I was just finishing university when Australia had its last recession and I honestly don’t remember that much about it.  I do recall our then Treasurer Paul Keating famously declaring that this was “the recession we had to have” and getting my first job as a graduate was very difficult, but the gravity of the situation certainly didn’t sink in as I was in my early 20’s.

That recession was in 1990-1991 and we have been fortunate to escape recession ever since, even during a Global Financial Crisis.  Thirty years later due to circumstances beyond our control we are slap bang in the middle of a severe recession.   This means that most business owners, including myself as a 51 year old, are experiencing this for the first time.  It is uncharted territory in so many ways.

Technically a recession is a fall in Gross Domestic Products (GDP) for two quarters in a row.  If you are not sure what GDP is, think of it like revenue in your own business.  GDP is the collective revenue for the country.  It is better to have more revenue than less in our country, just like it is better for your business to be selling more, not less.

When I think about recessions I am taken back to high school economics.  I loved economics at high school, but hated it at university.  In fact, I sucked at university economics because it was very complicated.  When we were discussing things like monetary and fiscal policy, supply and demand at high school, it just made sense.  High school economics started my love for business.  I really think as a first step to tackling this recession we need to revisit the fundamentals we were taught in high school.

I am not suggesting that this recession is as simple to understand as high school economics.  We have a layer of complexity that we have not confronted before in COVID-19.  Economics is based on the “perfect” market, which means that resources can simply move from one place to another when an opportunity arises, and information is equally available to everyone so that decisions can be made in a timely and efficient way.  This notion is unrealistic even in normal times but with the shut down restrictions and border closures, our market is far from perfect right now.  Yet that will not prevent our leaders from resorting to basic economic principles to help dig us out of this recession.

 

Supply and Demand

If you studied economics you will recall drawing a simple graph to demonstrate that the market price of a good or service is the intersection between supply and demand.  While that makes total sense, it is something we can overlook when we are pricing the products or services we sell.  We have seen some excellent examples of Supply and Demand impacts in the past few months as the price of products like hand sanitiser and face masks has skyrocketed as they have had a shift in demand, and the supply chain cannot meet that demand.  The price is correspondingly much higher than it was at this time last year when we didn’t really need these products in the same way that we do now. On the other hand retail outlets are constantly reducing the prices of their products to get stock moving.  People are just not buying certain products at the moment.

What is the demand for your product and how has it been impacted by COVID-19?  Life has not stopped altogether but if your product is a bit of a luxury, or something that can be delayed until better times, you will be starting to see a decrease in your revenue.  Knowing your customer, what they are experiencing and how this will impact their spending is critical to understanding the demand for your product.

If the demand for your product or service is reducing you need to consider a couple of things.  Clients will be price sensitive and maybe now is not the time to be raising prices. You still need to make a living so rather than dropping prices perhaps you need to be ahead of your competition.  Word of mouth is going to important and excellent customer service will help you to beat your competition when the pool of work reduces.  There will be competitors who undercut you on price but having the confidence to quote well and inform your potential clients of the benefits of quality over quantity will be more important than ever.  How will your business sharpen the experience for the customer?  How will you adapt to a reduction in demand for your products or services?

 

Monetary and Fiscal Policy

The two main ways a government can influence the economic outcome of a country are through Monetary Policy and Fiscal Policy.  Monetary policy is all about interest rates.  Changes to interest rates will impact our decisions to invest and save, as well as impact how much foreign investment we attract.  This delicate balancing act in turn impacts our economy.

The Reserve Bank of Australia look after monetary policy and you are probably familiar with the monthly publication of the official cash rate.  Reducing the interest rate is a tool to increase the investment that businesses make in our economy which should increase our GDP. The official cash rate is currently sitting at 0.25% as a result of many years of reduced interest rates.  At the present time, monetary policy has pretty much done what it can.  We really can’t go too much lower.

Without the assistance of Monetary Policy, we need to rely on Fiscal Policy.  Fiscal Policy is money injected into the economy from the government.  We are witnessing an incredible shift in our Fiscal Policy right now as we see our Budget Deficit grow to incredible numbers.  The necessary spend by the Government injects money into an economy that cannot sustain itself.  The Fiscal Policy impacts will be both short term and long term.

Our short term fiscal stimulus cannot go on for ever.  While so many businesses have benefited from Jobkeeper, Cashflow Boosts and other stimulus measures, we know that this money is going to drop off at the end of September.  It was always intended to be a short term fix.  The way to build our economy is to create jobs.  Infrastructure projects create thousands of jobs and we can see that this where the government will be focusing their longer term attention.

The construction industry are going to be the front line workers to drive our economy forward.  Infrastructure projects require tradies, and plenty of them.  There will be plenty of work but will you be in the right place to take advantage of this work?  The demand for Tradies will be high but there is going to be a lag between now and these projects being in full swing.  You need to be planning for this.

 

Unemployment

Unemployment is expected to reach 11% or higher in the next few months.  That is an incredibly high rate, and few of us remember a time when unemployment was so high.  People who are unemployed do not have the money for discretionary spending.  This means businesses that thrive on discretionary spending will have less customers.  In the next 6 months there will be many businesses that shut their doors.  It is going to be brutal, extremely sad and stressful for everyone.

Your focus for the next twelve months will need to be the survival of your business.  You should not expect to make extraordinary profits unless you are in an industry that is benefiting from the COVID-19 crisis.  You need to buckle down and get your house in order so that you can make it through.  Now is the time to think about the fundamentals of your business and go back to the basics so that you can be one of the surviving businesses at the end of all of this.

