The cash economy is never far from the ATO radar and in the most recent development it has released details of its cash economy letter program.
The program entails the ATO sending 110,000 “advisory” letters to taxpayers who may be participating in the cash economy.
The ATO said it will mostly send letters to business operators reporting outside small business benchmarks for their industry or to those who in the ATO’s view have reported insufficient business income to meet their expected living expenses.
For the purposes of small business benchmarks a small business is one reporting an annual turnover up to $15 million, with start-up businesses and those with turnover below $75,000 generally excluded.
The ATO says the letters identify potential compliance risks and prompt taxpayers to review records, returns and income as well as alerting businesses that the ATO uses the benchmark test as one of a range of indicators to select businesses for audit or review.
Some businesses operate outside the benchmarks and as I have discussed before there will often be good reasons for that.
Businesses that operate outside benchmarks for their industry need to show that they have correctly recorded and reported all income and deductions. To do that they must ensure they meet legal record-keeping requirements.
When calculating the cost-of-goods-sold benchmark the ATO makes adjustments for salary and wages where a business’s income tax return indicates it has included wages in its “cost of sales” figure.
The ATO said results from the program so far “have been encouraging, indicating a positive impact on compliance levels”.
It said many businesses which received letters responded by:
SMEs that receive a letter will invariably use a tax agent and in those cases tax agents will receive an advance copy of the letter the ATO intends sending to the business.
The ATO says if the tax agent is satisfied that their clients’ business records are correct no further action is required.
If a mistake has been made the tax agent or the business can advise the ATO by using the “Correcting tax errors” form enclosed with the letter.
Although neither tax agent nor business is required to respond any response explaining why the business is reporting outside benchmarks for its industry will be recorded in ATO files.
The ATO warns that providing an explanation will not exclude the business from further compliance action if the ATO has evidence of fraud or tax evasion.
If the ATO takes further compliance action using benchmark information it will contact the tax agent or the business at the outset and will provide the agent with an opportunity to advise the ATO about any special circumstances that explain why the business may be reporting outside the benchmarks for its industry.
The ATO sent more than 24,000 letters to taxpayers between July 1 and September 30 last year. Common responses included:
The use of benchmarks by the ATO is now well-known so there should be no surprises about how they are used.
While SMEs might consider the cost of complying with the letters is an issue, if the business has kept full and accurate records in compliance with tax laws the letters should not pose a major problem and the compliance cost could be minimised.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions . 
For more Terry Hayes features, click here.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
Comments