ATO cracks down on ‘shadow economy’ as tip-offs dob in tax cheats

Almost 1000 fed-up people a week are dobbing in suspected tax dodgers. Here’s why you should think again about that cash job.

The Australian Taxation Office is cracking down on individuals and businesses who avoid paying the right amount of tax in the 'shadow economy', including those paying workers with cash.

Have you ever offered to pay cash for a job in exchange for a lower price? Or maybe you have been asked to do a job for cash? Well it turns out that many people have and almost 1000 people a week are turning to the Australian Taxation Office to tip it off about suspected tax avoidance and other suspicious behaviour.

And, have no doubt, the ATO is taking action. In August the ATO visited more than 30 fast-food outlets, restaurants and cafes in Darwin which were suspected of taking advantage of workers and avoiding tax and super obligations. The visits followed tip-offs from both workers and the broader community.

Known as the “shadow economy”, the tax office is clamping down on individuals and businesses who avoid paying the right amount of tax.

Whether it is selling illegally imported cigarettes to avoid excise taxes, collecting payment in cash to avoid income tax, paying staff in cash to avoid super and other obligations, or renting out a room in your property and not declaring the income in your tax return, the ATO sees this as a significant problem and costs the Australian economy more than $100bn a year, roughly 5 per cent of GDP.

The ATO conducted raids in Darwin in August after tip-offs from workers and the community.

Although many argue that avoiding tax is a victimless crime, it affects all of us in two ways. The first is that it provides the government with less funds to provide public services such as health, education and transport. And, secondly, there is more pressure on people who do the right thing, who pay higher taxes to compensate for the people who do not pay their fair share.

ATO assistant commissioner Tony Goding says that businesses that dodge tax and super obligations are simply stealing from fellow Australians.

“Paying tax is not optional. Sooner or later, and probably sooner, if you’re operating in the shadow economy, the ATO will discover this through our extensive data-matching through initiatives including the Taxable Payment Reporting System and the Sharing Economy Reporting Regime, our industry benchmarks, or as a result of a tip-off from one of your workers, customers or competitors.”

ATO assistant commissioner Tony Goding

And in terms of where the tip-offs are coming from, outside of Sydney and Melbourne, people from Newcastle provide the ATO with the largest number of tax tip-offs in the country. This is followed by several places in Queensland – Robina, Sunshine Coast, Townsville and Toowoomba.

The sectors that get the most tip-offs are building and construction, cafes and restaurants, and hairdressing and beauty services.

Mr Goding says the tips are coming from a variety of people who have simply had enough.

“With tip-offs often coming from customers, employees, other businesses, and even family and friends, the community is clearly fed up with dodgy behaviours and is stepping up to help us make things fairer,” he says.

Sydney-based accountant Megan Mitchell from MBM Accountants says that the ATO also has broad-reaching powers to catch out people who live a disproportionate lifestyle compared to the income they declare to the tax office and it is usually just a matter of time until the ATO catches up with these people.

“It is not a long-term strategy to avoid tax and the ATO are now smarter than ever before, aided by powerful legislation and extensive technology,” she says.

“Take selling a business, for example. In order to show the ‘true’ profitability of a business and substantiate the asking price, owners commonly advise buyers to deduct certain expenses from the financial statements claiming they were personal in nature. Well, when the business sells and the ATO sees that the owner got an abnormally large sales price based on the expected sales multiple that business should sell for given the declared profits, the seller is at risk of an ATO audit going back many years, which could result in amendments to tax returns taking away deductions that were not legitimate and result in a very large income tax bill.”

Whatever shape or form it is in, the ATO is taking tax avoidance very seriously and reports that 85 per cent of the tip-offs received from the public result in further investigation.

So the next time you hear a tradesperson say “I can give you 10 per cent discount if you pay in cash”, firstly realise they are ripping you off as they are not just avoiding the 10 per cent GST but they are also avoiding income tax of up to 47 per cent tax.

But also realise they are ripping off the broader community and making life just that little bit harder for the majority of people who do the right thing.

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James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au