Historically, cash has been the preference for many Australian businesses. Unfortunately, this also made it very attractive for businesses to “forget” to disclose some of their cash-in-hand earnings. When cash is not banked, it’s very hard to trace. This meant that a lot of the participants of the cash economy were able to get away with tax avoidance and even getting around employment laws.
undeclared income costs the Australian economy an estimated $15 billion in lost taxes and welfare payments each year.
There are many businesses in the cash economy that do the right thing, but unfortunately because of the “bad apples,” all businesses in the cash economy have come under the microscope of the Tax Office and other government departments.
Now how does this affect you? What are some of the industries being focused on? And what are some of the ways you can safeguard yourself against this crack down on the cash economy?
Who is the ATO targeting?
Some of the industries the ATO is focusing on are cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building tradespeople, road freight businesses, waste skip operators and house cleaners.
Typically there are three types of problem businesses and individuals in the cash economy:
- businesses and people who don’t understand the law;
- businesses and individuals who deliberately avoid their tax obligations; and
- people who use cash payments to hide income, to avoid losing Centrelink payments, or who are breaching visa restrictions.
A key tool the ATO will be using to catch avoidance in the cash economy is data-matching programs. The ATO has created profiles of businesses based on their various characteristics. This allows them to benchmark and compares its income, profit margins and level of profitability with similar others. If a business falls outside these benchmarks they are more likely to get audited. Audits can be expensive and time-consuming even if you haven’t done anything wrong and have a legitimate reason for falling outside the ATO benchmarks. It is important to ensure your accountant has checked that you are within the benchmarks for your industry, sometimes choosing the correct industry code may be the difference between being audited or keeping clear of the ATO’s radar. For example, Let’s say a business earns income predominantly from selling goods (but also earns income from rendering services). When the tax return is done for this business, the business code that is chosen for the service industry (in which the business does not earn the majority of its income). The ATO will end up comparing this business against other businesses in a completely different industry which is likely to lead the ATO to the deem it to have fallen outside the industry benchmarks.
Incentives to move away from cash are on the horizon. As part of its terms of reference, the Federal Government’s Black Economy Taskforce will look into possible tax and other incentives for small businesses that adopt a non-cash business model.
How can you safeguard your business?
The first place to look in terms of safeguarding your business is your bookkeeping. Make sure sales and purchases are recorded accurately (ideally in an accounting software). Make sure you issue invoices when a sale is made and that you keep purchase invoices on file. This will give you a clear audit trail to prove that you are declaring all income. Most importantly make sure you have an open line of communication with your accountant and ask them questions about how you can keep your business out of the ATO firing line.