Author: Juston Jirwander

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.

Convenience

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.

Cultural Changes

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.

The Future

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!

“We were always focused on our profit and loss statement, but cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”

Michael Dell, Founder and CEO of DELL Computers.

“The substance of the eminent Socialist gentlemen’s speech is that making a profit is a sin. It is my belief that the real sin is taking a loss!” 

Winston Churchill

These quotes from a couple of pertinent figures are the ideal starting point to provide stimulus for the discussion of your profit and loss statement, and how your P&L can work for you and keep your business profitable.

What is a Profit and Loss Statement?

A profit and loss statement can help you pinpoint areas of success as well as spots where your business may need additional help such as cash flow management. A P&L is made up of various elements that depend on the nature of the activity that your business or organisation undertakes.

The best starting point for discussing the elements of a Profit and Loss statement, is to choose a time period to review, for example 1 July 21 to 30 June 22.

Revenue

The first and most important element is total revenue.

Here’s an example; Jim runs a B2B company that sells computers, and invoices $1,000,000 for the year. He only receives $900,000 in cash for that same period and is still owed $100,000. His “Total Revenue” under a “Cash Basis” is $900,000 but on an accruals basis is $1,000,000.

All Profit and Loss statements use accruals and this can cause business owners confusion when they compare the P&L to their cash flow. Remember this, because we will discuss this later in the article.

We can use this information to work for us such as comparing revenue to :

• Previous years, which can tell us if we are growing or contracting in our sales.
• Various periods during the year to determine which periods are our busiest periods and which are our quietest so we can plan our year ahead.  Quiet times are good for staff to have holidays and when we may need more finance. Busy periods are when we will have more cash and when we will need resources more available, so we have products to sell or staff to complete the task.

COGS: Cost of Goods Sold

The second element of the profit and loss statement does not apply to all businesses or organisations. The “Cost Of Goods Sold”, or COGS, refers to the value of the stock that is sold. Businesses that provide a service do not sell products and therefore have no stock. This means they will not have a COGS element in their P&L.

Here’s an example; Jims Computer’s COGS is calculated by what has been sold, not what he has purchased during that period. Jim has opening stock of $100,000 and closing stock of $200,000. During the year he purchased $600,000 of computer equipment. So he has sold the opening stock plus the purchases during the period, less what he has not yet sold:

$100,000 + $600,000 – $200,000 = $500,000.

Gross Profit

The third element is the “Total Revenue”, less the “COGS” which gives us the “Gross Profit”.

It is here that we can get more useful data such as the margin we are making on our product sales. This “Gross Profit Margin” (calculated as the Gross Profit / Total Revenue) tells us how we compare to industry average, to our competitors (especially public companies that must publish their data) or to best practices. It can tell us if we may be undercharging or overcharging our customers. We can also test the effects on sales if we increase or reduce our prices and if this helps overall profitability.

Operating Expenses

The fourth element of the profit and loss statement is the “Total Operating Expenses”. This includes all your operating costs such as rent, wages, insurance, electricity, travel, interest and depreciation among other things.

Again, this data can work for us by showing how we compare to the wider industry and how we compare period on period. For example, if our insurance costs have increased by 40% it may be time to test the market and get alternative quotes rather than paying the given increases.

Operating Profit and Loss

Our Operating P&L is calculated as “Gross Profit” less “Total Operating Expenses”. This is the second area of profitability that shows the profit or loss that has come from the operating activities.

There are additional elements to the profit and loss statement that you may have seen such as EBITDA or Earnings Before Interest Tax Depreciation and Amortisation which is used to calculate profitability without items regarded as coming from financing activities or investing activities. This is used to assist in valuing a company and we will not cover this in this paper.

More Ways a Profit and Loss Statement Can Work for You

Let’s be clear; a P&L statement is a snapshot of the revenue earned and the costs incurred for a given time period in the PAST. It is not a guarantee of the future.

Like all history lessons, it tells us about our past so we can do the following:

• Predict the likely future if no change is made to operations
• Allow us to review the past in order to see if we can make changes that will be favourable to future results
• Compare changes we have made in past periods and their effectiveness on the latest period
• Help us to determine our future forecast and set budgets into the future
• And lastly, after everything above it can help us manage cash flow moving forward

My P&L Statement Says I’ve Made a Profit, but I Have No Cash. Help!

This is a common frustration we hear from growing businesses and organisations. The answer lies in two key areas that we’ll explore in this section.

