Overview
We know most business owners are honest and that running a business can be difficult.
Unfortunately, there are businesses that gain an unfair advantage by not meeting all their tax and superannuation obligations. We aim to protect honest businesses from this unfair competition by addressing shadow economy activities.
The shadow economy refers to both dishonest and criminal activities that take place outside of, or involve misuse or abuse of, the tax and regulatory systems. Examples of these activities include:
- not declaring all income
- over-reporting deductions
- demanding (or paying for) work cash in hand to avoid obligations
- other illegal activities, such as illicit tobacco, sham contracting and ABN fraud.
The shadow economy is a significant economic issue that affects all of us.
We work closely with industry associations, tax practitioners and businesses to understand any issues they may have. We use up-to-date third-party data and sophisticated risk analysis profiles to identify those who may need a bit more help and those who may not be doing the right thing. Where we are concerned that a business is deliberately doing the wrong thing, we have an obligation to the community to investigate further.
We are visiting businesses around Australia as part of this work. You can register for an information session to find out more about these visits. Depending on what we find during the visit, we may contact businesses at a later stage to follow up.
We've found that the community has less tolerance for unfair practices than it once did. If you see something, let us know by reporting a concern.
See also:
Register for an information session
No sessions are currently scheduled at this time. Check back for upcoming information sessions.
Our business visits
Our visits are part of our approach to protect honest businesses from unfair competition by addressing shadow economy activities. In addition to helping businesses that need extra support, we are also dealing with those deliberately doing the wrong thing and getting an unfair advantage, so all businesses get a fair go. We work with businesses and industry associations along with local authorities like chambers of commerce and councils.
We will be talking to businesses about:
- record keeping and payment facilities, registrations, outstanding lodgments, tax debts, and employer obligations such as super
- how to fix mistakes
- the benefits of electronic record keeping and payment methods
- ATO tools and assistance products available for them
- any other help they may need.
Depending on what we find during the visit, we may contact businesses at a later stage to follow up (for example, through a phone call, letter or additional visit), and may undertake a review or an audit.
The areas we're visiting are considered to be higher risk. This could include:
- unreported or misrepresented sales
- omitted income, including missing payments and online transactions
- overstated expenses
- lack of record keeping knowledge (in terms of sales, expenses, staff, rosters and controls)
- discrepancies between activity statements and tax returns
- businesses that are operating outside the tax system
- when lifestyle and assets don't match up, like owning property and vehicles that they would need much higher incomes to cover
- businesses reporting outside of the business benchmarks
- not complying with employer obligations.
If businesses need or ask for help, we will help them get back on track as well as show them the ATO tools and information available to assist them. However, if we're concerned that a business is deliberately doing the wrong thing, we will investigate further and take any necessary action.
No matter what kind of business you have, you don’t need to be concerned if you're doing the right thing.
See also:
- Digital record keeping for businesses – make less mistakes and save time
- Electronic payment systems – you can save time, money and reduce the risk of theft
- Small business benchmarks – compare how your business is performing against others in your industry
- Ban on electronic sales suppression tools
- Supporting your small business
- Reviews and audits
Areas we've visited
From 1 July 2019, we have visited businesses in the areas of:
- QLD – Cooktown, Port Douglas, New Farm, Teneriffe, Fortitude Valley and Newstead
- NSW – Port Macquarie, Wauchope, Hornsby, Bathurst, Bankstown, Bega and Hornsby
- VIC – Healesville, Frankston and Croydon
- WA – Broome, Cable Beach, Derby and Kununurra
- NT – Darwin.
If you've made a mistake
If you realise you've made a mistake, or left something out, it's better to talk to us as soon as possible – for example, if you:
- haven't told us about income you have earned, including cash payments
- claimed deductions you weren't entitled to
- made any other statement to us that was false or misleading.
We may reduce the penalties that apply if you come to us first.
See also:
Making a tip-off
If you know or suspect phoenix, tax evasion or shadow economy activity, you should report it to us.
Next step:
Our work in the past
In the past, our work has also focused on:
Cash-only businesses
From June 2017 to May 2018, we visited businesses in 12 locations around Australia with a focus on businesses that:
- operate and advertise as 'cash only' or mainly deal in cash
- our data matching suggest don’t take electronic payments
- are part of an industry where cash payments are common
- indicate unrealistic income relative to the assets and lifestyle of the business and its owner
- fail to register for GST or lodge activity statements or tax returns
- under-report transactions and income according to third-party data
- fail to meet super or employer obligations
- operate outside the normal small business benchmarks for their industry
- are reported to us by the community for potential tax evasion – the number of reports we receive shows us that the community is less tolerant of unfair practices in these industries.