Just like the recession in 1990 and all the other recessions and depressions before them, the economy works in cycles and we will be return to a good place one day.  Riding out the storm will be tricky but it could make you a better business owner as you face the challenges ahead.   Read, learn, plan and adapt.  Lets hope this crisis is over soon.

We’ve put together a few quick and easy to follow video guides in how to correctly record your stimulus payments in Xero

How to record JobKeeper payments
Step 1 – Create a new account for JobKeeper income
https://www.loom.com/share/7dd605b361de40f39868871397e27c63

Step 2 – Reconcile payment from ATO to the JobKeeper income account
https://www.loom.com/share/7ccb72be07274d9398f1cb881228c25a

 

How to record Cash Boost
Step 1 – Create a new account for Cash Boost income
https://www.loom.com/share/6f015079a4334ab98a67994c57bc7bf8

Step 2a – Reconcile net payment from ATO to ATO income account (Jigsaw will reconcile at EOFY)
https://www.loom.com/share/5b72fa59654f4b91949fa6a5540ffd19

Step 2b – Reconcile gross payment cash boost to ATO liability account (balance sheet) and ATO income account (P&L)
1) Check whether your ATO Creditor account can accept credit payments
https://www.loom.com/share/62edcf1b6dc14e6ba2b21c921d99d7d3

2) Create a Cash Boost income transaction from ATO, and split your payment between ATO liability AND bank account (example is for a $10,000 cash boost to be split against BAS and bank account)
https://www.loom.com/share/6a6edd33a50741788e3f1c9e57756418

How to record NSW/VIC Grants
Step 1 – Create a new account for NSW/VIC Grant income
https://www.loom.com/share/fc1aacb015704693b2ed3e1793537f91

Step 2 – Reconcile payment from ATO to the Grant income account
https://www.loom.com/share/35623245c9f54ba2af0e0f98c6056151

Don’t worry too much – as we’ll be correctly reconciling these when we complete your next BAS / EOFY. If you have any concerns about your JobKeeper, Cash Boost or grants don’t hesitate to contact the team for more information.

FAQs 
JobKeeper:

  • JobKeeper is paid monthly, as a reimbursement for the last 2 fortnights (September payment will include 3 fortnights in August)
  • Every JobKeeper participant is required to lodge a monthly declaration, which will trigger the ATO to release the reimbursement (approx. 14 days from lodgement)
  • The forward month projection is your best guess at your future income. It will NOT be held against you if you are incorrect
  • Once you reach the required reduction in turnover in a month, you can continue claiming JobKeeper for the entirety of the scheme – even if your sales increase
  • Jigsaw Tax does not get notified whether your JobKeeper has been paid. Please let us know if it hasn’t been paid

Cash Boost:

  • Every business that is eligible and reports wages at W1/W2 will have the calculated boost applied automatically
  • The boost will be initially applied to ATO Integrated Client Account debt. Only excess will be refunded
  • The bank details provided for JobKeeper are not applied to Cash Boost refunds. We may have to confirm these again from you

NSW/VIC grants:

  • All grant income must be expended on business expenses (non-JobKeeper staff / top-ups, operating expenses such as rent, maintenance etc.)
  • Do not claim the grant unless you will be able to show expenditure on operating expenses
  • For NSW, we will provide a letter of support and you will be required to lodge documentation with the state Government
  • NSW has advised that compliance and verification action will occur after COVID

Over the last few days, we’ve been busy researching all the new information that has been released, and what that means for tax professionals and their clients. We’re still receiving updates and clarification from the ATO as late as Friday night on the intricate details on how the Jobkeeper Scheme will apply from Monday. I recommend that you read our summary guide on the Jobkeeper Scheme.

This article is simply a  summary of interesting topics we’ve been asked or noticed in our research. It has been prepared to the best of our current knowledge, but the advice is general in nature and should not be relied upon.

The Good – clarity and assistance for businesses

GST Turnover – cash or accrual: This important question has been clarified by a concession from the ATO – “Modification to Projected and Current GST Turnover”. In the original drafting of the legislation, the unintended consequence was that the turnover test would be based on accrual (i.e. when an invoice is raised). The issue arose where a small business had raised invoices in March or April for work completed, but due to the virus had little possibility of collecting payment from their customer: they would be disadvantaged as they would not qualify for the Jobkeeper Scheme due to ongoing invoicing.
The ATO has made the concession that where a business reports its BAS on cash basis, it can elect either cash or accruals turnover as the method for determining the required drop in turnover. Note that the same method needs to be used for both test periods.

Simple calculation: Once the technical aspects of the turnover test are determined (e.g. cash/accrual, add-backs, which period to test etc.), the actual test is generally quite simple. Calculate your actual turnover or projected turnover for March/April/May/June/July/August/September 2020; or the June or September Quarter 2020 and compare it to the to the same chosen period in 2019. If you satisfy the test in either March or April, either under cash or accruals, you are now eligible for the Jobkeeper Scheme. You can apply at any time between now and September, subject to other conditions but to claim the full benefit, you need to register before 30 April. Many clients are starting to forecast their income and will potentially notice a drop in June/July.

What if my income goes up the following month, after I’ve passed the test: The ATO and Treasury are clear on this – once you pass the test, then you remain eligible for the duration of the scheme, until 30 September. While monthly turnover reporting will be used to monitor the economy, it can be assumed that compliance activity may arise from those that did not have a bone-fide drop in income for the test period (e.g. holding off invoicing until the following month). It is very important that you prepare detailed evidence of your claim at the time of determining eligibility, and not down the track. Most accounting software packages provides audit trails, so don’t change invoice dates to qualify.