1. Understanding the Profit and Loss Statement and the Balance Sheet

As we discussed earlier in this blog, the P&L statement is created using the accruals method of what you have earned and the costs you have incurred, not what money you have received or paid. So, if your P&L states you have a profit but you have no money in the bank then you need to turn to the other section of your financial accounts which is the balance sheet. The balance sheet will tell you where your profit sits. If your profit is not in cash, it will be in other areas such as an increase in assets from the previous period. These could include:

• Accounts Receivable, i.e. businesses that owe you money
• Fixed Assets you may have purchased, i.e. equipment, machinery, property etc
• Loans to related parties such as Directors
• Stock on hand

The other place your profit may have gone is into reducing your liabilities from the previous period such as:

• Paying down bank loans
• Reducing employee provisions such as Long Service Leave or Annual Leave
• Reducing accounts payable

2. Demands of a Growing Business

The most frustrating issue for a growing business is seeing growing sales and growing profit but no money in the bank and creditors screaming for payment.

This is due to what we call “Working Capital”. Working capital is defined as the capital (or funds) of a business which are used in the day to day trading operations of the organisation. The most common elements of working capital are:

• Inventory
• Accounts receivable
• Accounts payable and
• Cash

When a business grows it needs to hold more inventory or stock on hand to be able to sell when there is demand. It will often need to provide credit terms as an incentive to gain more business, so the accounts receivable increases. If the business does not match the increased credit terms for its accounts payable, then cash becomes strained. For example, if the accounts payable terms are payments in 7 days but the business is providing accounts receivable at 45 days then the business will feel a cash flow crunch as it is effectively acting as a bank for its customers. As the business grows the strain on cash flow will get increasingly harder.

This may be okay if the business anticipates this and is strategically prepared by holding enough cash or debt to support the business while it is growing. If the extra terms are translating into more business without bad debts and the profitability is high, then this may be sustainable. There will however come a time when this needs to be balanced if profitability margins are small as capital availability is not limitless.

The management of cash flow and the strategic review of matching your accounts payable terms and your stock holding levels is critical. Poor cash flow management is one of the major causes of businesses failures.

A Final Word About the Profit and Loss Statement

Having your profit and loss statement up to date for your business is vital as it’s one of the best reports to determine the financial health of your organisation. In addition, it is always demanded by future and current lenders, investors and the tax office.

Always seek an expert professional accountant to assist you in determining your organisation’s health. At Bishop Collins, our team knows that every business and its needs are different. We’re a dedicated, analytical, strategic and professional team, who also care about our clients. Our purpose is to make sure you feel your business and personal finances are in safe hands, so you are able to focus on the things you do best.  Get in touch with us today.

In December 2021 I wrote a two-part article on Cryptocurrency.  There were two very different quotes from two brilliant minds and one of their comments may end up coming true if the recent Crypto Crash is any indication….

“In terms of Cryptocurrencies generally, I can say almost with certainty that they will come to a bad ending.” — Warren Buffett CNBC, January 2018

University of New South Wales data tells the story clearly. The sell-off in Bitcoin in Mid-June 22 saw the currency’s value fall to $17,592.78 USD. Bitcoin’s high in November 2021 reached Circa $65,000 USD, that’s a 73% fall. This was the first time since December 2020 that it had fallen below $20,000 USD. As per Bloomberg another Crypto, Ethereum, dipped a whopping 70% from its all-time high in November last year, prompting the world’s largest Cryptocurrency exchange, Coinbase, to sack a staggering 18% of its staff.

Proponents of Crypto currencies regarded the currency as relatively safe from volatility as it was based on the belief that it was a new form of currency that would continue to be supported by the members (people that own and mine) and the market, instead of being supported by a Bank or Government. What this crash confirms is that the currency cannot escape the volatility that affects all asset classes and is in fact more volatile and riskier than shares.

However as far as facts go I find the most interesting fact that the Crypto collapse is flooding the market with Rolex watches.

According to the report, the recent uncertainty surrounding Cryptocurrency has seen more owners unload their high-end timepieces.

What Does This Crypto Crash Mean for You and What Opportunity Can You Make of It Now?

Right now you could sell your Crypto assets, recognise your Capital Loss and use the funds from the sale to buy a cheap Rolex watch.

Jokes aside, there is some logic to part of what I have suggested. Timing is a critical part of effectively reducing taxes.

If you hold Crypto assets that have a “paper loss” and Other Capital assets that have a “paper gain” and wish to realise the gain on these other assets then it is wise to realise your loss on the Crypto assets and use this loss to offset your gain.

Let’s look at an example:

Raj owns an investment property that she sells in June 22 which will create a Capital Gain for her of $100,000. She earns over $200,000 and holds private health insurance, so her Marginal Tax rate including Medicare is 47%. The Tax will be $47,000 if she does nothing else.

