1 Jul 2019
In my latest book, 'The Next Financial Meltdown: 10 Shocking Predictions For Business Owners', I made a prediction that in the next economic collapse, the tax office will try to collect their rightful share of business income tax.
There is a significant cash economy in small to medium businesses. Everybody seems to know it, or pretends not to know it. And when it comes to business income tax, I have no doubt the Australian Tax Office (ATO) knows it too.
During the Great Depression, the Australian Federal Government had to hire many of the unemployed on massive public works project to alleviate unemployment (such as the construction of Sydney Harbour Bridge).
And I believe the Australian government will do the same again in the next economic shock, but because the workforce of today is much better educated, many of these will be employed as tax collectors for the ATO, because somebody has to pay for these extra public servants.
Businesses operating in the cash economy are difficult to audit, and the ATO hasn't really gone out in force to prosecute cash businesses that fly under the radar and avoid paying their fair share of taxes. But don’t underestimate the ATO in anyway. The ATO has incredible powers.
By issuing the notice of assessment, the ATO is judge on how much business income tax you owe and this automatically becomes a debt regardless of whether you have been treated fairly or not. When it comes to tax debt, you are ‘guilty’ until proven innocent.
Furthermore, the ATO does not have an independent ombudsman. The ATO is also the jury if you need to appeal against any of their decisions. The ATO decides on the merits of your argument, unless you have the resources to take the matter to court.
Finally, the ATO interprets the legislation. The ATO will function to collect business income tax in compliance with their view of the legislation, likely to be supported by the government of the day of course. Only big businesses or wealthy individuals with deep pockets have the resources to challenge the ATO in the legal courts. Small businesses and ordinary citizens have limited options.
If the worst economic downturn in history hits the country and results in severe tax shortfalls, the ATO will likely to come after the cash economy. In desperate times, the Federal Government will arm the ATO with the power it needs to collect more taxes.
The cash economy is no hidden secret. With many people in financial distress, the government and ATO will find popular support to go after business owners that fragrantly under-declare their business cash revenue and hence pay less than their fair share of business income tax.
The ATO's business income tax jar. Photo: TaxCredits.net @ Flickr.com
For politicians, the idea of taxing businesses in the past has proved politically easier to sell to the people than taxes on consumption (GST) or taxes on Pay-As-You-Go (PAYG) wage income. It is a palatable message to the public that big multinationals are evading their fair share of taxes through shady cross-border tax arrangements, or small businesses hiding their profit through the cash economy. And the ATO is not dumbed to either.
Business owners should be prepared for rigorous audits. Be prepared for a resurgent ATO with more power and zeal to recover tax revenue. Word on the ground says that the movement has begun. The ATO may cross check bank statements, assets acquisition, car ownership, real estate register, funds movement, credit card statements and pretty much anything they want.
The ATO has stopped short of confiscating assets at will. However, there is already precedent in the Federal Proceeds of Crime Act 2002. Under the Federal Proceeds of Crime Act 2002, the Federal Police can restrain and confiscate the proceeds of crime against Commonwealth law. In Western Australia, the Criminal Property Confiscation Act 2000 (WA) allows the State government to seize the assets of a drug dealer even if these assets have been lawfully obtained. The provision of the State law allows for unexplained wealth to be seized and does not rely on a conviction of any kind. The State only has to prove there is a discrepancy in the person’s lawful income against their known assets.
These are extraordinary powers. And in extraordinary times, these powers could be given to the ATO and used by the ATO to confiscate money and assets if there is a simple discrepancy between income and assets. Business owners with multiple investment properties, flashy cars, luxury residence, off shore investments but without matching income on their tax returns may well need to prepare for extensive interactions with the tax office.
Josh Foo contributed to this post.
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