Unreported ‘cash in hand’ payments to workers no longer tax deductible
The Australian Taxation Office (ATO) today reminded employers that any unreported ‘cash in hand’ payments made to workers from 1 July 2019 will not be tax deductible.
‘Cash in hand’ refers to cash payments to employees that do not comply with pay as you go (PAYG) withholding obligations. Payments made to contractors where the contractor does not provide an ABN and the business does not withhold any tax will also not be tax deductible from 1 July.
Assistant Commissioner Peter Holt said the new rules have a dual purpose of levelling the playing field for honest businesses that are doing the right thing by their workers as well as tackling the black economy.
“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”, Mr Holt said.
This new measure will take effect for payments made to workers from 1 July 2019 for income tax returns lodged for the 2020 income year onwards and is part of the government’s response to recommendations from the Black Economy Taskforce.
“The Black Economy Taskforce estimates that the black economy is costing the community as much as $50 billion, which is approximately three percent of Gross Domestic Product (GDP). This is money that the community is missing out on for vital public services like schools and roads.” Mr Holt said.
“Businesses that operate in the black economy are undercutting competitors and gaining a competitive advantage by not competing on an even footing”.
In addition to the loss of a tax deduction, employers caught not complying with their PAYG withholding obligations may be penalised for failing to withhold and report amounts under the PAYG withholding system.
“This new measure is just one of the many ways we’re tackling the black economy”, Mr Holt said.
Mr Holt said “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”, Mr Holt said.
Employers who mistakenly classify their employee as a contractor will not lose their deduction where their worker provides them with an ABN.
Mr Holt said that payers who attempt to do the right thing but make a mistake do not need to worry; they will not lose their deduction.
“Our objective is to support small business to help them get it right. But anyone caught deliberately doing the wrong thing will lose their deduction”.
Mr Holt said that employers that failed to withhold or report their PAYG obligations can come forward and voluntarily disclose this to the ATO before we take any compliance action. If they do they will not lose their deduction and may be entitled to reduced penalties.
If a member of the community has any knowledge or concerns about an employer paying their workers cash in hand, they can report it to the ATO online at ato.gov.au/ReportAConcern or by phone on 1800 060 062. Reports can be made anonymously. One in five of the reports we received in 2017–18 were about the black economy.
More information is available at ato.gov.au/paygwdeductions
About the Black Economy Taskforce
The Black Economy Taskforce was established to provide a whole-of-government approach to combat the black economy in Australia. It was established in December 2016 to develop a policy framework involving new proposals to tackle black economy activity. The Black Economy Taskforce's Final ReportExternal Link was released in October 2017.
The ATO plays a significant role in leading and delivering on the Black Economy Taskforce recommendations accepted by the Government. Since 1 July 2018, the ATO has coordinated an extensive program of work to tackle the black economy. This program of work includes a multi-faceted approach.
The ATO is responsible for addressing the following aspects of the black economy:
under-reporting income and over-claiming expenses
ensuring businesses meet their employer obligations – so they don’t pay employees or contractors cash in hand, underpay wages, fail to withhold tax or not contribute to super
addressing illegal phoenixing (together with Phoenix Taskforce partner agencies) – liquidating and reforming businesses to avoid obligations
preventing tax fraud
dealing with illicit tobacco, duty and excise evasion
targeting intermediaries and agents who enable black economy behaviour.