The tax office has issued a warning to employers that cash in hand payments to workers will no longer be tax deductible from 1 July.
The new rules, which follow Black Economy Taskforce recommendations, are aimed at tackling the black economy activity, which is closely associated with harder-to-track cash payments.
The changes will affect payments made to workers which don’t comply with pay as you go (PAYG) withholding and contractors where an ABN is not provided and the business also doesn’t withhold any tax.
Employers which mistakenly claim their employees as contractors won’t lose their tax deductions where workers provide them with Australian Business Numbers (ABNs), the ATO said.
Currently, businesses paying cash-in-hand or paying contractors without knowing their ABN, can still deduct those payments in their Business Activity Statements.
“It’s fairly straight-forward: do the right thing and you can claim a deduction. Deliberately do the wrong thing and you’ll miss out on a deduction and risk being penalised,” ATO assistant commissioner Peter Holt said of the changes.
“Transacting in cash is a legitimate way of doing business, and we recognise that some industries do tend to take more cash than others.
“But when cash is used to deliberately hide income to avoid paying the correct amount of tax or superannuation it’s not only unfair, it’s illegal”, Holt said.
Because the changes apply from the new financial year, they will apply to tax reporting for the 2020 income year onwards.
Employers not complying with their pay as you go reporting obligations have also been warned, with the ATO highlighting the possibility of penalties as tax time approaches.
All this is part of a broader ATO effort to reduce the $50 billion the black economy is estimated to cost Australia each year.
Cash payments were identified by the government’s Black Economy Taskforce as a hotspot for illegal activity, particularly in the small business space.
Taskforce members argued the changes will create a financial disincentive to operate in the black economy.
The taskforce described the practice as a “loophole” allowing companies to deduct “non-compliant payments”.
“Disallowing deductions encourages proper reporting of wages and payments to contractors. It increases financial deterrents to operating in the black economy by removing an opportunity to reduce taxable income through deduction,” the taskforce said in its final report in 2017.