The Cash Economy

There has been commentary in the media in recent years over the focus of IRD on the cash economy. The question that arises is why is there such an emphasis on the “hidden” or cash based economy within New Zealand?

It is important to note that while the IRD is focusing on the cash economy it is not necessarily looking into the one or two cash-based transactions that might take place within certain industries, rather the key areas of focus are on areas of high risk such as construction, retail and other cash influenced business (like bakeries and dairies).

If we look to the construction industry as an example, if a paid employee wishes to do some work for friends or family in their downtime the traditional “cashie” is not what they are trying to investigate. Rather the IRD is looking into individuals who significantly alter their lifestyle through the use of cash jobs. Keeping within the construction industry, if a builder was to quote a job such as a deck, and quoted a cash price that is usually significantly lower than a GST registered builder who would put the job “through their books”, it has not only undermined legitimate business but it has also materially affected the lifestyle of the builder who uses cash jobs.

If a builder was to do a number of jobs which were cash based, the amount that would not be disclosed could be quite significant. If this figure came to for example $20,000 this could have two effects. The first is removing approximately $3,000 of GST out of the economy and secondly impacting on the competitiveness of other legitimate businesses. For example, if the declared earnings of the cash-influenced business was $50,000 with undeclared earnings of $20,000 the business would not be required to be GST registered (as it is under the $60,000 threshold). Therefore, when quoting for work, the business would be more competitive and undermine the legitimate business as they do not have to compete in the domestic or end consumer market as their price is exclusive of GST (in effect a 15% saving).

On the same example above, the additional $20,000 would also deprive the tax system of approximately $7,000 in unpaid income taxes (based on a 30% marginal tax rate). Therefore, the effect is such that it has eroded the tax base by approximately $10,000 on $20,000 of cash based jobs and has put the business in an unfair competitive advantage to other legitimate businesses.

At the extreme, we are aware of some cases where approximately $200,000 of income has not been returned through non-declaration of cash sales and so individuals’ lifestyles have been materially affected by their ability to purchase assets and other income generating investments without having the tax declared on them. It is these examples that the Inland Revenue is chasing due to the impact it has on the erosion of the tax base.

It is important that you also should be aware that Chartered Accountants have legal protection for you to disclose, as our clients, all information so that we can make an assessment of your tax obligations. Therefore, if you are concerned that you may have cash earnings that should be declared, it is important to discuss those concerns with us as your Chartered Accountants and trusted advisers. Original Source