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In simple terminology Cash and Hidden Economy means that you accept/pay cash for selling/buying product or services and do not declare that income/expense on your tax return.

 

  • Do you run a pizza shop, café, grocery store, restaurant or any other business in which you accept cash at point of sales?
  • Do you report all sales on your business tax return?
  • Do you pay expenses such as salaries and wages on cash basis and not declare on your business tax return?

 

Businesses who deliberately conceal income to evade tax or superannuation are part of cash and hidden economy in terms of ATO. Businesses mainly do this by not reporting all their income and expense transactions.

 

How does it affect a customer?

 

Customers paying cash for a product or service and not obtaining a receipt, risk having no evidence:

 

  • In the event of a claim for a refund if the goods or services purchased are faulty
  • To prove who was responsible in cases of poor work quality.
  • Claim a deduction on their tax return if the item was used for income producing activity.

 

How does it affect community and other businesses?

 

  • It reduces the amount of money available to fund community services such as education, health and other government initiatives.
  • Businesses face unfair competition from businesses who participate in cash and hidden economy as they often sell their products/services at discounted prices, thereby attracting customers from other businesses who are selling same products/services at a higher price and are not participating in cash and hidden economy.

 

Catching the culprits

 

ATO has a number of strategies to detect and take corrective action against businesses participating in cash and hidden economy.

 

 Small Business benchmarks

 

The benchmarks are key financial ratios designed to help businesses compare their performance against similar businesses in their industry. Benchmarks provide guidance on what businesses in an industry are reporting on their tax returns.

 

ATO has developed and published benchmarks for businesses with different turnover ranges across more than 100 industries. ATO utilizes benchmarks to help detect businesses that may be avoiding their tax obligations by not reporting some or all of their income, especially cash transactions. If business is able to provide evidence to substantiate income and deductions claimed on their tax return, generally ATO will take no further action. If business doesn’t maintain accurate records to substantiate figures reported on their tax return, ATO will then rely on benchmarks to make a default assessment.

 

Example: Benchmarks used to calculate default assessments

 

A restaurant was selected for an audit after reporting income that was significantly outside the benchmark range for the industry.

 

A review of the business’s records showed the owners had failed to maintain the appropriate records as required by law. A number of errors were identified, including:

 

  • failure to keep cash register rolls or point-of-sale system printouts
  • failure to show evidence of regular till reconciliations to support daily sales records
  • Inaccurate and incomplete sales records relating to business income, such as missing sales records for significant trade periods.

 

The owners were unable to explain how the income reported in the business’s tax returns was calculated and they did not have the necessary records to support their reported income.

 

As part of the audit, the ATO auditor used the benchmarks to recalculate the business’s income. The auditor then adjusted the business’s tax return and the owners’ personal returns based on the recalculated income. ATO subsequently issued the business and both owners individually with default tax assessments.

 

The business owners had to pay tax based on the higher income calculated in the default assessments. The owners also incurred penalties, including penalties for failing to take reasonable care to meet their legal requirement to maintain accurate records.


Example – Paying employees on cash basis

 

A restaurant declared gross sales of over $500k and showed only 3 employees on payroll including the owner. Owner was paying some of the employees on cash basis at a rate lower than minimum wage rate and also not declaring them on the books that subsequently reduced superannuation liability. Business owner was receiving significant amount from sales in cash that he used to pay some of the employees on cash basis.

 

Business was picked up for audit by ATO. ATO asked for explanation how business owner was able to manage business without sufficient employees considering business was operating 7 days a week 7am to 9pm and only 3 employees including himself were declared on the payroll. ATO assumed minimum number of employees were working in the business at a minimum wage rate and asked business to disclose employee details and pay their superannuation and PAYG tax liability to avoid penalties.

 

By paying employees on cash basis and not reporting their salary on books, businesses effectively do not comply with ATO legislation by not withholding tax from their salaries and also not reporting income on business tax return. In addition, they also avoid meeting their superannuation and work cover obligations. In case if one of the employee gets injured, he/she may not be able to lodge a compensation claim.

 

Prosecutions

 

When ATO detects businesses engaging in fraudulent and evasive cash and hidden economy activities, following options are available to ATO for taking corrective action –

 

  • prosecuting them under the Taxation Administration Act 1953 (civil prosecutions)
  • Referring them to the Commonwealth Director of Public Prosecutions for prosecution under the Criminal Code Act 1995 (criminal prosecutions).

 

Penalties can include fines and, in the case of criminal prosecutions, imprisonment. These consequences can have a significant impact on the viability of a business.

 

For further assistance contact Expert Tax on 0449 952 855 or alternatively send us your query via our website – www.expert-tax.com.au

 

You can also email us your query at info@expert-tax.com.au

 

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Home office deductions: ATO substantiation requirements.

 

Home office expense claims are subject to the same general substantiation requirements as other deductions – that is, records must be kept for five years.

 

But in practice, full compliance with the substantiation rules may be difficult. It may be simple to keep a receipt for a printer purchased for a home business, but not so easy to prove the deductible proportion of a specific utilities bill. So the ATO has provided some administrative guidelines to ease this burden.

