact, they're quite a small player in those industries that we've identified as being higher risk industries, along with the building and construction industry that was addressed by previous legislation.
In response to concerns raised by stakeholders, the government moved an amendment in the House of Representatives to our legislation, which imposed a threshold test. That means that businesses that receive payments for courier or cleaning services that are less than 10 per cent of the business's overall GST turnover for the reporting period will be exempt from reporting the payments they make to contractors commissioned to complete their services.
I think this is a really important amendment, and it's worth reflecting more broadly on why these sorts of amendments are necessary. In dealing with a very important issue like the black economy, and seeking to address it, we also have to be mindful that, in doing so, we don't create an unnecessary or excessive red tape burden. This is a lesson that applies in a very general way to all legislation that government seeks to enact: stakeholders and community groups and experts raise concern about a social or economic ill, and they call on the government to address it. The government actually has limited tools to address these sorts of problems. If it is the government to solve this problem then it can do it with a tax, it can do it with a regulation, it can do it with a law: it can do it with a very limited number of tools. And while we are going about addressing these very serious issues—indeed, the black economy is a serious issue—we don't want, in doing so, to raise the burden of red tape on the economy, raise the red-tape burden on businesses and on individuals, because we know the corrosive impact that red tape has on our economy and on our society.
The truth is that in recent decades governments of all political persuasions have quite often passed legislation to address very genuine and serious issues, but, in doing so, have created what is a very excessive red-tape burden. Just an example of that: in 1915 the Commonwealth parliament passed just 112 pages of legislation, but 50 years later, in 1965, the Commonwealth parliament passed 1,357 pages of legislation. You can see the exponential growth in just 50 years. And, by 2012, the parliament passed 8,150 pages of new legislation. In fact, in an amusing sidenote, the Gillard government promoted this statistic as evidence of their success. They were proud of the fact that they were passing so much legislation, but that's legislation that every citizen has to comply with, that every business has to comply with. That's a very serious burden for them to comply with.
There's very good evidence that there is economic and social harm as a result of red tape burden. For example, the 2017-18 World Economic Forum's Global competitiveness report ranked Australia at 80th out of 137 countries in the world for the burden of government regulation. Now, Australia should be aspiring to be in a much better position on that list. We want to have the least burden possible. To be only 80th out of 137 countries in the world is a disturbing statistic. The OECD has ranked Australia only 20 out of 47 countries for barriers to entrepreneurship, and that report considers the regulatory burden to be licences and the protection of incumbents. Again, we should be aspiring to be a country that is very conducive and welcoming of entrepreneurs, not to discourage them.
The Institute of Public Affairs, which, as senators know, is a former employ year of mine, has estimated that $176 billion is the annual cost of red tape on the Australian economy. That equates to $19,300 per household—almost $20,000 per household. And, if red tape were in industry—if we measured it alongside other industries as a proportion of our economy—it would be larger than the mining industry, the manufacturing industry and the agriculture industry. Red tape should not be an industry in Australia. It should certainly not be an industry larger than some of our largest industries. One of the potential effects of that has been the declining rates of entrepreneurship in recent years in Australia. For example, between 2003-05 and 2012-14, small business start-ups as a percentage of all small businesses actually declined by 40 per cent; and the percentage of Australians in that key entrepreneurial age group—typically, aged between 25 and 49—has declined from 38 per cent to 35 per cent and will reach just 30 per cent by 2065. So we want to give those remaining in that age group as much encouragement as possible to be involved in entrepreneurship.
This government over its five years in office has recognised very seriously the evidence and the concern with red tape with not just the amendment to this bill but a range of measures. Prior to the 2013 election, senators might recall that the coalition made a promise that it would reduce the red tape burden by at least $1 billion every year in office. And, in just our first three years, between September 2013 and December 2016, decisions taken by the government to reduce the red tape burden amounted to about $5.8 billion—so, far exceeding the promise of the $1 billion a year. But, of course, we know that there is much more work to be done in this area.
I'm pleased that the government listened to stakeholders that identified the serious issue of the potential regulatory burden on businesses that only play a small role in the cleaning and courier industries and has established a threshold test to carve out those businesses which only participate in the industry in a small way. I want to follow up that contribution with a question to the minister about the threshold: why, in your view, is the threshold test necessary; and is it possible for the threshold test to be changed?
As a point of order, I didn't hear what the result of that prior division was. I'm not sure if it was announced or not?
