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Cash Crackdown by ATO
Often the lure of cash is hard to knock back, and reporting it to the taxman even more so.
Many Australian businesses accept cash and don’t declare it. The ATO however say that not declaring cash income is tax fraud.
When the GST was introduced in 2000 there was a spike in government revenue from businesses reporting cash that was effectively forced into the books of businesses and as such declared as income.
This was resultant from business to business transactions where the purchaser wanted a proper invoice for claiming an input credit.
The ATO is has been focusing on the high-cash sectors of the economy to ensure that reporting obligations are complied with. In the 2007-08 year this raised an additional $101.2m in revenue, increasing to $142.8m in the 2008-09 year and $165.3m in the 11 months to May 2010.
So serious is the government and ATO taking this that they have allocated $107.9m in funding over the next 4 years to address the issue of the cash economy, in the belief that some $491.8m in revenue from undeclared income, both GST and income tax, will be returned to the pie.
The funding is not only to see more compliance officers on the ground and in the office auditing. The ATO will increase its use of data matching and benchmarking to identify businesses that it believes may be operating outside the norms. Part of the process will see nearly 8,000 more audits and reviews a year.
To get an idea of how much the compliance program is being ramped up, the ATO will data match more than 500 million transactions, including checks on income from bank accounts, investments, overseas transfers and property related transactions.
This allows the ATO to spot spending patterns such as holidays and car purchases, and can look at spending from a location-based perspective.
The benchmarking that the ATO is undertaking categorises businesses based on their levels of turnover, with grouping of low, medium and high turnover. Then there is a range of percentages for expenses such as materials, labour and rent. Whilst it is difficult to set benchmarks as there are always exceptions, it does allow the ATO to generate a “please explain” to the business owner.
A couple of real life examples of cases where the ATO have used data matching and audits to uncover cash tax evasion include;
A plasterer recently had penalties of over $24,000 imposed after an ATO audit determined that he had not declared all his income. The audit found that there were additional liabilities of more than $74,000 for the past 5 years.
The plasterer came to the ATO’s attention after reporting low income for a number of years. The ATO was able to compare his income data with his spending habits thanks to data matching. It found he had bought a car, put down a deposit on a property, and sent money overseas, with the total exceeding his declared income.
The ATO also contacted his main suppliers and used the small business benchmarks for plasterers to calculate his expected income range. It found a significant amount of unreported cash and expenses.
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An example of how seriously the courts view cash skimming and omitting income is the Tasmanian man who founded a successful bakery chain and is currently serving 12 months of a minimum 2-year jail sentence. He had involved a number of his employees in skimming more than $100,000 of cash over several years.
During the case, the judge commented that “tax evasion no doubt causes enormous losses of revenue to the Commonwealth. In view of those factors, it is appropriate to impose heavy sentences for the purpose of deterring business proprietors who might be tempted to commit crimes like these”.
He concluded he crimes the baker had committed were too serious for anything other than a sentence of actual imprisonment.
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The reality is that the hiding of cash income is becoming more difficult, and does not do a business owner any favours when it comes to selling their business due to them not being able to substantiate their “real” takings and therefore the true value of the business.
Bottom line? Beware – the ATO is monitoring what you do.
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