Demanding cash from customers, paying workers ‘cash in hand’ or not declaring all sales are the most common examples of the 43,000 tip-offs received by the ATO in the last financial year (2021–22).
The ATO is using intelligence from tip-offs as part of its approach to dealing with the shadow economy.
What is the shadow economy?
The shadow economy (previously referred to as the ‘black economy’) refers to activities that take place outside of the tax and other regulatory systems, or people who are known to the authorities but do not correctly report their tax obligations. The ATO estimates that the community misses out on around $11 billion in taxes each year as a result of the shadow economy.
Topping the list of industries the ATO was tipped off about in the past year were building and construction, hairdressing and beauty services, cafés and restaurants, management advice and related consulting services and road freight transport. Tip-offs from NSW topped the ATO’s list with over 13,400, followed closely by Victoria (over 11,500) and Queensland (over 9,200).
The black economy is a complex, multi-faceted phenomenon operating across Australia’s workplace relations, financial, welfare, procurement and migration systems.
Black economy behaviours include:
- Demanding or paying for work cash-in-hand to avoid obligations;
- Not reporting or under-reporting income;
- Underpayment of wages;
- Identity fraud;
- Visa fraud and bypassing visa restrictions;
- ABN, GST, and duty fraud;
- Dealing in illegal drugs and tobacco;
- Sham contracting – presenting an employment relationship as a contracting arrangement;
- Illegal phoenixing – liquidating and re-forming a business to avoid obligations (the ATO now has the discretion to retain tax refunds in relation to taxpayers engaging in phoenixing);
- Money laundering; and
- Dealing in counterfeit goods.
Black economy activities have harmful consequences such as:
- Workers missing out on their entitlements (for example, proper wages, leave or employee protection)
- Honest businesses being undercut by dishonest businesses that don’t pay the tax or superannuation they’re supposed to
- Criminals operating business models outside regulatory systems, and funding organised crime.
The ATO uses a range of education, engagement and enhanced enforcement activities to address the tax and superannuation aspects of the black economy:
- Combat black economy behaviours – including under-reporting income and overclaiming expenses;
- Ensure businesses meet their employer obligations when paying employees or contractors;
- Address employers paying cash-in-hand, underpaying wages, failing to withhold tax or not contributing to super;
- Address illegal phoenix activity – businesses liquidating and re-forming to avoid obligations;
- Prevent tax fraud;
- Deal with illicit tobacco, duty and excise evasion;
- Target intermediaries and agents who enable behaviour; and
- Prosecute the worst offenders.
ATO tax avoidance taskforces
The Government will extend the existing ATO’s Shadow Economy Program for a further 3 years from 1 July 2023. This will enable the ATO to continue a strong and coordinated response to target shadow economy activity, protect revenue and level the playing field for those businesses that are following the rules.
The Government has also boosted funding for the ATO’s Tax Avoidance Taskforce by around $200 million per year over 4 years from 1 July 2022, in addition to extending this Taskforce for a further year from 1 July 2025. This will support the ATO to pursue new priority areas of observed business tax risks, complementing the ongoing focus on multinational enterprises and large public and private businesses.
These measures are estimated to increase receipts by $4.9 billion and increase payments by $1.785 billion over the 4 years from 2022–23.
The Government will also provide $80.3 million to the ATO to extend the Personal Income Taxation Compliance Program for 2 years from 1 July 2023.
Reference: ATO website
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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from a qualified accountant at KMT Partners.