BULAW5916 Taxation Law and Practice: The Black Economy
Purpose
To extend familiarity with locating legal decisions and undertaking research into an aspect of currently debated taxation law and practice.
For this topic you are expected to refer to at least the Black Economy Taskforce Interim Report and one academic journal article.
Topic
Tax reform remains an ongoing topic of debate in Australia. On 9 May 2017 the Honorable Kelly O’Dwyer MP, Minister for Revenue and Financial Services, released the interim report of the Black Economy Taskforce. The report, and related links, can be accessed through the Treasury (treasury.gov.au) website.
It is stated on page 1 of the Executive Summary of the Black Economy Taskforce Interim Report
“The black economy is a significant, complex and growing economic and social problem.
Black economy activities: undermine the community’s trust in the tax system; create an unfair commercial environment which penalises businesses and individuals doing the right thing; enable and entrench the exploitation of vulnerable workers; undermine tax revenue; and enable abuse of the welfare system.”
Also included in the Executive Summary is a recognition that, amongst other things, increasing use of new business models such as the sharing economy are contributing to the problem of the black economy.
Task
- Explain what is meant by the terms ‘the black economy’; and ‘the sharing economy
- Identify a business operating in Australia under a ‘sharing economy’ business model – and one operating under a more traditional business model. Both businesses mustoperate in the same industry (e.g. accommodation services) and must operate in Australia (although they may also operate in other countries).
Research and describe the two businesses you have chosen; describing their business structures and how they operate. Identify key differences between them that may affect taxation outcomes. Explain the tax consequences of these differences under existing Australian tax law.
3. Read the Black Economy Taskforce Interim Report – published by the Australian Treasury. Which of the identified proposals or initiatives do you think would be successful in reducing the contribution of the sharing economy to the problem of the black economy? Give reasons for your response.
Answer:
Task A: Introduction:
The term economy means the condition of a geographical location in terms of demand and supply interactions, measured in monetary terms. In simpler words, the economy of a country refers to the monetary measurements of the production activities and the financial health of the country at a point of time. These productions of goods and services are mostly accounted for and come under the domain of the rules and the regulatory framework of a country. This part of the economy, which comes under the accounts of the government of that country within a particular period, forms the white economy of the country. Just the opposite of white economy is the black economy (Schneider and Enste 2013).
What is a Black Economy:
The part of the economy and economic activities, which cannot be accounted for taxing purposes and does not come under the domain of the rules and regulatory framework of the country, though being very much existent in real life is known as the black economy of that particular country. The black economy, in other words, consist of those economic activities, which are carried out without following the protocol of commercial activities as designed by the governing authorities of that particular country (Schneider 2012). However, a activity falling under the domain of black economy of a country might not necessarily be illegal, though all the illegal economic activities necessarily fall under the domain of the black economy. For example, if a worker of a legal transport company, is paid under the table, then this automatically evades tax if the payment if it does not come under the notice of the taxing framework’s radar. This type of payment falls in the domain of the black economy. On the other hand, the category illegal activities like smuggling, bribing and others also form a part of the black economy (Alkon 2012).
Shared Economy:
The economic framework, in the global scenario, has undergone various changes and a significant amount of dynamism with time. With
changes in the world, in every aspect, newer models also developed in economics, the primary objectives of most of them being posing a different way of living or operating so as to increase the welfare of the relevant participants as a whole. One such economic model is that of the shared economy (Heinrichs 2013).
A shared economy refers to an economic framework, where the private individuals, belonging to that economy can share the goods and services in the economy, which are already owned by someone, in lieu of monetary fees or without paying any compensation, depending upon the nature and types of goods and services. This, in simpler words, means that the individuals falling under the domain of a shared economy have the provision of leasing private assets, which are already owned by some other person and are laying unused (Cohen and Kietzmann 2014). Though the concept of shared economy seems to be new, it has been in existence since the beginning of what is known to be a society. With time, this framework has undergone significant changes, though the underlying intuition and objective of the economic concept remains the same, that is to increase the welfare of the residents of an economy by ensuring a better and efficient allocation of scarce resources and their proper utilization. The framework tends to do this, by creating provision of sharing ones’ unused assets with another one who does not have access to the same asset but has requirement for the same (Schor 2016).
