Cracking down on cash economy cheats
Small businesses thinking about not declaring some or all of their cash earnings to the ATO should think again. The ATO recently announced in its 2010 compliance program that they have increased their ability to detect and deal with cash economy cheats.
Increased data matching and benchmarking will be used to identify businesses participating in the cash economy, and an additional 31,500 audits and reviews will be undertaken.
This year cash economy compliance activities will see the tax affairs of more than 26,000 micro businesses reviewed or audited. Around 100,000 micro businesses will receive letters notifying them that their reported income is outside the published benchmarks. The letter suggests they review their records and where they identify an error make a voluntary disclosure to the ATO.
There are now small business benchmarks for over 100 industries.
Small business benchmarks help to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income. Businesses that fall outside the benchmarks may be targeted and asked to explain why.
Commissioner of Taxation, Michael D'Ascenzo, said It's important that small businesses keep track of benchmarks relevant to their industry.
"If a business falls outside a benchmark there may be a legitimate reason. We recommend they review their record keeping, consider how their business operates and check if they have made a mistake on their tax return. If they find a mistake has been made, it's important to correct the information and make a voluntary disclosure to the ATO.
"Taxpayers are responsible for their own affairs and if they are caught participating in the cash economy may find themselves facing heavy penalties or even prosecution.
"Reduced penalties and interest may apply to those that make a voluntary disclosure, but it's important that this is done before the ATO comes to them," Mr D'Ascenzo said.
Businesses that fall within the benchmarks should not assume that they are safe from an ATO audit or review. The benchmarks complement the ATO's recently expanded data matching program. It now includes data from online auction sites eBay and Trading Post and will be used to detect individuals and businesses that are under reporting sales, not registering or not lodging returns.
The ATO also uses other sources of information to identify those not meeting their tax obligations. This may include information from other government agencies, trade suppliers, tax returns and activity statements and allegations of tax evasion sourced from the community.
"We are constantly improving our methods of detecting non-compliant behaviour and data matching and benchmarking techniques are becoming increasingly sophisticated," Mr D'Ascenzo said.
Cash economy activity includes:
- paying 'cash in hand' wages
- skimming some or all of the cash takings
- running some business activities 'off-the-books'
- not reporting the real value where goods and services are exchanged for other goods and services
- operating underground, that is, avoiding obligations by not registering or lodging returns.
For more information and a range of industry benchmarks:
Report information on tax crime to the Tax Evasion Referral Centre on 1800 060 062.
Example: An integrated approach to identify hidden income
Taxpayer avoids penalty and audit by making voluntary disclosure.
Richard, the owner of a hairdressing and beauty salon, came to the ATO's attention after reporting unrealistic business income for the 2007 and 2008 financial years.
Data matching activities revealed that Richard had made multiple cash deposits into his personal bank accounts that were inconsistent with his reported income.
Richard received a letter stating that the ATO had reason to believe that he had incorrectly reported his income. It requested that Richard review his records to identify any errors and provided him with the opportunity to make a voluntary disclosure.
After seeking advice from his tax agent, Richard took the opportunity to make a voluntary disclosure to correct his tax errors. He estimated that up to $500 per week from November 2006 had been used for personal expenses.
By making this voluntary disclosure Richard avoided penalties of $7,109. Richard also avoided being subject to an audit which would have involved detailed examination of his personal living expenses, business practices, customers, suppliers and would have taken up much of his and his tax agent's time.
Richard was fortunate to have made a voluntary disclosure before an audit had begun, as penalties of up to 75% can be imposed for intentional disregard of the tax law.