Cash economy: The taxman hones his scythe

The tax office has new strategies to snare those in the cash economy – know his targets you keep your head down. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

The tax office has new strategies to catch those operating in the cash economy, which includes more effective follow-up of information from third parties and identifying those “whose lifestyles are out of step with their reported income”.

Jail terms and penalties are increasing for tax cheats, and the tax and penalties can run into hundreds of thousands of dollars. Recently a landscape gardener, electrician and owner of a cleaning business were forced to pay a total of almost $1 million in tax and penalties after being caught.

But they were just three of many. In 2006-07, the tax office wrote to, phoned or visited 62,000 businesses to check for non-compliant behaviour. Tax office compliance activities in the cash economy led to more than $157 million in total liabilities being established. This is not small beer – and the Government and the taxman know it.

In the coming year, the tax office says it will pay special attention to business-to-consumer cash transactions – for example, retail businesses where non-reporting of cash transactions is facilitated by high-volume, low-value cash transactions.

Others that will attract special attention this year will be those where there is a high risk of non-disclosure of cash income such as tradespeople and sub-contractors in the building and construction industry, and operators of restaurants and cafes.

Use of benchmarks

The tax office is in the process of refining its benchmarks for some trades and industries where there is a high volume of cash transactions. The tax office says it is being transparent in this process as the benchmarks will be used to communicate to taxpayers what income levels might be expected based on their business activity.

This is not a fail-proof test, but is used by the tax office as an indicator that something may not be quite right – and is worth a look.

Where the tax office sees taxpayers who do not fit within the benchmark, it will take a closer look to see whether their activities involve non-reporting or under-reporting of income.

The new benchmarks will be published early next year and will be regularly updated. This is designed to allow taxpayers who are outside benchmarks to adjust their behaviour, where necessary – “forewarned is forearmed” as the saying goes.

Tax Commissioner Michael D’Ascenzo was blunt in his message here: “Those that deal in cash should heed the warning.” He outlined several case studies that came to light from tax office reviews in the cash economy. They deliver compelling messages.

The landscape gardener

Sam operated a business as a landscape gardener and participated in the cash economy through business-to-consumer cash transactions. He came to the tax office’s attention for several reasons – via information provided to the tax evasion hotline, because he was leading a “conspicuous lifestyle” (see below) and because he was a person of interest to Centrelink and Consumer Affairs.

Property searches revealed Sam bought a property for more than $1 million. He had $20,000 in a bank account, owned two vehicles including a new $75,000 Land Cruiser and his family has made frequent trips overseas.

His last lodgement indicated a business turnover of $47,000 with taxable income of $35,695. He failed to cooperate with the tax office, avoiding contact by leaving messages at unusual hours and failing to answer or return calls.

As a result of the audit, Sam was required to pay over $620,000 in tax and penalties.

The auto electrician

Charlie was reported as not declaring all income in his tax returns and business activity statements over several years. A tax office auditor established that source documents used to record supplies were poor and couldn’t be relied on to produce accurate sales figures. As a result of the audit, Charlie was required to pay over $140,000 in tax and penalties.

The cleaning industry

Eileen from the cleaning industry failed to report all cash sales. Eileen had only included EFTPOS and credit card sales in business activity statements and income tax returns. Analysis of information from outside the tax office, bank accounts and living expenses allowed the tax office to identify unreported cash sales. As a result of the audit, she was required to pay over $120,000 in tax and penalties.

It’s a competitive business world out there, and the pressures to succeed can be overwhelming. The lure of the cash economy might seem attractive (as least temporarily), but the taxman is watching.

His techniques for detecting tax fraud are becoming more sophisticated, and the instances of jail terms being given for such offences seems to be increasing.

It pays to be cautious and careful, and to know what the taxman is looking at. And as the D’Ascenzo points out, business that do not disclose their cash receipts not only cheat the community but also disadvantage honest business.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.

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