Shadow economy

The shadow economy refers to people and businesses who are either:

• operating outside the tax and regulatory system
• known to authorities but don’t correctly report their tax obligations.

All Organisation for Economic Cooperation and Development (OECD) member countries are dealing with the shadow economy issue. Australia is not alone.

Unreported or dishonest economic activity

The shadow economy involves a wide range of practices, including:

• understating income
• paying and accepting cash wages to avoid taxes
• contractors in the sharing economy not declaring or under declaring their income
• holding a secret second job as well as regular employment
• liquidating a business to avoid paying employees and creditors, called ‘phoenixing’.

Illegal activities such as money laundering form part of the shadow economy.

The shadow economy can lead to a dangerous dynamic:

• It can foster a culture which legitimises these practices, helping it grow.
• Those that don’t report or pay the right amount of tax disadvantage those doing the right thing, incentivising dishonest practices.

Shadow Economy Procurement Connected Policy

Treasury established a Black Economy Taskforce in 2016. ‘Black economy’ was used before the OECD chose shadow economy as the preferred term.

The taskforce’s final report made recommendations to increase integrity in government procurement.

In response to the recommendations Treasury developed the Shadow Economy Procurement Connected Policy.

The policy applies to new and existing approaches to market which close on or after 1 October 2024. The original policy applied from 1 July 2019.

It applies to businesses tendering as part of government procurements valued at $4  million or more, including GST.

They must provide a Statement of Tax Record issued by the Australian Taxation Office (ATO) showing they are compliant with various tax and registration requirements.