The Detail is in lockdown mode – we are switching from podcasts to written explainers while New Zealand is in Alert Level 4.
New Zealand’s second big Covid lockdown may be helping to shrink the country’s hidden economy – the under-the-table work that no one pays tax on
Cashies, under the table work, moonlighters. Along with concerts, restaurants and port fixtures, they’re gone under Level 4 lockdown rules.
But unlike legitimate businesses, you can’t claim government subsidies for money the Government doesn’t know about.
The black economy is thriving in New Zealand. In 2018 a report by IRD and Victoria University of Wellington estimated that $800 million a year wasn’t making it into the tax net – and that was only counting under-reported earnings by the self-employed.
John Cuthbertson, the NZ tax leader for Chartered Accountants ANZ, says it’s reasonable to assume the real number is well over $1 billion, when you add in people who have no footprint inside the tax system. The proceeds of crime is a whole other matter. He says that would be another billion by itself.
But two factors we are seeing in this pandemic could be a catalyst for change. One is the absence of a safety net during lockdown for people who are under IRD’s radar; the other is the disappearance of cash. Many stores that remain open are opting for card-only payment, and people who have traditionally used folding are becoming more familiar and more trusting with internet transactions. Many of them won’t go back.
The black – or shadow, cash, hidden, underground, grey, informal, cheating or parallel – economy refers to people who either operate entirely outside the tax and regulatory system (ghosts), or who under-declare their income (moonlighters). The likely suspects are trades people, labourers, or cleaners.
Cuthbertson compares attempts to daylight the hidden economy to changing attitudes towards drink-driving. It will take generations, and some people will still do it.
As well as the Covid-driven accelerations, Cuthbertson says IRD education campaigns have gradually helped prod a change of attitude from the people offering the cash.
Inland Revenue received additional funding of $85.2 million (over 10 years) in 2010 and an additional $25.4m (over five years) in 2015, to improve its ability to respond to the hidden economy. Marketing campaigns have been ‘hearts and minds’ style messages, pointing out we all lose when one sector doesn’t pay its fair share of tax.
Data capture by the IRD is another way the hidden economy is being revealed. From Bright Line tests on selling property, to information on the amount of paint it takes to cover a house, it’s material the tax department can weaponise.
“Things won’t add up. You can track it if you have a look.”
Now when people pay their builder, plumber or electrician, they want the warranties that go with the work; codes of compliance signed off; nothing done that runs the risk of voiding your insurance.
“It’s false economy to have a cowboy turn up and run the risk of getting what you paid for,” Cuthbertson says.
Jobs for beers
One tradie spoken to by The Detail agrees offers of cash jobs are happening less frequently – but they’re still happening.
“I think the black market economy is bigger than anybody possibly realises. I don’t think there would be a single tradesman I know that doesn’t do cash jobs,” he says.
“I know a builder who most of his jobs would be cash, he’s not GST registered and wants to stay under the radar. He hoards it. He’s the richest person I know and he’s had the same vehicle for decades. He doesn’t like being in the system. He doesn’t advertise, gets his jobs from word of mouth.”
Cuthbertson says tradies view it as their right, as something they can do – the side hustle from their day jobs that buys their beers.
“But all this is tax fraud, in reality.”
Ghosts and moonlighters
The cost and hassle of business compliance is another reason people dodge their responsibilities.
Agnes* is a ‘ghost’ who has never been inside the system.
She is on a jobseeker benefit but has a medical exemption for a variety of reasons – she’s pretty much unemployable. But she’s artistic and started a craft-based business four years ago. She’s not registered and pays no tax. Business has halted in lockdown because of supply issues.
“I started to do it (register)” she says, “but a whole load of stuff was involved in getting it up and running, compliance stuff. So I put it on the backburner.”
She was so broke she couldn’t afford the costs – no matter how minor – and “it was way too much hassle to sort the slightest things out with WINZ. The longer I can go without having anything to do with them the better.”
Giving themselves a hand up
But when it comes to low level stuff such as cleaners and gardeners, Cuthbertson doubts there is an appetite – or social licence – to go after them.
“I think most people would see that those people are actively trying to make ends meet and are doing something positive to support themselves,” he says. “I don’t think people would knock that. It’s very hard – on the one hand everyone is paying for that shortfall in taxes but the other point is that those people are helping themselves and not putting their hand out for a grant.”
During lockdown these are the people whose children are no longer getting free meals at school; who are probably trying to cope with keeping the power on so their kids can take part in internet schooling; and who are paying extra at the supermarket as cheap brands disappear from the shelves.
Henry and Tracey
Before Auckland shut up shop Henry* had 15-20 hours work a week with a gardening type franchise, but did about the same amount of landscaping work under the table.
“Some weeks it’s barely anything and other weeks it’s all go. It’s quite sporadic,” he says.
His wife Tracey* does all her work tax-free – about 10-15 hours of cleaning.
It’s all been reduced to nothing, and he falls just short of being able to claim the full-time wage subsidy for his declared work.
The couple also get the accommodation supplement, a disability allowance for their child, and Working for Families; and thanks to their landlord offering a slight rent reduction during lockdown they are getting by, in spite of the 30-40 percent loss of income.
Going completely legit is something he’s considered, but the record-keeping and red tape puts him off.
“Costs, expenses, it’s quite a rigmarole of record-keeping,” he says. “And it’s more lucrative when you don’t have to pay tax.”
“People were offering me the work at really good rates and beggars can’t be choosers. I wasn’t going to turn it down.”
That extra work for folding he describes as just “happenstance” but after two long bouts of enforced unemployment because of Covid lockdowns, things might change.
“Having all this extra free time has given me lots of time to reflect on the whole situation,” he says. “I’ve been brainstorming about my whole career, about where I want to go. Thinking about becoming a full-time employee so that in these events at least I can get a full-time wage subsidy. It affected me the same last time. I don’t want to repeat it.”
But it’s not the illegality of what he’s doing that will make him change, and he doesn’t feel bad about not paying his share of tax.
“I’m not the only one. There’s lots of people doing the same thing. It’s not as if I’m not paying other tax ….. I am paying tax. Why the hell should I declare for that (under the table work), you know, when I’m already declaring work for (my company)?”
Here’s one reason – some of his ‘cash’ jobs are actually paid in bank transfers. Does he worried about getting caught in an IRD data trawl?
“I hadn’t really thought of that.
“You’ve always got plausible deniability,” he says eventually. “I can make something up.”
“All we are trying to do is move forward and make ends meet,” he says. “We’re not trying to rip off the system … we’re not dishonest people …we are good people.
“You can’t blame people for doing what they have to do to survive.
“I really don’t think the black economy is going to go anywhere soon.”
*Names have been changed