Business Boost does not impact Jobkeeper: Receiving the Business Boost does not impact eligibility or requirements for employers. The Business Boost can be used to assist funding ongoing wages, provide cash flow assistance to pay the first mandatory Jobkeeper payments, or assistance in meeting any other business expenses.

Stimulus payments will be exempt from turnover test: The ATO has confirmed that Jobkeeper Scheme payments will not be included in your turnover test. A situation could arise, where a company has only marginally qualified for the Jobkeeper Scheme for May based on projected turnover, but due to the payment of the Jobkeeper Stimulus in late May for Fortnight 3, it would not satisfy the required reduction in turnover. We have seen that Jobkeeper payments may be over 60% of total prior year revenue. Also noting that previous releases have stated that Business Boost ATO credits will be considered Non-Assessable Non-Exempt income, and by that definition would not count under the GST Turnover test. While no office advice has been issued as to whether the Apprentice 50% wage subsidy or support state-based stimulus grants will also be exempt from turnover, we are assuming similar treatment to Business Boost stimulus payments.

Business Participation: Sole traders, one partner of a partnership (if an individual), one director, one individual shareholder, or one individual beneficiary are now eligible for Jobkeeper payments. A modification is that the payment is paid to the business and does not need to be paid to the business participant. This can be used assist in cash flow to support other business activities. In situations where there is a registered working director, on PAYG/W and/or STP, and a spouse is a co-director or shareholder or beneficiary who had not drawn a wage – the working director is eligible for Jobkeeper as an employee and the spouse may be eligible as a business participant.

Payment of Jobkeeper: ATO has indicate it will start processing payments by mid-May. The ATO is required to pay claims within 14 days of receiving a claim. The first day for lodgement of a claim is 4th of May, meaning that payments will need to occur by 18th of May. The ATO has advised it will try to pay this amount before Fortnight 3 is required to be paid. This payment will be for Jobkeeper Fortnight 1 and Fortnight 2. From then on, employers will need to apply for eligible employees and receive reimbursement 14 days after lodging the Jobkeeper payment notice.

The Bad – items of concern, but can be managed

Policy on the fly: While we appreciate the hard work that has been put into the legislation and the rules, it does seem over complicated and open to interpretation. Thankfully, the ATO is listening and is regularly adding updates on their websites and making administrative changes to the law to provide a fairer outcome (e.g. the cash vs accrual test). We know further information is coming regarding business participation mentioned above.

Tight timelines: For businesses wishing to apply for the Jobkeeper from 31 March, there is minimal time to obtain advice, plan cash flow, and make necessary payments (see the Ugly below). For new businesses or businesses with lumpy income, this is exacerbated with the ATO still not providing guidance on the Commissioner’s Discretion. Businesses are having to rely on merely 2 policy examples from the EM.

Fairwork Act experts: Many of the terms surrounding the application of the Jobkeeper Scheme to casuals are contained within the Fairwork Act. The Tax Agent Board is currently considering allowing tax agents to assist clients in determining when a casual is a long-term casual and eligible for Jobkeeper. Most tax agents do not have insurance or limited liability scheme coverage on non-tax advice. Please understand that we may refer you to Fairwork or an employment solicitor for specific advice. If you have an Employsure subscription, now is the time to start talking to them and asking questions. They host regular Q&A webinars.

One-In/All-In: If you are an eligible Jobkeeper Scheme employer, you must allow all your eligible employees to enrol in the scheme. With the ambiguity mentioned above, regarding some long-term casuals, it can be stressful determining which casuals are eligible. There are also cases where some employers don’t feel it is appropriate for a casual working 3-5 hours a week to receive the full Jobkeeper, but the scheme requires ALL eligible employees to be included.

Interaction with other income support: Employees need to be mindful that if they decide to participate in the scheme, other income support may be affected. Employees on Disability Support Pensions may lose their entitlements due to reporting too much income. This will cause flow on effects such as having to be reassessed for DSP (even those with lifetime assessments) and loss of their Pensioner or Health card until the DSP is reinstated. Other issues we are seeing is reduction in Family Tax Benefit, loss of rental assistance, and effects on the aged pension for those that may work to supplement their income. As an employer you are required to offer ALL eligible employees the opportunity to enrol, but we recommend that where you think the issues above may apply, that you advise that employer to seek professional advice, speak with Centrelink or Department of Veteran Affairs, or their carer. It could be recommended that they withhold providing the nomination form until after receiving advice; and their eligibility may commence in May rather than April.

Employee entitlements: The interaction between service periods, leave entitlements, superannuation has created a headache for many employers. This is especially confusing whether it is a full stand-down, partial stand-down, a reasonable adjustment to increase hours to $1500/fortnight, or Jobkeeper acts as a supplement for employees over $1500/fortnight – and each situation affects leave accruals differently. There are complex rules when and how employees can access their annual leave entitlements under each situation. It is best to see supporting information provided by the software provider.

Workers Compensation: it is unknown whether Workers Compensation premiums will be affected by the potential increase in overall wage expenses. At time of publishing, NSW Government has not provided advice on this. It is hoped that Workers Compensation will use similar rules to Superannuation Guarantee on Jobseeker top-ups – i.e. only actual hours worked will be counted.

