Cafes and restaurants are at heightened risk of a tax audit as part of the Australian Tax Office’s (ATO) efforts to clamp down on the illegal cash economy.
In March alone, dozens of hospitality sector businesses in Perth and Canberra were expected to receive a visit from the ATO, which estimates that 45% of businesses in the restaurant, cafe, takeaway and catering industry are cash only.
ATO Assistant Commissioner Tom Wheeler says the move is primarily aimed at helping small businesses stay on top of their taxes, and to ensure fairness for all businesses and the wider community.
"The ATO estimates that 45% of businesses in the restaurant, cafe, takeaway and catering industry are cash only."
“We know that the majority of businesses get it right, so our first aim is to help businesses by checking they are properly registered and provide them with an opportunity to ask questions in person,” said Mr Wheeler.
“We then work to protect honest businesses from unfair competition by taking action against those who do the wrong thing.”
In 2015-16 the agency monitored some 127,000 cash economy businesses, conducting 15,000 audits and enforcement activities, and raising over $200 million in tax and penalties.
The cost of tax audits
Tight margins in some industries – including hospitality – cause some business owners to prefer cash rather than card payments. Many business owners do not understand the risks of mishandling cash, which include robbery or theft.
Those who don’t pay sufficient attention to the financial details of running their business expose themselves to potentially costly tax audits, says Leanne Arscott of Gallagher Insurance Brokers – the endorsed broker of Restaurant & Catering Australia.
“Operating in cash is a valid option for restaurant and catering businesses, as long as it is correctly declared as taxable income,” she said.
“Evidence of under-reporting of income or the misallocation of allowable deductions – whether accidental or not – can result in a full tax audit. This can be a costly exercise, with the average cost of preparing a response to an audit estimated to be in the region of $25,000.”
Covering your back against tax audit costs
Leanne Arscott says that restaurant and catering business owners should seriously consider management liability insurance as means of safeguarding themselves against the costs of a tax audit.
“Management liability insurance is a great and cost-effective option for small business owners,” she said. “Tax audit cover can be included in the policy, and that can be an excellent safety net.
“Other covers in the management liability package can also include employment practices liability and workplace health & safety fines and penalties. This level of protection makes taking up this solution a sensible choice for many small businesses.”
Gallagher offers an excellent management liability insurance solution for small business owners, which includes up to $100,000 cover for tax audit costs, including accountant and tax agent fees.