Task B:
There are many economic and business frameworks existing in the global scenario, from which an organization can choose in order to follow an operational framework for its activities. Some of the commercial organizations take reference of the shared economic framework, while others believe in a more traditional form of economic frameworks. This section of the assignment tries to discuss the pros and cons of both of these types of economic models, by taking two real business organizations, each operating under the domain of a different economic model and studying their modes of operations and performances over time. The geographical location chosen for this study is Australia, where both the commercial organizations have significant share of operations (Stephany 2015).
Shared versus traditional business framework:
In the shared economic framework, the private individuals of a country have the provision of sharing the goods and services, which are already owned by some other individuals but are not used by the current owners. The sharing can be done in lieu of monetary fees or can be availed for free, depending upon the circumstances. However, a starkly opposite operating system to that of the shared economic model are the traditional economic frameworks. Under the traditional economic framework, the participants are not allowed to share the goods and services, which are already owned by the private individuals of the country. Under the traditional economic framework, the rights for utilizing the assets are only given to those who rightfully own the property by paying for these goods and services. The owners can only use these assets for their own interest, commercial or personal, but are not allowed to let these assets out to others in exchange of fees or for free (Cusumano 2015).
Discussion:
To understand both these economic models, the business organizations, Uber and Cab Charge are used to study the implications of both of these models. Both of these business organizations operate in the transport market in a global framework and deals with point-to-point transport system and both of them have a significant market share in the Australian economy. However, where Uber operates in the shared economic framework, the Cab Charge goes for a more traditional economic framework for carrying out their operating activities (Cannon and Summers 2014).
Uber, a global business in the transport industry, with a big market share in the Australian economy, offers point to point cab services, where the clients have the facility to book transports according to their preference of pick up and drop destinations and at times of their convenience. Individuals both can book cabs for emergency purposes as well as they can be pre-booked to be availed later at some pre-scheduled time. The main objective of the company is to facilitate transport and make cab booking easy and travelling convenient for the relevant customers. The company has an easy online portal in the form of a mobile application, which can be easily downloaded by the customers and used for booking cabs. The organization also provides ridesharing facilities to the clients, under which, more than one customer can share a ride, providing compensations in monetary terms (Uber.com, 2017).
Uber, being one of the largest transport companies in Australia, surprisingly does not own any of the cars used by the company. The business framework of the organization involves taking pre-owned car from the owners or from the local service providers and using them to provide services to the clients, thereby earning commission from both the sides of the clients as well as the service providers. The operating framework of this global transport facilitator, as can be seen from the above discussion, is very much in relevance to the shared economic framework of operations (Hamari, Sjöklint and Ukkonen 2016). The aims of the company is of providing extensive and convenient transport facilities to the relevant client, by using the under-utilized assets (cars in this case), lying with some other persons, who are eager to let out their assets for monetary benefits. This objective of the company also goes at par with those of the main objectives of the shared economic framework, which targets to use the scare resources present in the economy more efficiently through proper allocation and utilizations of these assets so as to maximize the welfare of the society as a whole (Cohen, B. and Kietzmann, J., 2014).
The Uber, as a transport organization, has emerged as a global leader in the transport industry, over the years and as per the calculations of the speculators and economists across the global financial market, the company has an annual turnover of an astonishing twenty billion USD. However, the company has only shown $18,000 as its first tax invoice in Australia, which is surprisingly low as compared to the huge speculated turnover of the business. With the advent of time and more and more companies and economies coming under the domain of the shared economic framework, many countries are trying to implement the concept of shared economy in their methods of operating. The dynamics of concept of shared economy, with an impressive and inclusive objective of overall welfare maximization, has also appeared to be appealing in the eyes of the Australian government, which is trying to implement it to bring agility and swiftness in the economy. Uber, being one of the foremost and predominant commercial organization, already operating under the domain of the shared framework, is expected to play an important role in achieving the long run target of agility of the Australian economy and can work as an inspiration for more commercial organizations to implement this framework in their operations (Posen 2015).
