The Tax Office is cracking down on the black economy, targeting businesses that are not declaring cash revenues, from restaurants through to home cleaners, in a bid to bring billions of dollars back into the tax net.
The Tax Office told Fairfax Media it had stepped up audits of small businesses including cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building trades, road freight and waste skip operators. Also in the ATO's sights are cleaners, who are almost always paid in cash for working in clients' homes.
"These 275,000 businesses potentially represent unfair competition for the honest businesses in their industries," senior assistant commissioner Michael Hardy said.
The cash economy continues to be one of the hardest issues for tax agencies worldwide. While eftpos and credit card usage is climbing, cash remains the most important payment method for low-value transactions – 70 per cent of payments under $20, and is widely used for payments around $50.
Mr Hardy said the Tax Office's data-matching system and an increase in public complaints had highlighted suspicious activity. Forty ATO officers – including staff who speak Cantonese, Mandarin and Thai – last month visited 168 businesses in Sydney's Haymarket area to remind them of their tax and super obligations. The area, a popular dining spot, was identified as having "pockets of businesses that look abnormal", Mr Hardy said.
"The particular initiative in Haymarket is because we also had high numbers of community referrals in relation to businesses in that area and because we also had community and industry groups expressing concern," Mr Hardy said.Businesses in other cafe and restaurant districts including Melbourne's Lygon Street area in Carlton, Northbridge in inner Perth and Fortitude Valley in central Brisbane may be subject to surveillance and – if suspicious – paid a visit, he said.
"We are taking a closer look at the cafe, restaurant, catering and takeaway industry because about 40,000 businesses in the industry [nationwide] lodge late," Mr Hardy said.
Mr Hardy said last year the agency identified a restaurant which had a second eftpos facility not immediately linked to the main trading company.
"Over $700,000 of sales made through this terminal were not declared by the business," he said.
"In recent years we've also had to deal with businesses that declare their "bricks and mortar" business sales, but omit the income from their online sales," he said.
In the past financial year the Tax Office had recouped $200 million through 10,000 audits of businesses that were found to be hiding cash transactions. In addition the courts had enforced tough penalties against tax dodgers."Taxpayers prosecuted for tax evasion in the cash economy have been given suspended sentences, community service orders and at least one custodial sentence, in addition to the more usual fines that accompany a conviction," Mr Hardy said.
Credit card fees push businesses to cash
Tight margins in the cafe and restaurant industries have caused some owners to prefer cash over card payments.
Di Bella Coffee managing director Phillip Di Bella said while they were able to absorb high fees on credit card transactions as a "business cost", smaller operators could not, and were therefore only dealing in cash.
Mr Di Bella said American Express charged them 3 per cent on credit card transactions while Visa and MasterCard charged 1.7 per cent. "A little espresso bar selling two cups of coffee and a biscuit or a muffin, tend to be cash only because they don't want the headache that goes with credit card transactions for purchases under $10," he said.
But MWE Consulting director Mike Ebstein said restaurateurs operating on a cash-only basis were doing a disservice to themselves and their customers.
He said a typical credit card sale in a restaurant was higher than a cash-based sale as it was not dependent on discretionary income.
Mr Ebstein said businesses dealing only in cash also ran the risk of upsetting their customers and were at greater risk of fraud. "If I am running a restaurant, I'd rather be welcoming someone who wants to pay by credit card through the front door, rather than risk them going down the road to my competitor," Mr Ebstein said.
"Business owners do not understand the risks of handling cash, including robbery, fraud and . . . the fact that until you cash the money at the bank it has no value."
Mr Hardy said "there's nothing wrong in operating in cash . . . as long as it declares the income."
The senior assistant commissioner said 50,000 people had contacted the Tax Office over the past financial year to complain about suspected illegal activity "particularly when they see cash-only signs in combination with suspicious practices like cash register draws left open or sales not actually rung up on a cash register". About 77 per cent of the tax evasion referrals from the public related to businesses paying cash-in-hand wages to avoid paying tax and super and about 42 per cent of businesses in these industries report income that did not seem to support the lifestyle of the owners or flagged the business as being outside the benchmark range for their peers.
"There was a recent case of a florist who had a cash register but it had not operated for several years," Mr Hardy said. "This contributed to the business not having sufficient records to adequately explain its income."
Of the top 30 industries, the cafe, restaurant, catering and takeaway industry was responsible for 16 per cent (or 4675) of all tax evasion referrals to the ATO from the community, he said.
Beauty, online business in sights
Mr Hardy said the Tax Office was playing close attention to "emerging business models such as those for collaborative consumption". These includes websites such as Gumtree where cash-based, visit-your-home services are advertised.
"We also monitor online casual job sites where we see people offering to undertake tasks, usually on weekends and usually for cash only," he said.
Another industry the Tax Office was looking at was the hair, nail and beauty industry. "Over the last 12 months, we've seen a 65 per cent increase in the number of community referrals, many of them from within the industry, about concerns of omitted income or other tax evasion," Mr Hardy said.
The building industry was also under watch.
"The ATO has been able to use the data from contractor reporting in the building industry to identify those businesses in the building trades that don't have any involvement in sub-contracting, and so are mostly operating in the business-to-consumer end of the market," Mr Hardy said. "Omitted income is more prevalent in the business-to-consumer end of the market so this information lets us sub-divide the market more carefully."
The tax authority has been tracking the credit card transactions of almost 1 million businesses. The 275,000 businesses that were targeted were flagged as part of the Tax Office's wider data-matching program.
More than 1.6 million small businesses in Australia have high volumes of cash transactions and contribute about $24 billion in tax. Of these, about 275,000 of them had shown "characteristics of omitting income", Mr Hardy said.
The Tax Office in 2013-14 also matched more than 640 million transaction from sources such as banks, share registries, employers, merchants, states and territories, and government departments, signalling pockets across the country where illegal cash economy activity may be taking place, among other wrongdoing.
Mr Hardy said the ATO would continue to match data provided by financial institutions against taxpayer records to identify those who may not be meeting registration, reporting, lodgment and payment obligations.
He said the majority of the ATO's interactions with business owners was to highlight how they were positioned relative to their peers and give them advice that might prevent them from making mistakes.
"While we have not done the analysis for the most recent year, we do know that in past years we have tracked the response of businesses we wrote to in relation to benchmarks. In one batch of 30,000 businesses we saw 17 per cent of them start reporting within the benchmark range for their industry in the year after we wrote to them, when they had previously been reporting outside of the range," he said.
This article first appeared on AFR.com