Along comes Raj’s Bishop Collins manager who informs Raj during her tax planning session in June that she purchased some Bitcoin for $80,000 AUD in 2021 and it is now worth $40,000 AUD. If she sells the Bitcoin before year-end and realises her Capital loss of $40,000, she can offset this loss against the gain on the property sale and save $18,800 in Tax.

If Raj still wishes to hold on to her Crypto, she could repurchase the Crypto asset on the same day. Effectively she is realising the Capital Loss and applying it cleverly to her Capital Gain. If she holds on to her Crypto asset and it goes up then she will only be liable to CGT when she disposes of the asset.

How to Avoid Tax on Cryptocurrency

Can you avoid tax on Cryptocurrency? When you buy Cryptocurrency in Australia, you are not taxed at the time of purchasing the asset, provided it is purchased with a fiat currency (Australian dollars, US dollars, British pounds, etc).

Tax is applicable only at the time of disposing of your Crypto and only if you have made a Capital Gain.

Crypto is also GST-free.

Other than when purchasing Crypto, broadly speaking, you won’t pay tax on Crypto in Australia:

• While holding Crypto.
• Acquiring it as a gift.
• Hobby-level Crypto mining
• Transferring your Crypto between your own wallets (however this can incur a transfer fee)
• Purchasing personal use assets using Crypto under $10,000 (see more on what counts as a personal use asset below)
• Donating Crypto to registered charities with Deductible Gift Recipient (DGR) status.

How to Minimise Tax on Cryptocurrency

You can guarantee that if you profit from Cryptocurrency, there will be some Tax to consider. As discussed previously, transacting in Cryptocurrency is not a secret transaction that is undetectable.

The Australian Taxation Office (ATO) Cryptocurrency data-matching program has been around since April 2019. Under the program, the ATO has collected data on Cryptocurrency transactions for the 2014-15 to 2019-20 financial years. This protocol will continue into the 2022-23 financial year.

Cryptocurrencies can be bought or sold on a digital currency exchange platform using traditional currency. In addition, some popular digital currencies or “stable coins”, like Bitcoin, can be purchased or sold for cash through special ATMs.

Tax Treatment of Cryptocurrencies

If you are involved in purchasing or trading Cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances.

Everybody involved in buying, selling or trading Cryptocurrency needs to keep records of their Cryptocurrency transactions.

If you’ve transacted with a foreign Cryptocurrency exchange, you may also have tax responsibilities in another country. This is an important thing to consider when you’re on the hunt for a reliable Crypto exchange. A few great ones are available in Australia, so you should research those over foreign exchanges.

When a Transaction is a Capital Gain

If you invest in Cryptocurrency simply hoping that it increases in value, any gain you make from the disposal is treated as a capital gain.

Capital Gains Tax (CGT) occurs when you dispose of your Cryptocurrency. The disposal can happen when:

• You sell or gift Cryptocurrency
• You trade or exchange Cryptocurrency (including the disposal of one Cryptocurrency for another Cryptocurrency)
• You convert Cryptocurrency to traditional currency, such as Australian dollars, or
• You obtain goods or services using Cryptocurrency.

Some or all the gain may be taxed if you make a capital gain on the disposal of Cryptocurrency.

Some capital gains or losses may be disregarded if they come from the disposal of a Cryptocurrency that is a personal use asset.

Crypto is a personal use asset if you hold it or use it mainly to purchase items for personal use or consumption.

If Cryptocurrency is acquired and used within a short period to purchase items for personal use or consumption, the Crypto is more likely to be a personal use asset.

The appropriate time for working out if an asset is a personal use asset is at the time of its disposal.

Except in rare situations, the Crypto will not be a personal use asset.

When a Transaction is an Ordinary Income

There are situations where a Cryptocurrency transaction or series of transactions can give rise to ordinary income if:

• You went into the transaction intending to make a profit, and
• The transaction is part of a business operation or commercial in character.

Relevant considerations for working out whether a transaction has such a character include:

• The nature of the entity undertaking the transaction
• The nature and scale of any other activities conducted by the entity
• The amount of money involved in the trade and the scale of the profit sought or obtained
• The nature, scale and complexity of the transaction
• The amount of time which the transaction occurs
• Whether the Cryptocurrency has had any other use, other than as an object of trade, for example, is it used to exchange or buy services only available on the blockchain?
• Whether there is the necessary profit-making intention and business or commercial character of the transaction will depend on each case’s particular facts and circumstances.

If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain. This includes if you carry on a business of Cryptocurrency Miner or Trader making multiple disposals frequently.