In 2017, the ATO placed a great deal of scrutiny on cash-only businesses and businesses that operate with a lot of cash transactions. The result was a series of random visits and subsequent audits to businesses across Australia.
Of the 11,000 business audits conducted by the ATO last financial year, about seven out of 10 businesses were forced to increase the amount of tax they needed to pay. The series of audits has yielded nearly $200 million in tax and penalties, but the ATO estimates that this is only a tiny portion of what is actually outstanding.
The Melbourne suburb of Box Hill alone has seen $1.8 million be repaid in outstanding tax bills and penalties after more than 130 businesses were visited by the ATO. Around $8 million in unreported cash payments were uncovered. The ATO also visited suburbs across Sydney, with the suburb of Haymarket having more than $18 million in misreported transactions.
The Black Economy
Why exactly are the ATO ‘cracking down’ on cash only businesses? The reason is the increasing amount of lost tax revenue because of the Black Economy. The Black economy refers to people and businesses who operate entirely outside the tax system or who do not correctly report their tax obligations.
The Black Economy – also known as the cash economy or underground economy – encompasses a wide range of practices, including understatement of takings, welfare fraud, ‘sharing economy’ contractors that don’t declare their income, moonlighting and phoenixing. It also encompasses illegal activities like money laundering.
The main thing the ATO is looking for in its audits of businesses is the payment and acceptance of cash wages and transactions ‘off the books’. Many businesses conduct most, if not all, of their transactions in cash, and dodge paying any tax on the income by neglecting to report the sales.
Estimates by the Australian Bureau of Statistics suggest that the Black Economy could account for as much as $24 billion, or 1.5% of Australia’s GDP, which amounts to a lot of lost tax revenue for the Australian government.
What Does This Mean for Businesses?
The aim of the ATO’s audits is to combat the Black Economy, they’re not out to get businesses. The ATO has highlighted that not all cash-only businesses are breaking the law and that businesses can legitimately run cash-only operations, they just have to follow some pretty simple rules.
Record-keeping is basically at the core of running a legitimate cash business. If your actual income doesn’t match up with the data that you’ve sent to the ATO when they come knocking, you could be in a bit of trouble. After record-keeping, you need to make sure you have all your registrations. The standard registrations that any business will need are things like an ABN (or ACN) and registering for GST.
There are a few important things to note if or when an ATO officer arrives on your doorstep. The first is that an ATO officer will always carry identification and you can and should ask them to produce it during their visit.
The second is that officers will generally not ask you to produce documents and records on their first visit and you will be given time to get everything ready if you need to.
Another thing to note is that a visit from the ATO does not automatically signal fines and penalties. The purpose of any ATO visit will be to work out whether or not there need to be any future conversations and actions about compliance. All ATO audits will be about helping businesses meet their tax obligations and identifying whether a business needs extra help or support.
To Cash, or Not to Cash?
With 2018 bringing more ATO audits on cash-heavy businesses, it could be a great time to transition online or even become cashless. Australia is already moving towards a Cashless Society, so it could be a good business move to get ahead of the pack and start implementing card readers and other cashless technology.
Getting a simple card-reader and similar payments technology can be pretty cheap, and they can usually integrate with accounting software like Xero or MYOB. This would mean less record keeping and paperwork, increased business productivity, and time saved not having to handle cash or deposit it in the bank.