Five ways the ATO is tackling the black economy

Peter Holt | Assistant Commissioner | Australian Taxation Office

Five ways the ATO is tackling the black economy

Have you heard of the black economy but don't know what it is or how it impacts you and your franchise business? Well, you're not alone!

What is the black economy?

The black economy includes dishonest and criminal activities that happen outside the tax system and those who try to misuse or abuse it. It encompasses many elements, from the under-reporting of income and non-payment of superannuation through to serious criminal activities such as money laundering, illicit tobacco and the illegal drug trade.

By avoiding their tax obligations, people participating in the black economy have an unfair advantage, allowing them to undercut people doing the right thing. This behaviour undermines community confidence and puts pressure on the margins of honest businesses, directly affecting their profitability and livelihood.

The Black Economy Taskforce estimated the economic impact of the black economy could be as large as 3 per cent of gross domestic product (GDP) or $50 billion in lost revenue each year. That's money which could have gone to funding schools, hospitals, roads and other critical public services. It has a huge impact on all Australians.

So, what are we doing about it?

To tackle the black economy head-on, the government announced a series of new measures, including many that came into effect from 1 July. We play a leading role in delivering much of this work as part of the Black Economy Program. It’s all about protecting honest businesses from competitors who are trying to get ahead by avoiding their tax obligations.

Let’s take a closer look at five of these measures and how they could affect your franchise business and how you can work with us to fight the black economy.

Black economy hotline

The new and improved Tax Integrity Centre (TIC) launched on 1 July, provides a single point of contact for reporting suspected or known phoenix, tax evasion, and black economy activity. We want any members of the community to contact us and tell us about instances where people might not be doing the right thing.

You will be able to tip us off online at ato.gov.au/tipoff, by using the Tip-Off form available in the ATO app, or by calling our Black economy hotline on 1800 060 062.

You can report any known or suspected activity where someone is gaining a competitive advantage by intentionally doing the wrong thing. Suspect activity is not just limited to tax issues. It involves behaviours such as:

  • Demanding or paying for work cash in hand to avoid obligations, such as paying employees super.
  • Not reporting or under-reporting income.
  • Illegal phoenixing – deliberately liquidating and re-forming a business to avoid obligations.
  • Over-claiming deductions, e.g. paying for home renovations through their business account.

All tip-offs are private and can be anonymous. We only request contact details in case the information provided needs further clarification.

We’re visiting businesses around Australia

We’re visiting businesses around Australia as part of our work to protect honest businesses from unfair competition by addressing black economy activities. While most businesses do the right thing, some get an unfair advantage by not meeting all their tax and superannuation obligations.

As part of this work, we’ll be visiting up to 10,000 businesses around Australia, each year, for the next three years. For businesses that are genuinely trying to do the right thing, we provide education and assistance to help them get back on track. We use these visits to help us identify who needs extra support to make it easier for them to comply.

We visit areas that we’ve identified as being higher risk. These risks could include:

  • Unreported or misrepresented sales.
  • Omitting income, including missing payments, online transactions,
  • Lack of record-keeping knowledge (e.g. in terms of sales, expenses, staff, rosters and controls).
  • Businesses that are reporting outside of the small business benchmarks.
  • Businesses that are operating outside of the tax system.

If you receive a visit from us, remember that our work is about reducing the opportunity for those getting an unfair advantage and levelling the playing field. We believe all businesses should get a fair go. We have an obligation to the community to investigate further and take the appropriate action if a business is deliberately doing the wrong thing.

Our teams visited over 10,000 small business across 22 locations in metropolitan, regional and remote areas in the first year.

Expansion of the Taxable Payments Reporting System (TPRS)

This change could affect your franchise. The Taxable Payments Reporting System (TPRS) was first introduced in 2012 in the building and construction industry to help detect those not reporting or under-reporting their income. The TPRS expansion now means that businesses providing cleaning or courier services will need to report payments made to contractors for cleaning or courier services provided on a business’s behalf.

The TPRS strengthens our ability to match income tax returns from contractors against what businesses report paying, allowing us to detect those trying to hide income and evade tax. The success of this system proves that any business trying to evade their obligations, won’t go unnoticed.

If your franchise business engages contractors to provide cleaning or courier services to your customers on your behalf, you may need to lodge a Taxable Payment Annual Report (TPAR). The report may apply even where cleaning or courier services are only part of your franchise business’ activities.

Businesses need to report the total payments they made to each contractor or subcontractor for cleaning or courier services in the 2018-19 financial year; the first TPAR was due on 28 August 2019.

The TPRS now also applies in the same way to businesses providing road freight, IT, security, and surveillance or investigation services from 1 July 2019, with their first TPAR due in 2020.

Franchise businesses need to look into it and find out more through ato.gov.au/TPAR or your registered tax professional.

Ban on Electronic Sales Suppression Tools

Use of these tools has been banned since 2018. Electronic sales suppression tools (ESSTs) allow income to be misrepresented and under-reported by:

  • Deleting transactions from electronic record-keeping systems.
  • Changing transactions to reduce the amount of a sale.
  • Misrepresenting a sales record, for example by allowing GST taxable sales to be re-categorised as GST non-taxable sales.
  • Falsifying POS records.

It is an offence to produce, supply, possess, or incorrectly keep tax records using an ESST. It is also an offence to assist others in committing these offences knowingly. Penalties up to 5,000 penalty units (currently $1,050,000 as of publication date) can apply.

Business owners need to keep records to explain all transactions, including records created by an electronic POS system.

The transitional period for the ban on possessing ESSTs ended on 3 April. Anyone who possesses uses, produces or supplies an ESST will be subject to strong action from us as part of our response to the black economy.

Removing deductibility of non-compliant payments

Since 1 July 2019, businesses can only claim deductions for payments they make to their workers (employees or contractors) where they have complied with the PAYG withholding and reporting obligations for that payment. This new measure will take effect for income tax returns covering the current 2019-20 year and onwards.

The government will also remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN, and the business does not withhold any amount of PAYG, even though withholding requirements apply.

If your franchise business failed to withhold or failed to report your PAYGW liability, you'd lose your deduction unless you make a voluntary disclosure to us before we tell you we’ve started an audit into your businesses’ PAYG withholding obligations.

If you made a mistake and withheld an incorrect amount, you won’t lose your deduction. You need to lodge a voluntary disclosure in the approved form to correct your mistake and minimise any penalties.

These are just five ways the ATO is tackling the black economy. Find out more about the black economy and what you can do about it at ato.gov.au/blackeconomy.

Help and support for franchise business owners

If you’re new to business or changing your business structure, you might feel like you need more support to understand your tax and super obligations. Visit ato.gov.au/SBsupport to find out about the range of tools, support and services we have to help you manage your tax and super. There are also some additional things to consider for franchised businesses at ato.gov.au/franchise.

Remember that registered tax professionals can help you too! Your registered tax professional can help you with more than just lodging your BAS or tax return. Speak with them for advice about your business and identifying areas for improvement, such as monitoring your cash flow or setting up electronic record keeping.

We understand that franchise business owners have a lot on their plate. We’re here to help you stay on track, or get back on track if you are behind with or having trouble with your tax and super obligations. No matter what your situation is, it’s never too late to ask for help.

Peter Holt is Assistant Commissioner with responsibility for the Black Economy measures program at the Australian Taxation Office. He is chair of the whole of government Black Economy Standing Taskforce. During his career, Peter has played an active role in policy development, law design, risk, governance, audit and assurance across the tax and superannuation systems