• Working with industry

    We know most business owners are honest and that running a business can be difficult, so by finding industry-wide patterns, we can see who may need assistance.

    Unfortunately, there are also businesses that operate in the cash economy, gaining an unfair advantage over those who declare their income and do the right thing. We aim to protect honest business from this unfair competition.

    Our data analysis indicates that there are more businesses in the following industries that have an unfair advantage:

    • hair and beauty
    • building and construction
    • restaurant, cafe, takeaway and catering.

    Our analytical tools can identify businesses that aren’t competing fairly.

    No matter what industry you work in, if you're doing the right thing, you don’t need to be concerned.

    Protecting honest business

    We work closely with industry associations, tax practitioners and businesses to understand any issues they may have. We use up-to-date third-party data and sophisticated risk-analysis to identify those that may not be doing the right thing or need a bit more help.

    We protect honest businesses by talking to them about:

    • what help they may need
    • our tools and demonstrating how to use them
    • how to lodge online
    • making sure they're registered correctly
    • ensuring all businesses pay the correct amount of tax and super by declaring all their income and knowing what expenses they can claim
    • assisting with lodging their tax returns and activity statements
    • meeting their obligations if they are struggling, taking into account their specific circumstances, and helping them get back on track.

    If we see a business deliberately doing the wrong thing, we have an obligation to do something about it.

    We have found that the community has less tolerance for unfair practices than they once did. If you see something, let us know so we can follow up.

    Report a concern

    Industry in focus

    We focus on industries when we see numbers of businesses that:

    • indicate unrealistic income relative to the assets and lifestyle of the business and owner
    • fail to register for GST or lodge activity statements or tax returns
    • under-report transactions and income according to third-party data
    • fail to meet super or employer obligations
    • operate outside the normal small business benchmarks for their industry
    • are reported to us by the community for potential tax evasion – the number of reports we receive shows us that the community is less tolerant of unfair practices in these industries.

    Building and construction industry

    We are taking a closer look at the building and construction industry, which includes a range of business activities. What we know at September 2016:

    • there are a high number of cash transactions, which increases their risk of not correctly meeting their tax obligations
    • 81% of businesses lodged their activity statements on time
    • 9% of businesses reported amounts significantly outside the key small business benchmark ratio for the business to consumer industry
    • this industry had the highest number of reports about potential tax evasion.

    Results of our activities

    By working directly with businesses and industry associations, we have seen:

    • an increase of around 5% in the timely lodgment of activity statements compared to the 2015 financial year
    • since July 2016 over 760 businesses in the building and construction industry have been shown our range of online tools and services.

    Here are some examples of how we have dealt with businesses that have not met their obligations.

    Example 1 – Failing to lodge and not reporting cash income

    A licensed carpenter failed to lodge tax returns for a number of years. We demanded lodgment and when the tax returns were lodged, it was clear that income from cash jobs weren't included.

    We conducted an audit for the 2006 to 2013 financial years and found they had over-claimed input tax credits in addition to not declaring cash income. Their record keeping was very poor and they couldn't explain how some materials and vehicles were funded.

    The audit resulted in the taxpayer owing additional tax and penalties of over $190,000.

    Example 2 – Failing to report cash income

    We identified a company in the building and construction industry that hadn't reported over $970,000 in cash sales over a two year period. The omitted income had been transferred into nine personal bank accounts as employee payments, including the company director. The nine employees also didn't report this income in their personal income tax returns.

    This resulted in over $90,000 GST payable by the company with failure to withhold penalties of over $200,000 on the wages provided to its employees.

    The total shortfall of income tax payable by the individuals was $277,000 and penalties of over $175,000.

    End of example

    Hair and beauty industry

    We have been taking a closer look at the hair and beauty industry. What we know at September 2016:

    • around 58% of businesses are potentially cash only, which can increase their risk of not correctly meeting their tax obligations
    • 84% of businesses lodged their activity statements on time
    • 10% of businesses are reporting amounts significantly outside the key small business benchmark ratio for the industry
    • this industry had the third highest number of reports about potential tax evasion.

    Results of our activities

    By working directly with businesses and industry associations, we have:

    • seen an increase of around 4% in timely lodgment of activity statements compared to the 2015 financial year
    • seen an increase in GST registrations being corrected
    • more timely payments of income tax and activity statement liabilities
    • a reduction in outstanding payment obligations
    • supported and educated business owners to make informed decisions about their tax obligations.

    Here are some examples of how we have dealt with businesses that have not met their obligations.

    Example 1 – Business owner's lifestyle didn't match their reported income

    A nail salon business with a number of outlets was selected when data matching indicated anomalies. Initial investigation confirmed the owner kept incomplete records and declared income that didn’t support the owner’s lifestyle and assets.

    We uncovered more than $2 million of undeclared income.

    After imposing penalties for reckless behaviour of over $241,000, the total amount of GST, income tax and penalties payable was more than $728,000.

    Example 2 – Poor record keeping leads to penalties

    Acting on concerns from a member of the public, we investigated a hairdresser and found the business owner couldn’t account for all of their expenses.

    They told us they didn’t know how to keep good records and never sought advice about how to do this from a tax professional.

    GST and penalties on over-claimed expenses payable were over $50,000.

    End of example

    Restaurant, cafe, takeaway and catering industry

    We are taking a closer look at this industry. What we know at September 2016:

    • potentially 45% of businesses are cash only, which can increase their risk of not correctly meeting their tax obligations, such as not reporting all sales
    • on average, 80% of businesses lodged their activity statements on time
    • 14% of businesses reported amounts significantly outside their small business benchmark ratio
    • this industry had the second highest number of community reports about potential tax evasion.

    Results of our activities

    We have worked directly with businesses and industry associations, resulting in:

    • an increase of over 6% in timely lodgment of activity statements compared to the 2015 financial year
    • corrections to GST registrations
    • an increase in timely payments of income tax and activity statement liabilities
    • business owners being supported and educated to make informed decisions about their tax obligations.

    Here are some examples of how we have dealt with businesses that have not met their obligations.

    Example 1 – Undeclared income and inflated expenses

    When visiting one business, our staff noticed the ABN quoted on cash register sales receipts varied. When asked about this, the owner made voluntary disclosures about over-claimed expenses.

    During the audit, we also found further unreported income and more over-claimed expenses leading to adjustments of more than $1.1 million. Penalties imposed on the tax shortfall were reduced by just over $12,000 because of the disclosures.

    GST, income tax and penalties payable exceeded $211,000.

    Example 2 – Tracking cash payments

    During one of our visits to a restaurant, it was apparent they needed to improve their record keeping practices as cash was kept in a cardboard shoe box.

    Our profiling work showed five merchant IDs, which the taxpayer told us belonged to five different restaurants operating under this entity, all had the same record keeping processes in place.

    Our analysis identified several bank accounts and third party information identified deposits in excess of $300,000 for 2014 and 2015. We identified $1.3 million of understated income for 2014 and $1.5 million for 2015. Cash not deposited was calculated by developing a ‘Cash deposit timeline’ for each restaurant.

    It turned out that no cash had been reported to us, only eftpos income was included in tax returns and activity statements.

    End of example

    See also:

      Last modified: 11 Jan 2017QC 35984