ATO warning on the cash economy and tax scams

The very nature of the ATO means that it is always on the lookout for “threats” to revenue. Those threats are sometimes obvious and sometimes not.

Not unexpectedly, a favourite target of the ATO is the so-called cash economy. The ATO says that, this financial year, it will send around 110,000 letters to taxpayers who it believes may be participating in the cash economy. The majority of letters will be sent to businesses reporting outside the small business benchmarks for their industry.

The ATO uses a broad range of indicators to identify taxpayers who it considers may be seeking an unfair business advantage. One indicator it uses is the outcome of comparing businesses against the small business benchmarks for their industry. These benchmarks are important for SMEs to be aware of.

The benchmarks look at key business ratios for high medium and low turnover businesses for more than 100 industries. They cover ratios such as:

the cost of goods sold to turnover;
labour to turnover;
rent to turnover;
GST-free sales to turnover;
motor vehicle expenses to turnover.

The ATO provides a ratio range for various industries (eg. building and construction trade services; education, training, recreation and support services; food services; health care and personal services; manufacturing; professional, scientific and technical services; retail trade; transport, postal and warehousing) to help businesses work out whether they fall within or outside the average for their industry, and to help them explain why their business may differ. Other benchmarks, called input benchmarks, cover record keeping and, for tradespeople, estimated turnover based on labour and materials used.

The ATO also seeks to identify businesses that report net income that appears to be lower than required to support the business operator’s personal living expenses. As you might expect, the ATO monitors the behaviour of previously audited taxpayers to encourage their continued compliance.

The ATO says the letters will inform taxpayers that they have been identified as a result of one of the ATO’s cash economy indicators. The ATO is seeking to encourage taxpayers to review their records to ensure they have correctly reported all income, especially cash transactions.

Letters that are sent to taxpayers identified by the ATO as reporting outside the small business benchmarks for their industry will provide information about: (i) the tax performance of their business; (ii) how the ATO uses benchmarks to calculate default assessments; and (iii) details of how to correct their mistakes or make voluntary disclosures.

Tax scams involving fraud

At the same time, the ATO has warned of tax schemes involving identity fraud and tax return fraud. It reminded taxpayers that the ATO never sends emails asking for passwords, banking and credit card details. The Tax Office says it will contact taxpayers to request payment in relation to outstanding debts but will not request credit card details from a taxpayer to process a payment on their behalf.

Examples of tax schemes the ATO has encountered include:

A job aimed at international students advertised in a newspaper to call and provide their TFN and date of birth. Students are told they will be contacted a few days before they are due to start work. The number is subsequently disconnected and their details used to lodge fraudulent tax returns.
People claiming to be from the ATO call people advising they are entitled to a payment of approximately $3,600 as a bonus for paying their taxes on time. If only it were true! The people contacted are asked to provide their personal bank account details so the refund can be deposited. If the phone call is unanswered, a message is left providing a return contact number and a reference code. When this number is called, the people are requested to make a payment to a third party bank account, usually for an amount between $150 and $190, to facilitate the refund which is never paid.
People claiming to be from the ATO call to offer $3,000 tax refunds and instruct the person to make a money transfer ($150) to a specific charity in order to receive their refund. The taxpayer is generally given a NSW phone number to contact the “ATO” once they have completed the transfer. Personal information such as the address and date of birth of the taxpayer is quoted during the conversation to show authenticity, and several private contact numbers are provided.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.