Could managing cash stop tax cheats?

Are high-denomination Australian banknotes soon to be stamped with a use-by date?

Stopping people using and hoarding large sums of cash could be a crucial step in cracking down on tax avoidance.

For those who like to hold their wealth in cold hard cash, managing that stash under the bed may be about to become a major headache. High-denomination Australian banknotes could soon be stamped with a use-by date – just like a carton of milk – in a bid to end people sitting on large piles of loot.

Michael Andrew, who heads the Australian Government’s Black Economy Taskforce, has suggested the novel, but decidedly low-tech, idea as part of a broader strategy to stem the loss of tax revenue through the informal economy. It’s a way to target individuals and enterprises who conduct all or part of their business in cash to avoid tax, retain welfare entitlements, or for more nefarious purposes such as money laundering.

Part of tackling the problem is tracking where the banknotes go. It is a huge task. As at June 2017, there were 1.5 billion Australian banknotes worth A$73.6 billion on issue, according to the Reserve Bank of Australia (RBA). Demand for A$50 and A$100 notes, favoured by those handling large amounts of cash, is particularly strong.

In the past decade, there has been a surge in the number of large denomination notes in circulation. By November 2016, there were 339 million A$100 notes issued (14 for every Australian) and 670 million A$50s (see Figure 1).

Figure 1

The RBA reckons a lot of these banknotes are being held offshore by institutions and individuals doing business in Australia. It has found that when the value of the Australian dollar goes down, demand for A$100 notes jumps. Foreigners – whether tourists, business travellers or international students – then spend that cash when they come to Australia. 

Of A$11 billion in cash spent by overseas visitors last year, less than A$4.5 billion was withdrawn from domestic ATMs, making it likely that “a large share of it is obtained prior to arrival in Australia”, according to the RBA.

Authorities suspect a significant share of Australian banknotes is also in the hands of criminal gangs and tax avoiders, who want to hide their dealings from law enforcement agencies and the tax office.

Financial intelligence agency Australian Transaction Reports and Analysis Centre (AUSTRAC) has been part of several investigations and prosecutions of individuals who have been caught trying to launder large amounts of cash. In August, AUSTRAC started court action against the Commonweath Bank for failing to notify the agency of cash transactions of A$10,000 or more between 2012 and 2015, which totalled A$624.7 million.

In 2012, the Australian Bureau of Statistics estimated the informal economy to be 1.5 per cent of GDP, about A$25 billion per annum in today’s money. With so much potential revenue at stake, it’s little wonder the Australian Government is dreaming up ways to bring such transactions within the tax system’s orbit.

Cracking down on cash 

The Indian Government has taken the boldest action, with its shock move in late 2016 to take all 500 and 1000 rupee notes out of circulation. It was a hugely disruptive undertaking, intended to root out vast stashes of cash the government suspected sat outside the financial system – and therefore beyond the taxman’s grasp.

However, the exercise appears to have been a flop. Bank of India figures show that of the 15.4 trillion rupees (US$241 billion) withdrawn from circulation, all but one per cent has been accounted for, suggesting hoarders found a way to convert their stashes without detection or the informal economy was far smaller than expected.

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The experience also shows that setting a use-by date on A$50 and A$100 bills may not, by itself, be enough to drag shadow economy transactions into the light. The Australian Government’s Mid-Year Economic and Fiscal Outlook, due for release in December, is expected to contain a range of measures recommended by the Black Economy Taskforce, including a possible A$10,000 limit on cash transactions, a crackdown on business deductions for cash wage expenses, and greater support for non-cash payments. 

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In the meantime, the Australian Taxation Office (ATO) warns that businesses operating on a cash-only basis should not assume they are invisible to the taxman. “The ATO receives data on all businesses that take electronic payments, so we can identify those that don’t,” an ATO spokesman says. “We also have sophisticated analytical models that will identify if a business is declaring unrealistic income or if an individual has unexplained wealth.”

This is not a hollow threat. In the 2016 financial year, the ATO raised almost A$210 million in taxes and penalties from firms and individuals using cash in an attempt to dodge their tax obligations.

The ATO’s recommendation to businesses, and the accountants who advise them, is not to try it. “Our increased use of data and analytics means that, sooner or later, we will catch up with those businesses seeking to avoid their obligations. Accountants should advise their clients that they should declare all income, be it cash or electronic,” the spokesman says. 

Take it to the cleaners

Crime tends to be a cash-only business, and when criminals try spending the large stashes of banknotes they accumulate it arouses suspicion. Stories abound of gangsters paying cash for luxury cars, high-end apartments and businesses; just as suspicious are attempts to deposit large amounts of cash in bank accounts, as Yi-Hua Jiao found out in 2013.

An investigation by financial intelligence agency AUSTRAC and law enforcement authorities found that on 20 January 2013, two days after arriving in Sydney from New Zealand, the then 55-year-old Jiao went to The Star casino and met with Thi Nguyen. 

Jiao identified herself to Nguyen by handing over a A$5 note with a particular serial number on it. The pair then went to the casino carpark where Nguyen gave Jiao a backpack containing A$624,340 in cash.

Jiao deposited the money into her casino account, then asked if she could transfer an amount into the bank account of an associate. However the casino staff were suspicious, as they’d noticed dirt and grit on the notes, and the unusual way it was bundled. They declined Jiao’s request and quietly alerted the Australian Federal Police. 

Figure 2

With the transfer declined, Jiao instead withdrew A$300,000 from her casino account. The next day, she went to a nearby Commonwealth Bank branch, intending to deposit the cash, then transfer it to another account. 

Again, the large transaction aroused the suspicion of staff. When Jiao was unable to provide a satisfactory explanation about where the money came from (she said it was from “a property”), bank staff called the police and she was arrested. Subsequent investigations revealed the funds were destined for Jiao’s brother in China. 

Nguyen, who had handed Jiao the backpack of cash, was also investigated, and a search of his home revealed a hoard of illegal cigarettes, which were surrendered and destroyed.

Jiao was later convicted in the NSW District Court of dealing with more than A$100,000 that was reasonably suspected to be the proceeds of crime. 

During the trial, Jiao told the court she believed the money belonged to her brother through a “money remittance transaction”. She said the money was going to be used by her son to open his Taiwanese coffee cart business in Sydney. She also said it was going to be used to buy a “ranch” where her brother intended to retire.

Initially Jiao was sentenced to six months in prison, but prosecutors appealed. In 2015, the Court of Criminal Appeal reviewed the case and imposed a 16-month sentence on Jiao, with a minimum 12 months to be served in jail.

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