Cracking down on the cash economy

Friday 22 January 2010

by Martin Rush
Accru Page Kirk Jennings, Perth

The cash economy is an area that has long been targeted by the Australian Taxation Office (ATO). As well as defrauding the Commonwealth of taxes, the ATO believes that unreported cash transactions introduce unfair practices and do not provide a level playing field for businesses.

With the ATO’s release of 50 new “small business benchmarks”, small businesses will be increasingly on their radar. The benchmarks provide expected ranges of income and expenditure for businesses in particular industries and are designed to assist the ATO to check on tax compliance, particularly businesses that may be avoiding their tax obligations. However the benchmarks will also give small businesses a useful view on how they are performing compared to similar businesses.

Benchmarking by the ATO is not particularly new, however the ATO is becoming more proactive in this area. The recent release of benchmarks for 50 new industries has taken the total to 58 and the ATO are hoping to have released benchmarks for 100 industries by June 2010.

Who is being targeted?

The new benchmarks are specifically targeted at small businesses (turnover up to $2 million). The small business benchmarks are grouped into categories based on business industry codes used in income tax returns. Categories include manufacturing, construction, retail trade, accommodation and food services, transport and postal and warehousing, rental and hiring and real estate services, administrative and support services, and other services. The industries benchmarked are high on the likely offenders list for the cash economy.

What do the benchmarks measure?

The ATO have developed two types of benchmark

• Performance benchmarks
• Input benchmarks
  

Performance Benchmarks

These benchmarks are based on information small businesses disclose in their income tax returns and business activity statements. The performance benchmarks allow small business owners to compare their business with similar businesses. The benchmarks are also designed to assist the business owners to check whether they are complying with their tax obligations, particularly in relation to cash income.

The ratios used by the ATO for their performance benchmarks include

• Cost of goods sold to turnover
• Labour costs to turnover
• Rent to turnover
• GST free sales to turnover
• Motor vehicle expenses to turnover
  

It should be noted that all ratios will not necessarily be relevant to each business.

Input Benchmarks

Input benchmarks show an expected range of income for tradespeople based on the labour and materials they use and apply to tradespeople who deal directly with consumers. These benchmarks are based on information industry participants and trade associations provided to the ATO.

What happens if I am outside of the benchmarks?

The burning issue for most small business owners will be ...’what are the consequences if my business does not fit into the benchmarking ranges?’ In short, if you are outside the benchmark ranges, the ATO may take this as an indication that your business is not recording all transactions and paying all your tax, especially on cash transactions. The longer or more regularly a business falls outside of the benchmark range the more likely the business will attract attention from the ATO.

If a business does not fit into the benchmark ranges then the business owner needs to understand why this is the case and be able to explain the reason should the ATO raise a query. The business owner needs to ensure that all transactions are recorded and there has been no error in recorded transactions.

It should be remembered that benchmarking is only one test that the ATO is using in cracking down on the cash economy. A business must also understand that just because it falls within benchmark ranges it is not precluded from an ATO review or audit.

All the ATO benchmarks published can be found at www.ato.gov.au/businesses

Please contact your Accru adviser should you require any advice in understanding, calculating or reviewing the benchmarks for your business.