The Ugly – material impacts on businesses

No backpay allowed: This is a shocker and to most clients, this has been the biggest hurdle to pass. Due to the One-In/All-In rule, all eligible employees must be fully paid up by 30 April. For mum/dad style businesses, that will be fine – as a round-robin cash injection, and wage payment will suffice.

But take a café with 15 eligible casuals, some working as few as 3 hours a week, and a team of 4 fulltime staff (real example). To be eligible for the April Jobkeeper for the fulltime staff, the business must also pay the 15 eligible casuals for Fortnights 1 and 2 = $3000/employee. The small business needs to find 19 x $3000 = $57,000 and pay that through to all eligible employees by April 30th. Monthly wages were usually only $20,000-$25,000. The business owners will now have to redraw against their home equity or attempt to obtain a line of credit in under a week to make the required payments.

The inflexibility is frustrating and not reflective of the commitments made by the Government, as many small businesses cannot afford to bank roll such a large amount for nearly 6 weeks. Some lee-way would have allowed businesses to access the Business Boost, make back payments, and then be required to make the necessary payments going forward on time.

Non-long term casuals are excluded: We have had many examples where casuals have missed out by a matter of days or have had extended holidays during the last 12 months and do not meet the long-term casual requirements. Other issues are certain professional industries are casualised or hired on contracts. Examples include physiotherapists, who tend to work on casual contracts for multiple centres, and are remunerated on commission / patient number basis. The industry norm is that these employees may move every 6-12 months as work is available but usually retain their customer base. These employees have worked in the industry for many years, but those employees are excluded. Treasury has been hesitant to open up the scheme to casuals.

Business Participation through interposed entities: While the business participation test is a welcome addition, issues such as businesses operated as partnership or unit trust of disparate non-individual entities (e.g. a business operated in a unit trust held by family trusts) means that those individuals are now excluded from Jobkeeper eligibility.

Administration entities cannot pass test: A common structure feature of many businesses is an administration company which employs employees – and charges for those costs to the business/invoicing entities. Usually, the invoice between the administration company and the business entity is equal to the wages and minor costs and is primarily used for asset protection purposes. In this case, unless 30% of wages are reduced (e.g. under a stand-down) and no pre-Jobkeeper payments are made, the administration entity will not pass and employees employed in that company will not be eligible for Jobkeeper. In many cases, the main business entity may be suffering a decline in turnover, but in order to maintain wages, the invoice from the administration company to the invoicing company cannot be reduced by 30%;  alternatively moving to a loan rather than invoice may be seen as a scheme by the ATO to artificially obtain Jobkeeper eligibility. Eliminating intra-group invoices would provide a better picture of the economic reality for a business. For entities above $1b turnover, the more appropriate “aggregated turnover” test is used, which does look at the economic group as a whole, eliminating internal transactions.

Employees refusing to work: We are now hearing anecdotal examples of Jobkeeper eligible employees stating they are concerned about COVID19 and refusing to work. The Fairwork Act 2009 has been modified, to allow an employer to make reasonable adjustments to staff work patterns during COVID19. The advice I have heard is that OH&S overrides all reasonable adjustments and an employer can refuse to attend work on OH&S grounds – and cannot be dismissed so therefore is eligible for the Jobkeeper payment. On the other hand, an employer is required to make the workplace as safe as reasonably possible and an employee cannot refuse. What is reasonable is different in every industry and different employees have different requirements. We advise obtaining advice from Fairwork or an employment solicitor.

Many businesses have changed work practices (e.g. rostering teams together to minimise contact points, additional distancing measures with physical barriers / Perspex barriers, additional cleaning, PPE, etc.). If the employee is still not satisfied and refuses to attend work, then the business owner may only have 2 choices if the employee is not satisfied with the amended work practices:
1) stand-down that employee (and risk other employees requesting stand-down) and continue paying $750/week, or
2) terminate employment and cease any stimulus support.

We advise seeking professional advice as each case is different. Franchises may be able to reach out to the Franchise support team. We also ask that you consider reputation risk, especially in small communities.

Harsh penalties: Businesses and tax agents have been warned that harsh penalties will apply if contrived schemes or non-compliance is identified. The ATO has been given extraordinary powers, to be able to review claims for up to 5 years (rather than the standard 2 year period of review). Agents advising on stimulus remain exposed to rapid changes in legislation, policies and rules. The additional time to review the rules for our clients is affecting other areas of a tax agent’s business. Similar extensions have been granted to Fairwork and the various State departments if claiming state stimulus grants.

The ATO is issuing and updating guides nearly every day. Advisers are expected to apply the rules correctly with no prior warning. As yet, we have not received any advice on Commissioner’s Discretion for new or lumpy income businesses, but many employees of these businesses are expecting coverage under the Jobkeeper Scheme. The difficulty for advisers is that most of these decisions need to be finalised and implemented by 30th of April. We ask for your continued patience and support, to understand that the industry is under a lot of pressure to complete reviews, advise employers and employees, and lodge the necessary documentation with the ATO. Please review the previous article and follow the procedure if you wish assistance. 

 

Cashflow is one of the biggest issues facing small business.  We all complain about it and get upset at the client who has not made payment, particularly if you have gone out of your way to do a great job for them.  In my business cashflow management is a huge issue as we have a large number of clients and it is very easy to lose control of our Accounts Receivable.  You need to be vigilant.  Take you eye off those debtors and they can very quickly get out of hand.

