Working with industry
Running a business can be difficult, particularly when other businesses may be deliberately hiding income to gain an unfair advantage over their honest competitors.
While most businesses meet their obligations, there are some that deliberately:
- don’t register for GST
- pay cash-in-hand wages
- fail to pay their employees’ super
- don't report all their income.
From data collected, there are particular industries where more businesses are getting an unfair advantage:
- hair and beauty
- building and construction
- restaurant, cafe, take-away and catering.
We also take necessary action to correct this behaviour, regardless of industry. We look into industry-wide patterns to protect honest businesses and take firm action against those deliberately avoiding their obligations, by applying penalties as well as interest charges.
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 who may not be doing the right thing.
We protect honest businesses by:
- correcting tax and super payments of businesses to rectify any financial advantage they have obtained
- assisting businesses that fail to lodge their tax returns and activity statements
- identifying businesses operating outside of the system and helping them comply
- working with businesses struggling to meet their obligations, taking into account their specific circumstances
- providing tailored information and tools.
Industry in focus
We focus on industries when we see disproportionate 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 income 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.
Hair and beauty industry
We are taking a closer look at the hair and beauty industry because at June 2015:
- 25% of businesses were a higher risk of not meeting their tax obligations
- on average, 20% of these businesses fail to lodge their activity statements on time
- almost 3,000 businesses were significantly outside the key small business benchmark ratio for the industry
- this industry had the fourth highest level of community concerns about potential tax evasion.
These businesses are identified by the ATO business industry code 95110.
Primary services offered in this industry include:
- hair cutting and styling
- barber shop operation
- beauty treatment services
- hair removal, depilatory and electrolysis services
- make-up services
- nail care services
- skin care services.
Results of our activities
By working directly with businesses and industry associations, we have seen an improvement in timely lodgment of activity statements.
From the results of our activities, 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 third-party data 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
Building and construction industry
We are taking a closer look at the building and construction industry because at June 2015:
- 23% of businesses were rated as higher risk of not correctly meeting their tax obligations
- on average, more than 23% of businesses fail to lodge their activity statements on time
- this industry has the highest level of community concerns about potential tax evasion.
Businesses within the industry are identified by the following ATO business industry codes:
- 30110 – House Construction
- 30190 – Other Residential Building Construction Services
- 30200 – Non-Residential Building Construction
- 32120 – Site Preparation Services
- 32210 – Concreting Services
- 32220 – Bricklaying Services
- 32230 – Roofing Services
- 32240 – Structural Steel Erection Services
- 32310 – Plumbing Services
- 32320 – Electrical Services
- 32390 – Other Building Installation Services not elsewhere classified
- 32410 – Plastering and Ceiling Services
- 32420 – Carpentry Services
- 32430 – Tiling and Carpeting Services
- 32440 – Painting and Decorating Services
- 32440 – Painting Services
- 32450 – Glazing Services
- 32910 – Landscaping Services
- 32990 – Other construction services not elsewhere classified.
Results of our activities
We are helping businesses to get their tax and super right, ensuring more businesses compete fairly. 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 was not 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
Information from a concerned member of the public resulted in an audit on a tiling business.
We identified the taxpayer hadn't reported over $60,000 in income, consisting of cash transactions and income deposited in personal accounts. They also had incorrectly claimed input tax credits of over $22,000, which was spent on their private house.
The audit led to over $7,000 in GST and over $4,500 in penalties being owed by the taxpayer. The short fall of income tax was $23,500 and penalties of over $8,000.
End of example
Restaurant, cafes, takeaway and catering industry
We are taking a closer look at this industry because at June 2015:
- 42% of businesses were rated as higher risk of not correctly meeting their tax obligations
- on average, over 27% fail to lodge their activity statements on-time
- over 5,500 businesses reported amounts significantly outside their small business benchmark ratio
- this industry has the second highest level of community concerns about potential tax evasion.
These businesses are identified using the ATO business industry codes and include:
- those that serve food and beverages on the premises
- food service operators that mainly provide catering services at specified locations or events
- those primarily selling fast food, including mobile food vans and milk bars.
Results of our activities
Examples of these businesses that haven't 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 – Taxpayer cooperation leads to a reduction in penalties
A restaurant was selected for audit after a review that had a lack of proper cash management controls, which indicated there was more income than was reported.
We estimated revised income figures from gaps in point of sale data and additional cash required to cover expenses. Two years of activity statements and income tax returns were revised for undeclared income of over $1.2 million.
Penalties of over $75,000 were imposed for recklessness. GST, income tax and penalties payable exceeded $226,000.
End of example
What you can do
Our activities only target businesses that indicate avoiding paying their fair share of tax and super.
If you're doing the right thing and meeting your obligations, you don’t need to do anything.
Our analysis has identified industries with large numbers of businesses that may be gaining an unfair advantage over their competitors by not paying their fair share.