CASH AND HIDDEN ECONOMY
In simple terminology Cash and Hidden
Economy means that you accept/pay cash for selling/buying product or services
and do not declare that income/expense on your tax return.
- Do you run a pizza shop, café, grocery store,
restaurant or any other business in which you accept cash at point of
sales?
- Do you report all sales on your business tax
return?
- Do you pay expenses such as salaries and wages
on cash basis and not declare on your business tax return?
Businesses who deliberately conceal
income to evade tax or superannuation are part of cash and hidden economy in
terms of ATO. Businesses mainly do this by not reporting all their income and
expense transactions.
How does it affect a customer?
Customers paying cash for a product
or service and not obtaining a receipt, risk having no evidence:
- In the event of a claim for a refund if the
goods or services purchased are faulty
- To prove who was responsible in cases of poor
work quality.
- Claim a deduction on their tax return if the
item was used for income producing activity.
How does it affect community
and other businesses?
- It reduces the amount of money available to
fund community services such as education, health and other government
initiatives.
- Businesses face unfair competition from
businesses who participate in cash and hidden economy as they often sell
their products/services at discounted prices, thereby attracting customers
from other businesses who are selling same products/services at a higher
price and are not participating in cash and hidden economy.
Catching the culprits
ATO has a number of strategies to detect
and take corrective action against businesses participating in cash and hidden
economy.
Small Business benchmarks
The benchmarks are key financial
ratios designed to help businesses compare their performance against similar
businesses in their industry. Benchmarks provide guidance on what businesses in
an industry are reporting on their tax returns.
ATO has developed and
published benchmarks for businesses with different turnover ranges across more
than 100 industries. ATO utilizes benchmarks to help detect businesses that may
be avoiding their tax obligations by not reporting some or all of their income,
especially cash transactions. If business is able to provide evidence to
substantiate income and deductions claimed on their tax return, generally ATO
will take no further action. If business doesn’t maintain accurate records to
substantiate figures reported on their tax return, ATO will then rely on
benchmarks to make a default assessment.
Example: Benchmarks used to
calculate default assessments
A restaurant was selected for an
audit after reporting income that was significantly outside the benchmark range
for the industry.
A review of the business’s records
showed the owners had failed to maintain the appropriate records as required by
law. A number of errors were identified, including:
- failure to keep cash register rolls or
point-of-sale system printouts
- failure to show evidence of regular till
reconciliations to support daily sales records
- Inaccurate and incomplete sales records
relating to business income, such as missing sales records for significant
trade periods.
The owners were unable to explain how
the income reported in the business’s tax returns was calculated and they did
not have the necessary records to support their reported income.
As part of the audit, the ATO auditor
used the benchmarks to recalculate the business’s income. The auditor then
adjusted the business’s tax return and the owners’ personal returns based on
the recalculated income. ATO subsequently issued the business and both owners
individually with default tax assessments.
The business owners had to pay tax
based on the higher income calculated in the default assessments. The owners
also incurred penalties, including penalties for failing to take reasonable
care to meet their legal requirement to maintain accurate records.
Example – Paying employees on
cash basis
A restaurant declared gross sales of
over $500k and showed only 3 employees on payroll including the owner. Owner
was paying some of the employees on cash basis at a rate lower than minimum
wage rate and also not declaring them on the books that subsequently reduced
superannuation liability. Business owner was receiving significant amount from
sales in cash that he used to pay some of the employees on cash basis.
Business was picked up for audit by
ATO. ATO asked for explanation how business owner was able to manage business
without sufficient employees considering business was operating 7 days a week
7am to 9pm and only 3 employees including himself were declared on the payroll.
ATO assumed minimum number of employees were working in the business at a
minimum wage rate and asked business to disclose employee details and pay their
superannuation and PAYG tax liability to avoid penalties.
By paying employees on cash basis and
not reporting their salary on books, businesses effectively do not comply with
ATO legislation by not withholding tax from their salaries and also not
reporting income on business tax return. In addition, they also avoid meeting
their superannuation and work cover obligations. In case if one of the employee
gets injured, he/she may not be able to lodge a compensation claim.
Prosecutions
When ATO detects businesses engaging
in fraudulent and evasive cash and hidden economy activities, following options
are available to ATO for taking corrective action –
- prosecuting them under the Taxation Administration Act 1953 (civil
prosecutions)
- Referring them to the Commonwealth Director of
Public Prosecutions for prosecution under the Criminal Code Act 1995 (criminal
prosecutions).
Penalties can include fines and, in
the case of criminal prosecutions, imprisonment. These consequences can have a
significant impact on the viability of a business.
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