Money is what makes business happen.  If we don’t invoice our products and services, we don’t get paid and we are no longer in business.  Yet discussing price and payment is a topic that many of us do not feel comfortable with.  I know, because I am one of those business owners who cringes at discussions on pricing and payment.  Debt collection is without doubt my least favourite part of owning a business.

There will always be clients who don’t pay you bills or have difficulty paying our bills, but are we doing the best we can to give our clients the opportunity to pay our bills?  What is your invoicing process?  How easy is it for your client to make payment?

Here are four tips to help your client make timely payments of your invoices.

1.       Use an online invoicing system

Whether you are using Xero, QBO, MYOB or a purpose-built app, there will be the ability to create and send your invoices on the spot.  Honestly, if you are still handwriting your invoices you need to move into the 21st century.  We have mobile technology in our telephones that is infinitely greater than anything we could have imagined 20 years ago (when it was standard practice to hand write or type up invoices).  Everyone who is below the age of 80 (and many who are over the age of 80) has an email address.  Why are you not using the mobile app on your phone or tablet to create the invoice and deliver it (via email) while you are with your client?  I guarantee if you sit down with your accountant for 1 hour to get your invoice program set up, and you genuinely take an interest in learning how to use the program – you will be able to do it.  The investment you make by paying your accountant to help you, taking the time to learn and paying the subscription fees for the software WILL pay off if you embrace the technology.

The faster you get your invoice out – the faster you will get paid.

2.       Attach a payment system

Do you have the option on your invoices to press the “Pay Now” button to allow for fast and easy payment?  If not, why not?  There are many payment apps out there that easily connect to your accounting system to make payment as easy as possible.  Examples such as Pinch (see link to interview below), Stripe, Go Cardless and Paypal are all very simple to set up.  These systems charge you for each payment, so you only pay when the service is used.  In many cases you can get the client to pay the fees, or perhaps you just accept the fees as part of doing business (and getting paid faster).

3.       Consider a card reader so you can get payment in person

The Square card reader is now available at Officeworks so it is fair to say that mobile payment devices are becoming mainstream.  It is a simple mobile app and a small device that allows your client to tap their card while you are out on site.  You can’t get paid much faster than that.  For more details check out their website.

https://squareup.com/au/en/hardware/reader

4.       Debt collection policy

It is important that you have a policy for debt collection, but that policy needs to be followed closely.  Due dates are given for a reason so if the due date has passed, follow up.  There are some people out there who will not pay invoices until they have been followed up (which I personally think is very disrespectful as a customer) but be aware that some of your clients may be waiting for you to chase them because that is their arrogant way of doing business.

As a customer I don’t wait for a follow up to pay my invoices, but I do sometimes forget that something is due and payable.  Maybe the invoice has been sent to one of my staff, so I was not aware it needed to be paid.  Maybe my busy schedule has not made paying an invoice as a priority and I have simply overlooked it.  Maybe you need to do something to get my attention? I am sure in most cases non-payment of invoices is simply due to an oversight.

Whether it be an automated invoice reminder (set up in Xero), a statement, an email or a text – a soft communication method will normally get your invoice paid.   If that doesn’t work a follow up phone call should be made to remind your client that you did something for them and they have not paid for it.  It is not for you to be embarrassed about – they are the ones who have not paid.  There should be no fear in asking for what is rightfully yours.

If you do not feel comfortable making these calls consider a debt collection service.  An example is Chaser https://chaserhq.com/, which is an app that integrates into Xero and provides real follow up on your outstanding debts.  There is nothing wrong with outsourcing the tasks you don’t feel comfortable doing. Your time is valuable so paying someone else to do something you don’t like doing is never a waste of money.

You have done the work and you deserve to be paid for it.  Take this part of your business seriously.  If cashflow is an issue for your business think about what changes you could be making to improve your cashflow.

‘Tax evasion’ is a broad term and it is not quite as simple as it might seem at first. In this article, I will unpack the meaning of the term and outline how the ATO decides which acts constitute tax evasion and which do not.

What we call ‘tax evasion’ are actually two separate but related Commonwealth offences under the Criminal Code Act.

The first is obtaining a financial advantage by deception, under Section 134.2(1) of the Act. This applies when someone obtains a financial advantage for themselves or another person, or induces a third party to do so. The deception that leads to the financial advantage must be reckless or deliberate, rather than due to a genuine mistake. A genuine mistake is when the taxpayer omits income or incorrectly claims a deduction by accident, but not in a manner that is reckless; meaning that they’ve considered the question of whether they have paid the correct amount of tax to the best of their knowledge.

The second offence is conspiracy to defraud, under Section 135.4 of the Act. This applies when two or more people work together to defraud the ATO.

You might be charged under the above sections if you knowingly and deceitfully misrepresent your tax obligations to the ATO, leading you to pay less tax than you are legally required to, or if you help someone else do so. The kinds of actions that might fall under the scope of tax evasion include, for example, hiding income through specific structures or offshore entities, and/or providing advice on how to understate income. This is different to merely accidentally overstating a deduction or forgetting to advise the ATO of interest. The threshold for fraud or evasion is quite high under the Criminal Code Act.

In cases of the deception being due to a genuine mistake, the ATO will impose a penalty amounting to 25% of the tax shortfall on the taxpayer rather than prosecuting them. Most cases fall into the category of genuine mistake. In fact, in my time as an ATO auditor, only one case was ever referred onto to the AFP for prosecution. This is because prosecution is expensive and it is not in the spirit of the ATO to prosecute all cases that break the rules.

Tax evasion is distinguished from tax planning and tax avoidance.

