The cash economy will always be with us but the tax office is doing its best to make life difficult for cash operators.
With the introduction of single-touch payroll to all Australian businesses just around the corner from 1 July, the Australian Tax Office (ATO) will have a very clear idea of where money goes when it leaves businesses.
And it is using that new found visibility to stop businesses from claiming tax deductions on cash payments.
Cash payments no longer tax deductible
Cash payments won’t be illegal – just not tax-deductible, so most businesses will now have a strong incentive to ensure that they only make payments to contractors that have supplied an Australian Business Number and are thus easy to trace or to employees who have PAYG arrangements.
Either that or they will need to withhold the full rate of marginal tax from the payments.
It is a bit of tough love that should have the desired effect, given that is uses the businesses’ own self-interest to ensure either that the full rate of marginal tax is deducted before payment, full ABN or TFN details are recorded or there is no tax deduction.
Tough love cracks down on the cash economy
The cash payment crackdown comes after a growing realisation that Australian businesses had been claiming tax deductions for practices that were friendly towards the cash economy.
Under the old system, businesses could pay staff in cash and then under-declare their income.
Even if that lack of declaration was later uncovered by the ATO, the company would then be able to claim a “pay as you go” withholding deduction for those cash wages.
The new rules could cause serious trouble for some small businesses that have been effectively been subsidising their employee’s after-tax pay cost free.
Fess up early or pay the penalty
The ATO is encouraging businesses to confess early so that they can apply for possibly reduced penalties which will ratchet up higher if they keep trying to hide the payments.
At this stage, the ATO hasn’t put an estimate on how much extra tax the measure will collect but traditionally such enforcement measures have yielded bigger than expected tax windfalls.
The new arrangement probably won’t stamp out the common “discount for cash’’ arrangements for tradespeople, but they should level the playing field a little between businesses that are happy to rort the system to their own advantage compared to those that don’t.