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Small businesses and the cash economy, what you need to know and what you need to avoid.

Cash market

Regarding the cash economy many people think cash is KING and it can be ‘pocketed’ without the Australian Taxation office knowing what was made.

When consulting to clients our advice is always declare everything, there are more benefits down the line that you may not be aware of. These benefits that most people take for granted, they never understand why they need to pay tax and why it is so important to show more than less. As technology is developing, we may be going to a cashless society in a few years like some countries like China.  It is possible in the future for Australia that everything will be digital, take a look at services like Medicare and Centrelink, they have gone totally paperless in less than two years, now you need to log into your account from one portal and everything is connected. To enter your mygov account you need to first set it up which requires your past historical data from your tax return, you will need your Notice of Assessment and the last bank account details that your refund went into, if it is your accountants bank details you will need to check your tax return and grab those details before you start registering your new mygov account.

You bank deposits and your withdrawals are data matched with the Australian Tax Office, the only thing that doesn’t match is any cash you earn or spend.  If your circumstances change this can become a problem for example, if a new life event occurs you are separating or getting a divorce, a death in the family, moving houses and you want to show the least possible money ever made so your ex-spouse doesn’t take you for child support.

The average price of a home not apartment in Sydney is say a million dollars, you dodge the system and beat child support, you saved $8,000 for the year and you saved another $13,000 in tax for not lodging that you made $65,000 profit net income from your small business, then it is time for you to buy the Australian Dream the home that you need to house your loved ones, you apply for loan to one of the major banks with tax returns that say no tax was paid or that your taxable income was as the least possible to avoid tax and child support and all of sudden you receive a loan declined and you are not sure why because in your head you think you make a lot of money, say $140,000 with a net income profit of $65,000.

That is why many people always amend their tax returns in the future, to show the true value of what they really earned, so they always pay the accountant twice than what they really are worth, which is crazy because now you will pay for everything you should have paid in the start plus double the services from your accountant.

What else can you miss out on, most banks these days need you to cover and protect your mortgage in the event of death, total permanent disablement and or critical illness, so you can keep up with the loan repayments in the event of unforeseen circumstance, and it always has me puzzled that most people will insure their cars that are worth $30,000 to $50,000 for $2,000 per year but when it comes to insuring there life for a $1,000,000 or more or at least for what the house is worth there not willing to pay $4,000 for the life insurance policy, we can assist you making all these payments tax deductible so please see us, before buying any policies.

Hypothetically you lodge a tax return that you earned $25,000 net profit and although the bank won’t provide a loan for you to buy a house or even to receive a car loan, and you saved $13,000 in tax, and or didn’t pay child support of $8,000, if you were ever to make a claim on your income protection policy, your last tax return is what the insurance company will usually go by to pay your monthly payments of income protection now they only pay 75% of your yearly income so that means you will only be paid $18,750 you know Centrelink pays as close to that in the event of an accident per year on some certain allowances, so we always tell clients to think twice of what their future goals are and do the right thing from the start.

The ATO reminds business owners to ensure they declare all cash and online sales in their tax return, including money they have earned from participating in the cash economy.

‘If for example, you are renting out a room, a car parking space, doing odd jobs such as delivery or cleaning for a fee, or driving passengers for a fare, remember to include this income in your tax return,’ lodge it all because the Australian tax office will understand that if you are using more petrol than ordinary however not declaring the income they will know by the basic statistics they have that you are making money that has never been declared, platforms like Uber and Airbnb where by you earn income and never declare, will need to report in a few years to the Australian tax office all income made, so they can data match and catch you out hence why in Australia the Australian tax system is self-voluntary, you lodge what you believe is your income.

The ATO also reminded self-employed people to declare personal services income also for any personal efforts, skills or expertise; you may be earning personal services income as for example if you are contractor cleaner and only have one person paying this means it personal services income, the deductions are fewer for people with this sort of income.

The new personal services income tool will help you work out if your income is personal services income and if special tax rules apply.

If the special tax rules apply to your personal services income they can affect the deductions you can claim and how you report your income.

The ATO also said it there are simplified depreciation rules for small business that have an aggregated turnover of less $2 million.

One of the simplified depreciation rules is the instant write-off. The instant asset write-off means you can immediately deduct assets bought for your small business, which cost less than $30,000 in the year that you buy and use them, or install them ready for use. The ATO also noted the increased instant asset write-off threshold of $30,000 applies from 30 June 2018.

Besides the instant asset write-off, another important rule to remember is that if the balance of your pool for depreciating assets is less than $20,000, before applying any other depreciation deduction, you will need to immediately deduct the full amount in your tax return, is it complicated yes, hence why you should always use a reputable tax agent that know what they are doing.

The best example are restaurants, cash always passing by their hands and the restaurateurs avoid lodging the correct figures, the Australian tax office have statistics that show that if you use so much flour and so much of any other product to produce your meals, they will know how many meals you produce, and the one thing that most owners always leave out is meals for own use, always thinking they are entitled to meal from there business, “well it is my business and I work for it” so I should get a free meal and not declare it, this is not the case it must all be lodge, imagine your yearly expenses to live are home loan private health insurance motor vehicle costs and school fees and everyday shopping to put a meal on the table that may come to $30,000 a year and you declare in your tax return $24,000 we have a massive issue, and a slight possibility of a tax audit, as previously mentioned technology is getting better and data matching will be a thing of today and into the future, there will be no escape unless you go and leave on an island in the Caribbean or the Mediterranean, and eat off coconuts, big brother is always going to catch you out, so do the right thing from the start as it does get expensive down the track when you want to amend tax returns to suffice the correct figures to certain government departments and large institution’s.

If you are running a small business and need help in getting it right the first time give us a call for a free fifteen minute consult to see if  we are the right fit for your small  business anywhere in Australia, our base is in Sydney though we travel all around Australia and the world, to see our clients.

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