Employers warned over cash payments to employees and contractors

The Australian Tax Office (ATO) is cracking down on cash-in-hand payments to employees and contractors and has reminded the Australian business community that such payments will no longer be eligible for a tax deduction.

Due to the introduction of Single Touch Payroll (STP) to all Australian businesses from July 1, the ATO will have a clearer insight into where money goes when it leaves a business. This level of transparency will be used to stop businesses from claiming deductions on cash payments.

Cash payments will not be illegal, just not tax-deductible, so most businesses will have a strong incentive to ensure they only make payments to contractors that have supplied an Australian Business Number, or to employees who have PAYG arrangements. The alternative is that they withhold the full rate of marginal tax from the payments.

Unveiled as part of the 2018-19 federal budget, the new rule will take effect for all payments made from 1 July this year, for income tax returns lodged for the 2019-20 financial year and beyond.

The crackdown is part of the government’s ongoing attempts to undermine the so-called “black economy”, which costs the community as much as $50 billion each year, or the equivalent of 3% of gross domestic product (GDP). This money would otherwise be used for vital public services like schools and roads.

ATO assistant commissioner Peter Holt said in a statement that businesses operating in the black economy are “undercutting competitors and gaining a competitive advantage by not competing on an even footing”.

Holt added that employers not complying with PAYG withholding requirements can be penalised.

He noted that cash is “a legitimate way of doing business”, and the ATO recognised that some industries tend to take more cash than others. However, cash-in-hand is often being used to avoid paying tax and superannuation.

“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.

ELMO Payroll is compliant with SuperStream and Single Touch Payroll in Australia, in addition to being Payday Filing and KiwiSaver compliant in New Zealand. To see how ELMO Payroll can potentially help your organisation, contact us.