My husband is big believer in paying “cash”, and as much as I’d like to say he’s an exception he’s not. Many of us think we are winning by paying cash to businesses, and these businesses think they are winning too.
We dodge GST and they dodge GST and income tax. Some even pay cash wages to employees and dodge superannuation and pay as you go withholding and workcover, while these employees dodge income tax and often can get higher other benefits.
As a business owner it might seem to make sense – save some money from the tax man, but it’s not really that simple.
I recently had a client bring in some figures for a business they were looking to purchase. This was a business that was totally cash based. They had five years of figures. The business started off with a turnover of $90,000 - a great little income earner – but by the end of the five years it was only declaring a turnover of $40,000. It had more than halved it’s turnover! There were no logical reasons, no new competition, it was in a major growth area. As it turns out there was a second set of records – the undeclared cash which meant the turnover was still at $90,000!
While it might sound great that the business owner got $50,000 tax and GST free it’s caused a headache. Firstly, there is no way the buyer is going to pay for a business that has no proof of a $90,000 turnover. In fact, in this case, the sale price was halved. The next issue is the buyer needs to get finance to pay for the business and the figures look crap. No finance, no sale.
I had a chat to Deb Smith, a mortgage broker from Smartline. “What these business owners don’t understand is you have to have a saleable asset to borrow money. A business constantly showing low turnover and profit is not going to get you over the line with the financiers” she told me.
It’s true – without even considering the drain on our economy through the lost tax revenue, you aren’t doing your own self any favours. Add to that that the ATO are not dumb. They have systems that look at business averages and determine if your figures are outside the norm. They also link in with lots of different providers and can snoop on lots of your info. They can look at your lifestyle and expenses compared to the income you are declaring. If they think you’re a fibber they get to make their own assessment of what your income is and how much tax you should pay - plus penalties!
So next time you get asked for a “cash” price – say nah mate, all above board here.