28th February 2019
Chess, Not Checkers – Why Cash Isn’t Always King
It’s no secret that the Australian Taxation Office (ATO) is in constant pursuance of those who underreport their income. With the data-matching systems the ATO has its disposal becoming more in-depth and sophisticated, the ATO is cracking down on the ‘cash economy’ more so than ever. The ATO describes the cash economy as occurring when ‘businesses deliberately use cash transactions to hide income to avoid paying taxes’.
Intentional or not, there’s no denying that there are businesses out there who underdeclare their income due to the use of cash transactions. There appears to be a misconception with some businesses that dealing with cash is illegal. It is likely that people here are confusing the term ‘cash’ with ‘cash in hand’, which generally refers to paying someone for a product or service off the books. When paying ‘cash in hand’, it is expected that neither party involved in the transaction will report the cash transaction as income or an expense, therefore never reaching the ATO and not able to be taxed. As long as it is reported correctly, transacting with cash is completely lawful.
Whilst legal, we tend to suggest for businesses to stay away from cash transactions as much as possible. The rationale is simple. Tracking cash transactions is messier than card transactions and bank transfers. With integrated accounting software like XERO automatically importing your bank transactions to account for, it only makes sense to pay for everything with a business card so that you stay consistent with one method of record keeping. Our reliance on technology to make our life easier is ever-present and it is no different when it comes to running a business. Accounting software, if utilised properly, can assist in all facets of a business and how it’s run.
There’s no doubt that the role of the public accountant has shifted recently with small businesses demanding more analytics on their numbers. Gone are the days where your accountant would churn out a bunch of numbers for your business leaving you clueless about how you’re performing compared to similar businesses. A competent understanding of business performance compared to other businesses in the same industry is crucial to staying competitive. Through benchmarking, you are able to identify weaknesses and attempt to rectify them. If your data isn’t a true reflection of your business, then your skewed data makes business analysis essentially useless and may make you attempt to rectify problems within your business that don’t exist.
Whilst more difficult to keep track of, it is still possible for those involved with cash to have accurate record-keeping which can be converted to data that can be benchmarked and analysed. It is just less efficient than the autonomous record keeping nature of bank account use which connects with accounting software. Those businesses that don’t have competent record-keeping generally are those who run a business which struggles to improve and runs consistent every year. Whilst fine for those who are happy with a simple money-making business, there’s no doubt business owners want growth and expansion and seek out their accountant to help implement this.
When dealing with cash in your business either by choice or not, it is important to ensure you are on top of your record keeping and be transparent with your accountant. It is easy for cash transactions to be overlooked if you forget about the cash you paid or received and your accountant wasn’t aware of it. The flow-on effect is that you have underreported income which is unlawful or you haven’t claimed expenses, meaning you are paying more tax than what you should be. Arguably the biggest drawback is that your data will be skewed and your data would not be useful for implementing strategies to grow your business.