Tax planning is the normal preparation you would do with your accountant to figure out how to pay the correct amount of tax, all through entirely legal and appropriate means. Through tax planning, you ensure that you do not overpay and/or seek to minimise the amount of tax you pay through, for example, reductions or planning, but do so honestly and as intended by the law.

Tax avoidance differs from tax evasion in that it is not a criminal offence, but it is nevertheless frowned upon by the ATO. Tax avoidance generally amounts to exploitation of the tax system to minimise the amount of tax you pay – while it may all be within the limits of the law, it may not be in the spirit of that law. For example, one might find loopholes in the relevant laws that have not been corrected. The ATO is more likely to conduct audits of businesses and individuals that engage in such practices, and scrutinise them to ensure that their actions do not breach the thin line into tax evasion. Businesses and individuals that engage in tax avoidance are much less likely to pass ATO audits than those that do not attempt exploit the tax system.

One way of thinking about the difference between tax evasion and tax avoidance is that it is ultimately up to the ATO to decide whether an act is within or outside the law. It is a Schrödinger’s cat of sorts: you have simultaneously both broken the law (and are in trouble) and not broken the law (though you might still be in trouble if your actions lead to an audit, which is not a very pleasant experience), a paradox which resolves itself only when the ATO decides which one it is. It is thus no wonder that the terms ‘tax evasion’ and ‘tax avoidance’ are often used interchangeably, despite them technically being two distinct concepts.

To determine whether the law has been broken or not, the ATO might apply the ‘reasonable person’ test, which has two main components. Firstly, it will look at what a hypothetical reasonable person in the same circumstances as the taxpayer would have done if they were acting reasonably and honestly. Secondly, if the taxpayer’s actions differed from those of this reasonable person, the ATO will look at any reasons that they have provided for acting as they have. It will ask whether, in light of these reasons, the taxpayer’s wrongful acts or omissions should still be considered blameworthy. If its answer to this yes, the ATO may proceed to audit or prosecute the taxpayer.

Once the ATO decides to audit you, you are unlikely to be able to effectively hide evidence of any wrongdoing. The ATO is great at easily figuring out if your income is greater than what you are declaring, through comparing your businesses’ income to those of similar businesses, audits, and data matching. As technology develops, all of this is made easier for them, and, for those that are caught, there are some strict and severe penalties that they might face, from a 5% administrative penalty on the shortfall to up to 10 years’ imprisonment. So, the benefits of tax evasion are probably not worth the risk of getting caught and punished, and it is best to minimise the tax you pay in lawful ways through working with an accountant, rather than through fraud.

Michael Konarzewski CPA
Partner
Ex-ATO auditor in the High Wealth Individual Taskforce ($2m-$200m)

From July 1 this year, all employers must use Single Touch Payroll reporting. STP is billed as the biggest tax change since GST. Preparing for this will allow you to transition smoothly to the new system.

 

What is STP?

STP changes how you report your employees’ payroll and superannuation data to the ATO. In the past, businesses reported payroll information to the ATO every month or quarter. Now you will need to report payroll AND superannuation info whenever you pay your employees.

If your existing payroll software is updated for STP, you can use it to register for STP.

STP is a more efficient way of payroll reporting. Each time your employees are paid, the ATO will get information about their salaries and wages, allowances, deductions and other payments, PAYG withholding and superannuation.

What do you need to do?

  • Make sure your accounting software is STP-enabled by July 1 2019. MYOB, Quickbooks and Xero are all STP-enabled. Xero and MYOB will offer a new STP-enabled Payroll-only product priced at around $10 per month for businesses with four employees or fewer.
  • Use your software to register for STP by July 1 2019
  • Once you’re set up, stop providing your employees with annual payment summaries – this info will be available through MyGov.
  • Complete a finalisation declaration at the end of the financial year so that your info is tax-ready for your agent and employees.

How to register

Jigsaw supports Xero, MYOB and Quickbooks.

Xero

  1. Select “Pay Employees” from the Payroll menu.
  2. Click “Get Started” in the message about Single Touch Payroll and follow prompts.
  3. Update your Organisation Details if necessary.
  4. Connect your Xero account to the ATO by calling them or using your AUSkey to access the ATO portal.
  5. Provide the ATO with the proof of ownership listed in Xero’s prompt.
  6. Select the checkbox to confirm that you’ve contacted the ATO, and then click “Register.”

MYOB

  1. Go to the Payroll command centre and click “Payroll Reporting.”
  2. Click “Check Payroll Details” and fix errors, if necessary.
  3. Click “Connect to ATO” and follow prompts to complete the connection. You will need to enter the details of everyone who processes payroll and check your ABN, and then enter your MYOB product key.

Quickbooks

  1. Click on “Employees” in your Quickbooks account and sign up to KeyPay
  2. Click “Payroll settings” and then “Electronic Lodgement and STP”
  3. Click “Enable Single Touch Payroll.”

FAQs

Do I need to change my business’s pay cycle?

No, you can continue to pay your employees every week, month or fortnight. Your software will report to the ATO whenever this happens.

Who does STP apply to?

STP has applied to businesses with more than 20 employees since July 2018. From July 2019, it will apply to all businesses with employees.

Will I need to keep submitting payment summary annual reports?

If you use STP reporting, you won’t need to submit a PSAR in June 2019 because the ATO will make the information available to employees through MyGov.

Do I still need to submit a BAS?

Yes.

Can I start using STP before July 1 if I have 19 employees or less?

Yes. STP reporting is already offered by common payroll softwares.