The TEMPORARY CHAIR: I have handed the sheets over, but, from memory, there were 38 ayes and 30 noes. I thought I did call it. Was the microphone not on?
Honourable senators interjecting—
The TEMPORARY CHAIR: Okay—thank you. Senator Macdonald.
Mr Chairman, either you had an uncharacteristically soft voice today or the microphone wasn't on, and I suspect it was the latter. I had some other questions I wanted to ask. I did want to ask some of Senator Polley, and I know my colleague Senator Paterson did too. But, in this day and age, it's typical of the Labor Party and their hypocrisy. Do you remember a couple of weeks ago when we had all this confected outrage about gagging debate when the government didn't actually gag debate; it just put some sensible time limits on the debate? There was outrage from the Labor Party and the Greens, and yet, as we've just seen today, when it suits the Labor Party and the Greens, they'll gag anyone from speaking. Particularly in a case such as this where it is quite a complex bill and senators do have serious questions to ask about the complexity of these bills, the Labor Party and the Greens, again, join to curtail debate.
Of course, it reminds me of the time a few years ago when, regrettably, we were in opposition and the Labor Party and Greens political party were in charge of the government of the land. We had, if I remember correctly—what was it?—57 gags in one week on bills that the then Labor-Greens government wanted to promote. That's bad enough, but what really concerns me is the confected outrage when the government, which is trying to deal with important legislation that it has to get through, puts a time limit on bills. We had motion after motion and points of order after points of order from the Labor Party and the Greens political party about that time management, and yet, with the ultimate hypocrisy, they now move gags and suddenly all of their moral indignation seems to disappear.
I divert myself from the bill just to express my concern at the hypocrisy of the Labor Party and the Greens political party when it comes to curtailment of debate. I expect that sort of thing from the Labor Party. The Greens are always so morally outraged when that happens when it's the government time managing the bill, but they seem to lose that moral high ground when it comes to the question of the Greens and the Labor Party trying to curtail debate on something that other senators want to inquire further.
I wanted to ask the minister why it is that this sales suppression software hasn't already been banned. I think the minister answered in a question from my colleague Senator Paterson earlier about the existence of the software that it cannot be used for anything else but to falsely indicate what income an entity is making.
I did ask the minister previously—although I'm not sure if you answered, Minister—about what types of people were propagating, distributing and retailing this software. They may be questions that you don't have the answers to, Minister, but it's certainly fascinating to think on whether they are bikie gangs or whether they're some of the more radical unions who some allege are involved in criminal activities. I don't know whether that's right, but I do see that alleged at times. I was wondering if you did have any information on that.
I'm also curious as to the cost of this sort of software—again, you may not have this information, Minister—and whether the software itself was patented in such a way that whoever discovered, manufactured or wrote the software was the only person able to do that or whether others could do it. But they're perhaps side issues.
Minister, my principle question to you is: why wasn't the sales suppression software banned previously? Has it not been known of previously? Or is this just a recent phenomenon?
Thank you, Senator Macdonald. There are a number of aspects to the question, but in response to that specific part of the question, the current penalties are confined to just the taxpayer for minimising their taxes and not keeping proper records. The current law does not explicitly penalise any part of the supply chain for the possession or use of this software. The new offences target each stage of the software supply chain—that is, the manufacture and production, supply and use of electronic sales suppression tools—and they do impose severe penalties.
To answer the second part of your question in relation to why it wasn't been banned, it is a relatively new phenomenon. Obviously the government is acting through this task force and through the response to the task force. It's worth highlighting that it is part of a pretty significant overall response, and this is one very, very important part that we are debating today. The government's response to the Black Economy Taskforce's final report provides the first ever whole-of-government blueprint for tackling black economy activities.
In addition to what we're debating here, it will expand the taxable payments reporting system to security providers and investigative services, road freight transport and computer system design and related services starting on 1 July 2019. It will introduce an illicit tobacco package target to target the three main sources of illicit tobacco: smuggling, warehouse leakage and domestic production. It will modernise business registers and consult on reforms to the Australian business number system. It will introduce an economy-wide cash payment limit of $10,000 for payments made to businesses for goods and services from 1 July 2019. It will remove tax deductibility of non-compliant payments from 1 July 2019. This will mean businesses will no longer be able to claim a tax deduction for employee wages where the business has failed to withhold. It will increase the integrity of the Commonwealth procurement processes by requiring all businesses tendering for Commonwealth government contracts over $4 million to provide a statement—