Making It Fairer for Honest Businesses

Businesses are being visited nationwide by the working with industry program; an initiative launched by the Australian Taxation Office focused on auditing businesses that deal with a high volume of cash payments.A trend has emerged highlighting particular industries that are susceptible to the belief that if a business receives a large portion of their income in cash the ATO will have trouble detecting whether they are fulfilling their tax obligations. The focus of the initiative is targeted predominantly are within the hospitality and hair and beauty industries with the objective to detect whether businesses are reporting their income correctly.  In 2015, over 6,032 hair and beauty businesses were visited and $8.2 million in errors was detected in the hospitality industry within the first 150 visits.

 

The most common errors arising consist of:

  • Businesses not reporting all of their income
  • Not reporting cash wages
  • Not claiming their expenses correctly
  • Not treating a ‘rent a chair employee’ properly (when a self-employed hair dresser rents a chair in a salon owned by someone else.

 

The ATO undertakes many strategies to determine the potential businesses that are improperly declaring their tax. Benchmarking is a common process where the financial performance of simular businesses are used to compare with one another. Alternative strategies employed by the ATO to determine the existence of undeclared income include incomplete book keeping records, estimating income gaps in sales data, analysis of the cash needed to remain solvent, comparing the owner’s lifestyle and assets to the amount of income declared.  This information assists the ATO to distinguish which companies are not reporting correctly.  A nail salon on the Gold Coast was ordered to back pay a total of $728,000 of income tax, goods and services tax (GST) and penalties due to not declaring over $2 million of income.

 

Not declaring all income or claiming expenses which have not been incurred is a violation of taxation law.  If a business has made a mistake with their reporting obligations, this may create the obligation for back payment of tax and based on the circumstances, the owner could incur penalties.  In the case there has been a violation of tax reporting obligations, the ATO may reduce or cancel penalties due to the cooperation of the business in providing information the ATO needed to correctly calculate the amount of tax that is required to be back paid.    Business owners should undertake comprehensive records as advised by the ATO and your tax agent as a preventative measure to ensure your business complies with all tax obligations and remains financially healthy.