 

If you have any further questions or concerns about Single Touch Payroll, call us on 1800 JIGSAW.

Here are common GST mistakes we see:

  • Government fees
    ASIC, business name registration, vehicle registration (remember CTP may have GST)
  • Food
    Fresh fruit, vegetables and milk for the office
  • Banking
    Bank fees are GST free; merchant/eftpos fees are subject to GST. Interest doesn’t attract GST either
  • Insurance
    No GST on the stamp duty and fire levy component; also insurers pay the GST directly to the ATO for successful claims that involve a payout
  • Small Businesses
    Remember some small suppliers or contractors may not be registered for GST
  • Entertainment
    Where a business has elected the 50/50 split method for FBT, only 50% of credits can be claimed. Remember – travel is not entertainment, and all credits can be claimed
  • Travel
    International airfares do not attract GST, as they are regarded as an export service
  • Private expenses (sole traders and partnerships)
    When apportioning private and business use expenses, only claim GST on the business proportion
  • Government grants and awards
    Most grants and awards are GST, but worth making sure

Many businesses continue to pay their staff cash wages for a variety of reasons – but what’s in it for you – the employer?

Advantages of paying your staff with cash wages

When reviewing wage expenses, and we identify cash wages, we hear all sorts of excuses – some potentially valid and some purely to minimise employer obligations:

  • “It’s easier to calculate an hourly rate, and not worry about tax and everything else” – a common issue is that employers are saddled with burdensome regulations: PAYG/W, Superannuation, Workers Compensation, cash flow on withholding tax etc. and so paying staff out of the till is seen as an easy alternative
  • Super is too much of a hassle” – like a lot of things in running a business, Superannuation can be a hassle – especially when each staff member had their own superannuation fund
  • I don’t believe in/want to pay super”  this one is quite common but is a legal employer obligation. Superannuation and PAYG/W are the 2 areas where all directors are jointly and personally liable, even in insolvency. Read that bit again, if you enjoy owning your home!
  • It’s how everyone in the industry gets paid” – while common a decade ago, young workers these days need to show regular income and payslips to be able to apply for credit cards, car loans and home loans. Not many industries use cash payments, and ATO compliance activities in those industries is shrinking the amount of cash wages.
  • “My staff want me to pay them cash” – we don’t know the situation of our staff’s personal lives. There could be various reasons staff would request cash: divorce/child care payments, claiming Centrelink or pension cards, underpaying tax. Do you want to be involved in that, and if you have knowledge – are you being complicit in the defrauding in Centrelink were to question it?
  • “Keeps my workers comp down”  while you can’t argue with that, what happens when that staff member is injured at work and makes a long-term claim?

There is never a good reason to pay cash – as the disadvantages ALWAYS outweigh the advantages

Disadvantages of paying your staff with cash wages

These stories are based on experience working with clients and also as an auditor in the ATO.

  • No deduction available for cash wages: Employer paid staff cash for over 10 years, mostly non-residents (Backpackers as labourers); ATO audit deemed that no deduction was allowed as no paper work was provided, and non-residents had left country” – the individual sole trader was left with a $650,000 tax debt and an overall debt of over $900,000 after penalties and interest, as they could not satisfy record keeping requirements and therefore could not claim any deduction for wages (50% of his total costs). Period of review limitation of 2 or 4 years does not apply for cases of Fraud or Evasion – in this case as there was clearly an evasion of tax, ATO had unlimited period of review. Remember that for every $1 of cash wages you pay, you are the one losing deduction, not the employee.
  • PAYG Withholding grossed up: “Employer and employee agree to $700 cash per week; ATO audit deemed the $700 as a cash component of a gross wage and assessed the client on an additional $200 PAYG/W and 9% superannuation on $900/week” – the employer and employee were together in agreement that they would be satisified with $700 per week, to include their wage and superannuation. During a regular ATO review, the cash wages were identified (even though no tax deduction was claimed) and a subsequent audit ensued. The client was reviewed over 2 years with the advised outcome and was required to amend 8 x BAS with a 25% penalty and 8 x Quarterly Superannuation Guarantee Charge statements with penalties, interest and no deduction allowed.
  • Superannuation claimed twice by employee: Employer and employee agreed to pay the superannuation as cash bonus, rather than to Superannuation Fund; after 5 years of working together, employee was dismissed; employee ‘dobbed-in’ employer for non-payment of superannuation guarantee” – in this case, both the employer and employee were in agreement about the superannuation component; but after being dismissed, the aggrieved ex-employee called the ATO and advised that there was a non-payment of superannuation. As all employer obligation breaches MUST be reviewed by the ATO, eventually the ATO caught up with the employer some 2-3 years after the employee left and was required to lodge Superannuation Guarantee Charge Statements with interest, penalties and no deduction.

These stories aren’t particularly uncommon and with ATO deploying specialist teams into cash economy businesses (cafes, primary production, transport etc.), there is little upside for employers to pay wages in cash. All risk is borne by employers, while the employee potentially obtains benefits from Centrelink, overall tax debt, HECS repayment relief etc.

What can I do?

In some industries and personal employment agreements, cash remuneration is deeply entrenched such as tips, cash/meals for overtime, etc. to staff fully employed on cash wages. The first thing is to tell yourself as an employer – enough is enough and there will be no more cash wages. The risk of potential liability (remember, that as a director you’re personally liable for superannuation and PAYG/W of your staff, even if the company is liquidated, with no period of review time limit) should be enough for most. The advantage of obtaining additional deductions should help the financial situation.

