Cash Economy – Tax and Superannuation

Cash or hidden economy refers to when businesses intentionally hide income to avoid paying the right amount of tax or superannuation. It means honest businesses face unfair competition. ATO emphasizes that cash economy affects all Australians by reducing the amount of money available to fund community services such as health, education and other government programs. To regulate those dishonest businesses, ATO has been running several policies such as investigations of Small Business Benchmarks and Data Matching.

Small Business Benchmarks are financial ratios developed to compare a business’s performance, for instance comparing total sales or cash sales against similar businesses in the same industry. The benchmarks provide guidance on what figures normally expected from a business in a particular industry to report. In other words, it is an index about ratios of expenses and cash sales to total sales. That means when the turnover amount of a café is $500,000, the ratio of average total expenses to turnover is 85% – 92% which is between $425,000 and $460,000. Also, the ratio of total wages to turnover is 19% – 28% and lease expenses to turnover is 10% – 17%. Thus, there is a high possibility of getting an audit from ATO if the ratio is significantly outside the benchmark range for the industry.

In regards to Data Matching, it compares the information about expenses and income of taxpayers using the data of Individual/business Tax return, Credit/debit card, Motor vehicle registration and online selling records. It is important to note that ATO has an authority to access the information of a taxpayer’s banking transactions. As an example, ATO can access to the records of online purchases to detect unreported or hidden income (Paypal or internet bankings) when a taxpayer’s reported income was less than average and purchased a luxury car or a property.

Apart from this, ATO randomly visits the businesses for one day to record cash transactions to match with the data after the investigation of their reported cash transactions. For this reason, it is crucial to correctly report the amount of sales in order to avoid an audit.

As stated above, accurate data recording and reporting are important since ATO has range of strategies in place to detect and take corrective action against businesses participating in cash and hidden economy and also for fair competition.