We found a number of businesses that don’t:
- have business bank accounts – it’s important to separate business and personal income
- record all sales or keep proper books.
We also found businesses that had friends, family and other employees working ‘off the books’ – remember to make sure family and friends who help out and employees are receiving the pay and super they're legally entitled to.
Businesses with electronic payment and accounting systems told us it saves them time because the basics are done for them.
Remember to keep good records – it lets you know how your business is really doing.
Most businesses were happy to see us and took advantage of getting one-on-one advice.
Working with industry
In the past, we have also worked to help businesses in particular industries.
Hair and beauty industry
Our activities in the hair and beauty industry resulted in:
- an increase in timely lodgment of activity statements – up 4% compared to the 2015 financial year
- an increase in GST registrations being corrected
- more timely payments of income tax and activity statement liabilities
- a reduction in outstanding payment obligations
- business owners being supported and educated to make informed decisions about their tax obligations.
Here are some examples of how we have dealt with businesses that have not met their obligations.
Example: Business owner's lifestyle didn't match their reported income
A nail salon business with a number of outlets was selected for a visit when our data matching indicated anomalies. Our initial investigation confirmed that the owner kept incomplete records and declared income that didn’t support their lifestyle and assets.
We uncovered more than $2 million of undeclared income.
After imposing penalties for reckless behaviour of over $241,000, the total amount of GST, income tax and penalties payable by the owner was more than $728,000.
End of example
Example: Poor record keeping leads to penalties
Acting on concerns from a member of the public, we investigated a hairdresser and found that the business owner couldn’t account for all of their expenses.
The owner told us they didn’t know how to keep good records and had never sought advice about how to do this from a tax professional.
GST and penalties on over-claimed expenses payable by the owner were over $50,000.
End of exampleRestaurant, cafe, takeaway and catering industry
Our activities in the restaurant, café, takeaway and catering industry have resulted in:
- an increase in timely lodgment of activity statements – up 6% compared to the 2015 financial year
- corrections to GST registrations
- an increase in timely payments of income tax and activity statement liabilities
- business owners being supported and educated to make informed decisions about their tax obligations.
Here are some examples of how we have dealt with businesses that have not met their obligations.
Example: Undeclared income and inflated expenses
When visiting a business, our staff noticed the Australian business number (ABN) quoted on cash register sales receipts varied. When we asked about this, the owner made voluntary disclosures about over-claimed expenses.
During the audit, we also found more unreported income and over-claimed expenses. This led to adjustments of more than $1.1 million.
GST, income tax and penalties payable exceeded $211,000. However, because of the voluntary disclosures, the penalties imposed on the tax shortfall were reduced by just over $12,000.
End of example
Example: Tracking cash payments
During a visit to a restaurant, it was apparent the owner needed to improve their record keeping practices as cash was kept in a cardboard shoebox.
Our profiling work showed five merchant IDs, which the taxpayer told us belonged to five different restaurants operating under this entity. All had the same poor record keeping processes.
Our analysis identified several bank accounts, and third-party information identified deposits of over $300,000 for 2014 and 2015.
We calculated cash not deposited by developing a ‘cash deposit timeline’ for each restaurant. It turned out that no cash had been reported to us, and only EFTPOS income had been included in tax returns and activity statements.
From this, we identified $1.3 million of understated income for 2014 and $1.5 million for 2015.
End of exampleBuilding and construction industry
Our activities in the building and construction industry have resulted in:
- an increase in timely lodgment of activity statements – up 5% compared to the 2015 financial year
- over 760 businesses in the building and construction industry have been shown our range of online tools and services.
Here are some examples of how we have dealt with businesses that have not met their obligations.
Example: Failing to lodge and not reporting cash income
A licensed carpenter failed to lodge tax returns for a number of years. We demanded lodgment, and when the tax returns were lodged, it was clear that income from cash jobs wasn't included.
We conducted an audit for the 2006 to 2013 financial years and also found that the taxpayer had over-claimed input tax credits. Their record keeping was very poor and they couldn't explain how some materials and vehicles were funded.
The audit resulted in the taxpayer owing additional tax and penalties of over $190,000.
End of example
Example: Failing to report cash income
We identified a company that hadn't reported over $970,000 in cash sales over a two-year period. The omitted income had been transferred into nine personal bank accounts as employee payments, including the company director. The nine employees also didn't report this income in their personal tax returns.
This resulted in over $90,000 GST payable by the company, with failure to withhold penalties of over $200,000 on the wages provided to its employees.
The total shortfall of income tax payable by the individuals was $277,000 with penalties of over $175,000.
End of example