The company has delivered more than 5 million rides and the numbers are expected to increase substantially with time and more people getting accustomed to the online booking methods. However, the debt structure of Uber is currently becoming an issue of concern for the management as well as the governing authorities of the country. If the reports are to be trusted, the company has a $980000 debt, which is much higher than its first recorded revenue, which is of the amount of $804000. The Australian tax regulations allow the companies with a gearing ratio of 60% or more to claim deductions for the purpose of loan repayment. The management needs to take care of the debt structure. However, the overall success and expansion of the business of this company and the huge potential it is showing in the near future, shows the feasibility of the shared economic framework in the real international business scenario (Rogers 2015).
However, not all commercial organizations are very much in favor of the shared economic model as the concept of sharing of personal assets may not sound to be feasible for these companies. One such commercial organization operating in the same industry as that of Uber, in Australia, is that of the Cab Charge. The transport enterprise, has a traditional form of business model, the nature of which has been discussed in the above section. The operating framework of the Can Charge, does not allow for any provision of sharing of private assets, with some other individuals, which are already owned and kept unused by the present owner. Under this framework, the users are only allowed access to usage of any of the assets only after owning these assets in exchange of monetary fees.
The Cab Charge Australia Limited has become ASX 200 organization from December 1999 and is listed in the Stock Exchange of the country. Currently, the company is running as a joint venture along with ComfortDel Gro, which has 49% interest of the company. One of the most notable business strategies taken by the company involves the initiation of a new payment system for their customers, with which the users have the provision to pay through account payment methods, thereby avoiding cash transactions as far as possible. Cab Charge has its services in almost all the primary populous locations of the country and is one of the most prominent cab providers in Australia, with a striking number of 7000 cabs running across the country (Cabcharge.com.au, 2017). The company owns almost all of the assets it uses and has been leading the transport market. As can be seen that the business framework of the country is fully under the domain of that of the traditional economic framework, which only allows usages of owned assets to those who own these assets, for their personal and commercial purpose and does not have any provision for sharing pre-owned assets (Feeney and Companies Uber 2015).
Over the years, the company has enjoyed a significant share of the transport market in Australia and the prospects of the company has not reduced with the entry of new and dynamic players in the market, much of which has to be attributed to the robust operating and management framework of the company. However, Cab Charge has faced severe criticisms regarding it payment systems with various court cases against it, much of the allegations being regarding the anti-competitive and predatory pricing strategies (He and Shen 2015).
The activities of the company, contributing to its business framework are as follows:
- The company introduced non-cash payment method facilitating account payments for its clients.
- There are provisions for the customers to use credit and debit cards to make payments.
- The company also runs other transport services in primary locations.
- It need to develop the security system for its client in order to ensure future business prospects.
The traditional profit-maximizing model, as can be seen from above has proved to be beneficial for the company in an overall framework. The company, in spite of facing several issues in pricing strategies, has significantly dominated the transport market in the country, with its business increasing substantially with the introduction of non-cash payment mechanisms. The company, in 2009, was convicted of misusing its predatory pricing powers to stay ahead of its rivals. The case was settled after it agreed to the contraventions of its practices (Andersson, Hjalmarsson and Avital 2013).
Task C:
The problem of black economy being one of the most serious issues in the Australian economy and the shared economic framework contributing to the extent of the black economy considerably, it is of utmost importance to address to this issue. In this context, it will be sensible to take reference of the recommendations that were made in the Interim Report of the Treasury of Black Economy Taskforce of the country (Martin 2016).
Recommendation to solve the problem:
The relevant recommendations are as follows:
- The small and new startups should be eligible to get incentives if they choose non-cash transaction methods.
- The taxation system should be properly expanded and should be made more dynamic.
- For getting access to the prospects of loan procurement, the companies need to maintain a transparent tax records.
- Overpowering technologies and those, which hamper the sales, should not be encouraged.
- Increase in the funds should be based on the operations of the Australian Taxation Office (Treasury.gov.au, 2017).