 

Proving business use proportion

 

The ATO will generally accept these three methods of calculating the business use proportion for a particular expense (in order of preference):

  1. Explicit evidence of business use – such as an itemized phone bill.
  2. Records of representative periods of use – such as a diary record spanning a 4-week period (see below for details).
  3. A “reasonable estimate” – the ATO does not define this term, but the taxpayer must be able to demonstrate that such a component was “reasonably likely” under the circumstances.

 

4-week representative records

 

Claims exceeding $50

 

The ATO requires a taxpayer to keep records for a 4-week representative period in each income year in order to claim a deduction of more than $50. It is unclear as to whether the $50 limit applies per expense type or in total.

 

The taxpayer can choose to keep records for longer than 4 weeks or to base their deduction on itemized bills (see above) for the entire year for a more accurate deduction. The 4-week record is merely the minimum amount of record-keeping that the ATO will accept. It is not a legal requirement to produce a time-limited representative record like the 12 week log book for car expense deductions (Division 28).

 

Note – Do not claim deductions for the period during which you were on leave.

 

According to an ATO fact sheet, the ATO will look favorably upon evidence that the employer expects the taxpayer to work at home or make work-related calls. But be aware that employer expectation is not a legal requirement. Under legislation and common law covering work-related expenses, it is enough that the expenditure is incurred in the course of producing assessable income and is not private, domestic or capital in nature.

 

Claims of $50 or less

 

 

It can be assumed (although it is not explicitly stated) that claims of $50 or less will not be subject to substantiation checks by the ATO. This however only affects the substantiation of the amount, and does not change the fact that the amount still has to be deductible under law. Therefore it would be prudent for the taxpayer to be able to show that they had a reasonable basis for making the claim (keep evidence that some work was done at home during the year).

 

 Shared expenses

 

According to the ATO, an invoice in the name of one person is acceptable as evidence of incurred expenditure for more than one person. This may be relevant where spouses or rental accommodation housemates each do home-based work, using shared utilities.

 

For further assistance contact Expert Tax on 0449 952 855 or send us your query via our website – www.expert-tax.com.au

 

You can also email us your query at info@expert-tax.com.au

 

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It is important to know the differences between an employee and a contractor (also called an independent contractor or sub-contractor) as this will affect employer’s responsibilities and obligations, such as paying superannuation contributions and withholding tax from gross payments.

 

A worker isn’t automatically a contractor just because they have an ABN with specialist skills or a business only need them during a busy time. You need to consider the entire working arrangement. Following points need to be considered while reaching a conclusion on whether a worker is an employee or contractor –

 

  • Basis of payment – an employee is paid for the time worked or commission basis. Whereas a contractor is paid for result achieved on the quote they have previously provided.
  • Equipment, tools and other assets – A business will provide all necessary equipment, tools and other assets required to an employee to enable them to complete the work or in case employee provides most of the equipment, they are then paid either an allowance by the employer or get reimbursed by their employer for the cost of equipment, tools and other assets. Whereas in case of a contractor, contractor will provide all equipment, tools and assets required to complete the work. A contractor only receives payment upon completion of work, they do not get reimbursed for the cost of equipment and tools used in completing their work.
  • Commercial Risks – the worker takes no commercial risks. Employer is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. A contractor takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
  • Control over work – An employer has the right to direct the way in which the worker does their work. A contractor has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
  • Independence – An employee is not operating independently of employer’s business. They work within and are considered part of the business. A contractor is operating their own business independently and performs services as specified in their contract or agreement and is free to accept or refuse additional work.
  • Hours of work – An employee works standard or set hours (a casual employee’s hours may vary from week to week. A contractor on other hand will decide what hours to work to complete the task.
  • Superannuation – An employee is entitled to have superannuation contributions paid into a nominated superannuation fund by their employer. A subcontractor pays their own superannuation.
  • Tax – An employee has income tax deducted by their employer. A contractor pays their own tax and GST to the Australian Taxation Office.
  • Method of Payment – An employee is paid regularly (for example, weekly/fortnightly/monthly). A contractor has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.

 

If you’ve hired a company, trust or partnership to do the work, then the relationship is contracting for tax and super purposes. The people who actually do the work may be directors,  partners or employees of the contractor but they’re not your employees.

 

Note – Having an ABN doesn’t automatically classify an individual as a contractor. If a contractor is demonstrating characteristics of an employee, then his/her employer must make superannuation contributions in their nominated superannuation fund.

 

An employer may attempt to disguise an employment relationship as an independent contracting arrangement to avoid responsibility for employee entitlements.

 

The ATO provides following penalties for contraventions of these provisions –

 

  • PAYG withholding penalty for failing to deduct tax from worker payments and send it to the ATO
  • super guarantee charge, made up of:
    • super guarantee shortfall amounts (the amount of super contributions that should have been paid into a complying fund)
    • interest charges
    • an administration fee
  • Additional super guarantee charge of up to 200%.

 

Unlike super guarantee contributions, the super guarantee charge is not deductible.

 

For further assistance, contact Expert Tax on 0449 952 855 or send us your query via our website – www.expert-tax.com.au

 

You can also email us your query at info@expert-tax.com.au, we will attend to your email as soon as possible.

 

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