The next steps will depend on your business but will involve:

  • Understanding the award for employees. While you may have the best intentions and paying staff over the minimum wages, various Modern Award require allowances and loading that are complex meaning you may be underpaying or overpaying your staff. E.g. Did you know the Modern Award “General Retail Industry Award MA000004” requires a $1.25 for every shift worked; but does not form part of your Superannuation Guarantee obligation?
  • Staff education. If staff are resistant and are willing to subvert federal tax laws, maybe they shouldn’t be handling your stock and cash?
  • Invest in a good accounting system. Most accounting software packages receive regular updates, including the latest PAYG/W tax tables, integrate into you online bank to allow you to process wages quickly and securely and streamline superannuation with only a few clicks. Apps and advanced integrations allow for modern award updates, self-service kiosks, rostering and timesheets, SMS staff about next shift, and the ability to plan and budget ahead.
  • Have a skilled book-keeper assist you with regular payroll processing
  • Talk with an employment relations expert, to create contracts, policies and ensure you’re FairWork compliant

As a business owner, you are responsible for all Employer Obligations – and with more data matching becoming available to the ATO, Centrelink, Dept of Immigration and Citizenship, Workers Compensation, banking institutions, superfund reporting – you can’t afford to be paying cash wages any more.

For more information, check out:

http://www.fairwork.gov.au/pay/paying-wages

https://www.ato.gov.au/Business/Your-workers/In-detail/Employer-obligati…

http://keypay.com.au/quickbooks/

https://www.xero.com/au/accounting-software/payroll/

https://tailoredaccounts.com.au/

http://employsure.com.au/

Australia’s complex tax laws and regulations make it time-consuming and costly to choose a small business structure. Jigsaw Tax & Advisory can provide guidance and assistance in helping you choose the correct structure for your business. The choice of structure will depend on the size and type of business, your personal circumstances and how much you plan to grow your business in future.  The type of business structure you choose can determine:

• Tax liabilities
• Responsibilities as a business owner
• Potential personal liability
• Asset protection
• Costs and record keeping requirements
• Succession and exit strategies

There are four commonly used structures by small business in Australia:
Sole trader: an individual trading on their own who controls and manages the business
Partnership: a group or association of people or entities running the business together
Company: a legal entity which is separate from its owners. A company is run by its directors an owned by its shareholders
Trust: an entity which holds property or income for the benefit of others. A trustee is legally responsible for the operation of the trust. A trustee can be an individual or a company. While a trust has similar legal protection to a company, it cannot retain earnings – all profits need to be distributed annually.

The following table outlines the key advantages and disadvantages of each particular structure:

Business Structure Sole Trader Partnership Company Trust
Is the structure difficult to set up? No No No Yes
Is it expensive to register? No no Yes Yes
Do I retain complete control? Yes No No No
Are there complex reporting requirements? No No Yes Yes
Will my assets (house etc…) be under threat if my business goes into debt? Yes Yes Not as likely Not as likely
Do I receive full profits made from the business? Yes No No No
Can I employ staff? Yes Yes Yes Yes
Do I have to pay myself superannuation, workers comp etc.? No No Yes (if employed by company) Yes (if employed by company)
Can I change the legal structure easily? Yes No No No
Do I have the ability to plan tax through avenues like income splitting No Yes Yes Yes
Is it easy to raise capital? No Yes Yes Yes
Is it easy to dissolve or exit? Yes Yes Yes No

One of the ATO and Commonwealth’s key focuses in recent times has been the cash and hidden economy.

Particularly, the ATO is concerned about businesses who advertise ‘cash-only’ or deal mainly in cash. We can see that the ATO and the Commonwealth are both pushing for more transactions to be electronic – by regulating merchant fees to be capped; RBA’s Fast Settlement Service to clear funds between institutions nearly instantly; Single Touch Payroll for all wages and a framework supporting businesses migrating to electronic commerce. The private sector is also joining the rush to assist businesses in transacting online for quicker, safer and easier to manage sales.

The ATO is working collaboratively with business operators, business chambers and industry associations to highlight the following key messages:
• the benefits of electronic payment and record keeping facilities
• community expectations of paying by card
• making sure businesses are registered correctly
• ensuring all businesses pay the correct amount of tax and super by declaring all their income and knowing what expenses they can claim
• lodging their tax returns and activity statements
• meeting their obligations and if they are struggling, taking into account specific circumstances, and helping them get back on track
• any other help they may need.

The ATO regularly undertakes data matching to identify businesses that don’t take electronic payments from customers. These businesses will be contacted by the ATO via email or letter highlighting the benefits of investing in an electronic payment facility. Some of the benefits of electronic payment options are as follows:
• easy to set up including EFTPOS, smartphone and tablet card processing
• consumers are going cashless and expect to have a choice
• fewer mistakes – so less contact from the ATO
• quicker reconciling at the end of the day – less time in queue at the bank
• less chance of being presented counterfeit notes
• reduces the risk of theft or break-ins.

EFTPOS/Paywave machines are now evolving:

CBA’s Albert integrating into many POS  like Kounta to eliminate staff fraud.

ANZ’s BladePay can integrate with Kitchen docket printers…

 

and phone intregated solutions like Square for Tradies on the go.

Most solutions integrate reliably with Xero or Intuit QuickBooks

If your business operates mainly in cash or is not currently using electronic payment systems, we can assist you in sourcing, implementing and maintaining the appropriate electronic payment and record keeping systems to keep the ATO at bay.