Cash and the Modern Economy
In the post-COVID world and with the rise of smart technology, cash is becoming a rare sight so it can be easy to forget how to declare cash income in Australia. We’re using less and less cash everyday, however there was a time we used cash every day – even if these days seem like ancient history! One thing has been the same over a long period, though; we rarely use or see hundred dollar bills! The thing is, these account for mountains of cash! So, where is all this money?
According to the Reserve Bank of Australia (RBA) in their discussion paper titled The Life of Banknotes (2015), there are 300 million $100 notes in circulation. To put it in perspective, that’s almost three times the number of $5 notes! There’s a reason you never see $100 bank notes. The RBA thinks they are literally “stuffed under the mattress” as an alternative to banks with some portion kept overseas for tourists. It is thought only 25% are in general circulation.
While they are often hidden as a store of wealth, another less virtuous reason is that they are being used for Tax Avoidance purposes or for criminal activities.
Let’s deal with the issue of Tax Avoidance first then move to how to declare cash income as they are closely linked.
I’m often asked whether it is better to accept cash money and keep it “under the mattress” rather than deposit it into a bank account. The reason stems from thinking this is tax free. Let’s be clear: it is not tax free! Not declaring cash income in Australia is against the law.
The ability to use this cash has significantly reduced as less and less people use or want cash payments. COVID has accelerated this change.
There are two main factors which I believe are eliminating the need for cash and therefore the cash economy, which is also known as the shadow economy: efficient use of technology and cultural changes.
Efficient Use of Technology
The efficient use of technology has two key effects on cash and its use in the shadow economy.
Technology makes it more efficient to use digital means of payment. I can’t remember the last time I preferred to pay with cash rather than “Tap and Go”? I don’t even want the receipt anymore because I have that record on my phone unless it is a deductible expense and I want a compliant tax invoice.
Compliance and Policing
The Australian Taxation Office (ATO) uses very sophisticated data matching analysis and forensic capabilities, making cash payments more visible. For example, the ATO can identify people who may be running a part of their normal business activities off the books and avoiding their obligations.
To keep it fair for the majority of businesses that do the right thing, the ATO deals with those who try to operate outside the tax system firmly. With a significant increase to funding in the latest budget, the ATO’s tax avoidance taskforce aims to raise $3.7 Billion over 4 years from the shadow economy and personal income tax, while the Multinational tax integrity package will aim to raise $1 Billion over four years from large multinational entities.
NOTE: We recommend all our clients to consider ATO Audit Insurance as this can save considerable pain if the ATO decides to audit your affairs.
Technology is used more widely by Generation Z (those born between 1997 and 2012) who grew up in the digital age, as well as Millennials (those born between 1980 and 1997) who saw the most rapid technology advancements. Generation X (those born between 1965 and 1980) remember an analog life but have no problem adapting to digital services. Even the Baby Boomers (those born before 1965) are willing to adopt digital methods of payment provided it is more convenient and adds value.
More secure digital banking and payment platforms provide not only security but also flexibility and convenience.
So, now I have shared my opinion, let’s look at how to declare cash income in Australia.
How to Declare Cash Income in Australia
Receiving Cash for Work You Do
Your employer may pay your wages to you in cash (or with a cash cheque), rather than into your bank account. Paying wages in cash is legal and may be more convenient.
However, some businesses deliberately use cash transactions (for example, pay their employees ‘cash-in-hand’) to avoid meeting their tax and employee responsibilities. This is not legal and they will eventually get caught.
If your employer is paying you cash make sure to consider the following:
- You must declare any cash you receive as income when you lodge your tax return
- You should get a payslip showing your earnings and the tax your employer takes out
- At the end of the year you should also get an income statement that shows your full earnings and the amount of tax your employer has taken out for the full year
- Make sure that your employer is making super contributions
- Check that your employer is taking the correct amount of tax out of your pay – this helps to make sure you don’t end up with a large tax bill at the end of the year. Click here to utilise the ATO Tax Calculator.
Declare Your Tips
Cash tips are income and not excluded from tax, regardless of how you receive them. It makes no difference if tips come from your employer or direct from customers.
If you receive cash tips, you must declare these as cash income in your tax return at “Allowances, earnings, tips, directors fees etc”. Not declaring cash income in Australia, including tips, makes you liable for interest charges and penalties as well as the undeclared income tax.
Receiving Business Cash Income
Your clients may wish to pay cash, so if your business receives cash payments for goods or services, it must be declared as cash income.
Something you may be unaware of is that the business must also include:
- Income earned through coupons, vouchers or gift cards,
- Income deposited into a mortgage or private credit card instead of the businesses trading account.
When you see buskers using QR codes to receive appreciation donations, I believe that’s a sign that in the medium term, perhaps five to ten years’ time, physical cash will be very rare and may even cease to exist. So get those $100 bills out of the mattress and either start spending or put it in your account!
In the meantime, if you have any questions or concerns about whether your utilisation of cash is legal, or how to declare cash income in Australia, then don’t hesitate to get in touch with the team here at Bishop Collins. Our team of professional accountants and finance experts know the legalities of tax and money inside and out, and can assist you in ensuring you’re compliant.
Happy cashless day to you all!