- The commercial organizations, especially those which are small and have just came to the market, needs to be more aware of the taxation regulations of the country and for this purpose, proper training and monitoring needs to be implemented.
- To ensure efficient working of the taxation system and lesser defaulting of tax amounts, the introduction of the Phoenix taskforce is of utmost importance.
- The excessive usage of cash should be curbed to a considerable extent to decrease the burden of black economy in the country.
These recommendations, if implemented properly, are expected to be beneficial for the economy as a whole. The desired objective of the government, to reduce the implications of the shared economy in increasing the burden of black economy, can be achieved, if the following recommendations are emphasized upon:
- Increase in the usage of non-cash payment methods
- Limiting the usage of cash money in the overall economy as a whole
- Reduction in the regulatory strictness for the small firms
- Proper spread of awareness and trainings to the companies with respect to the taxation regulations
These recommendations can help the government to achieve its target objective to prevent the dominance of the black economy in the country in the long run (Singh, Jain-Chandra and Mohommad 2014).
References
Alkon, A.H., 2012. Black, white, and green: Farmers markets, race, and the green economy (Vol. 13). University of Georgia Press.
Andersson, M., Hjalmarsson, A. and Avital, M., 2013. Peer-to-peer service sharing platforms: Driving share and share alike on a mass-scale. In International Conference of Information Systems 2013, Milan, Italy. Association for Information Systems.
Cabcharge.com.au (2017). Cabcharge - Taxi cab charge card providers. [online] Cabcharge.com.au. Available at: https://www.cabcharge.com.au/ [Accessed 14 Sep. 2017].
Cannon, S. and Summers, L.H., 2014. How Uber and the sharing economy can win over regulators. Harvard business review, 13(10), pp.24-28.
Cohen, B. and Kietzmann, J., 2014. Ride on! Mobility business models for the sharing economy. Organization & Environment, 27(3), pp.279-296.
Cusumano, M.A., 2015. How traditional firms must compete in the sharing economy. Communications of the ACM, 58(1), pp.32-34.
Feeney, M. and Companies Uber, R., 2015. Is Ridesharing Safe?.
Hamari, J., Sjöklint, M. and Ukkonen, A., 2016. The sharing economy: Why people participate in collaborative consumption. Journal of the Association for Information Science and Technology, 67(9), pp.2047-2059.
He, F. and Shen, Z.J.M., 2015. Modeling taxi services with smartphone-based e-hailing applications. Transportation Research Part C: Emerging Technologies, 58, pp.93-106.
Heinrichs, H., 2013. Sharing economy: a potential new pathway to sustainability. Gaia, 22(4), p.228.
Martin, C.J., 2016. The sharing economy: A pathway to sustainability or a nightmarish form of neoliberal capitalism?. Ecological Economics, 121, pp.149-159.
Posen, H.A., 2015. Ridesharing in the Sharing Economy: Should Regulators Impose Uber Regulations on Uber. Iowa L. Rev., 101, p.405.
Rogers, B., 2015. The social costs of Uber. U. Chi. L. Rev. Dialogue, 82, p.85.
Schneider, F. and Enste, D.H., 2013. The shadow economy: An international survey. Cambridge University Press.
Schneider, F., 2012. The shadow economy and work in the shadow: what do we (not) know?.
Schor, J., 2016. DEBATING THE SHARING ECONOMY. Journal of Self-Governance & Management Economics, 4(3).
Singh, A., Jain-Chandra, S. and Mohommad, A., 2014. Inclusive growth, institutions, and the underground economy. Human dignity and the future of global institutions, pp.103-122.
Stephany, A., 2015. The business of sharing: Making it in the new sharing economy. Springer.
Treasury.gov.au (2017). Treasury.gov.au. [online] Treasury.gov.au. Available at: https://www.treasury.gov.au/ [Accessed 14 Sep. 2017].
Uber.com (2017). Drive or Ride with Uber Sydney. [online] Uber.com. Available at: https://www.uber.com/en-IN/cities/sydney/ [Accessed 14 Sep. 2017].
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