The Australian Taxation Office is currently on an audit blitz targeting the vast “underground” economy of cash-only businesses. It is estimated there are more than 1.6 million such businesses in Australia that are operating on cash only or in some kind of a hidden economy. These include businesses such as beauty parlours, restaurants, clothing boutiques, pubs, takeaways, hairdressing businesses, barbershops, cafes and many other local small businesses that serve a niche neighborhood market. The hair and beauty industry is particularly affected with 58% of the businesses in this sector being cash-only.
These kinds of businesses are generally considered “high risk” by the ATO because there is some leeway for the business operator to declare just enough revenues to make the books look believable while keeping as much of the cash as possible. Cheating on your taxes is difficult but still possible if you are running a cash-heavy business. The ATO generally has benchmarks that it can use to detect if a particular business in a certain locale is faking its books. So far, its raids have been highly successful, netting it close to $200 million in taxes and penalties from businesses in breach of their tax obligations. Typical breaches have included the following:-
- A clear lack of an audit trail where the business is not recording or only partially recording its sales and purchases.
- The business owners do not adhere to their obligations; for example, they fail to register PAYG for their employees and do not pay superannuation.
- Operating a business without a current ABN and a GST registration.
- Operating cash registers without till tapes.
You are likely to fall on the ATO radar if you advertise your business as cash-only, you don’t offer buyers electronic payment options, or are operating in an industry where cash payments are quite common. In some small neighbourhoods or cities, there has developed a “vicious cycle” or ripple effect where more businesses, including those that previously provided electronic payment options, are forced to offer cash-only options because that is the predominant way of doing things in the locale.
Other red flags likely to attract ATO enforcement officers to your business premises include having a lifestyle that is out of tune with your reported business income and even running a business outside the industry benchmarks. These breaches are likely to attract serious penalties and even jail time. If you are running a small cash-only or cash-heavy business, here are some simple tax tips you can incorporate that are likely to put you in the good books with the ATO:-
Have Very Good Accounting Records
If you have a commercial rationale for running a cash-only business, then the best way to satisfy the ATO is by keeping very good accounting records. You can contact a professional accounting firm Melbourne has to assist you with your bookkeeping needs. Install accounting software for your business and ensure that every purchase and every sale is recorded therein.
When you are making a sale or receiving invoices, make sure that you give out receipts. The aim should be to have a solid audit trail of your business that shows you are not skimming off any cash from the business evading taxes.
Incorporate Electronic Payments or a Financial Management System
The Australian economy is neck-deep into a cashless one so it is possible for a business to cover a large part of their transactions through electronic payments. The use of credit cards and debit cards in Australia is so ubiquitous that the Australian Taxation Office believes that the only reason some businesses might be offering cash-only payment options is to avoid paying taxes.
If you are running a cash only business, look at the possibility of implementing new financial management systems in your business. Not only does this help the ATO, it is also beneficial for the business owner as it produces some great insights and data that you can use to manage your business more effectively.
However, there are still instances where offering cash as a payment mode makes business sense. In that case, good record keeping will save your back from potential penalties. A professional accountant Melbourne has can offer you great recommendations on the best financial management systems that will help you with your bookkeeping needs when running a cash-heavy or cash-only business.
Include all Your Income
Thanks to the “uberization” of the global economy, people now have multiple income sources. You might be running a restaurant during the day while making some money off the sharing economy such as with Uber and AirBnB and also freelancing online in your free time. When filing your tax returns, make sure that you include all this information in order to avoid extra taxes or penalties.
Claim Your Tax Deductions
One of the drawbacks of “flying under the radar” is that you are unlikely to benefit from tax incentives such as tax deductions. As a small cash-only business, you may be entitled to certain tax deductions that cover the costs that you incur when running your business. You must therefore make sure that you file your claims to benefit from these. You can contract a professional accounting firm Melbourne has that can assist you with this process.
You can generally make claims on your operating expenses such as wages and office stationary in the year that the expenses have been incurred. You can also make claims over a longer period of time on the capital expenditures in your business such as machinery, buildings and business equipment.
However, you cannot claim tax deductions on your domestic or personal expenses such as entertainment expenses. Fines are also excluded from the claims. Talk to a professional accountant Melbourne offers that can clarify for you the spectrum of business expenses over which you can make tax deduction claims.
Lodge Your Tax Returns on Time
Make sure you lodge your tax returns by 31 October with the Australian Taxation Office. In case you have contracted a registered tax agent they could be having a different lodgment date so talk to them in advance to establish this. If you have employees, ensure that you lodge their PAYG annual report summarizing their payment details by 14 August.
Hire a Professional Melbourne Accountant
The best way to mitigate the tax penalty risks associated with cash-only or cash-heavy businesses is to have a professional chartered accountant Melbourne on a retainer. With a professional accountant managing your bookkeeping, it is unlikely that you will find your business in the wrong books of the ATO.