Every year, the “shadow economy” causes the Australian community to miss out on around $11 billion in taxes that could be used for vital services like health and aged care.
The shadow economy refers to activities that take place outside of the tax and other regulatory systems, such as demanding cash from customers, paying workers cash in hand, or not declaring all sales.
The Australian Taxation Office (ATO) details how it uses intelligence from tip-offs as part of its approach to dealing with the shadow economy.
How the ATO uses tip-offs
Tip-offs from the community help the ATO to address tax avoidance, and to protect honest business. The ATO uses the intelligence gained from tip-offs to assist with current and future investigations, with more than ninety per cent of the 43,000 tip-offs received in the 2021–22 financial year being found suitable for further investigation or retained for intelligence purposes.
Who tips off the ATO to shady business practices?
The ATO receives tip-offs from other businesses, customers, members of the public, and employees from all over Australia. Tip-offs from New South Wales topped the ATO’s list with over 13,400, followed closely by Victoria (over 11,500) and Queensland (over 9,200).
Which businesses are being “dobbed in” to the ATO?
Topping the list of industries the ATO was tipped off about in the past year were:
- Building and construction.
- Hairdressing and beauty services.
- Cafés and restaurants.
- Road freight transport.
- Management advice and related consulting services.
An example is a hairdresser only accepting cash payments, and not ringing up these transactions or reporting them to the ATO. The business may also be charging customers GST and pocketing it.
Consequences for those engaging in the shadow economy
ATO Assistant Commissioner Peter Holt said that “The ATO will take firm action against business owners who deliberately avoid paying their fair share of tax. We know that honest businesses and the community expects us to do this. It’s all about keeping the playing field as level as possible”.
If you are found guilty of tax avoidance, you may need to repay the ATO the underpaid tax plus a penalty (typically 75 percent) and interest.
Signs that a business may be operating in the shadow economy
Some of the tell-tale signs that a business may be operating in the shadow economy include:
- “Cash only’” signs.
- Offering a discount for cash.
- Not accepting card payments.
- Failing to provide payslips to workers.
- Not ringing up sales.
- Running illegal software that deletes or modifies sales transactions.
The ATO encourages tax professionals to look out for shadow economy behaviour, including when reported income falls outside of the ATO’s small business benchmarks, and to “ask their clients more questions when things don’t add up”.
Key takeaways
People who engage in the shadow economy to avoid paying their fair share of tax don’t only have to worry about flying under the radar of authorities. Increasingly, responsible citizens are reporting such behaviour to regulators like the ATO. Offenders may need to repay the underpaid tax plus a penalty and interest.
