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Penalty rates and their role in Australia’s cash economy

A debate about penalty rates ought to involve the cash economy. Image sourced from

Amid the ongoing debate over the future of penalty rates, a subtle but important issue also deserves to be examined: their impact on Australia’s “cash economy”.

The Fair Work Commission is currently reviewing minimum wage conditions across more than 200 awards, while the Productivity Commission is also reviewing penalty rates as part of a review of workplace relations.

But as well as scrutinising low-paid workers payment entitlements, employer behaviours and attitudes should also be in the spotlight - particularly where exploitation of the cash economy occurs.

Penalty rates have significant impacts on employees in sectors such as retail, hospitality, cleaning, construction, home maintenance and aged and child care industries. In the retail and hospitality industries alone, more than 1.1 million workers regularly work on weekends.

Some businesses offer wages to some or all of their employees as “cash-in-hand” which, according to the Australian Tax Office, could be “associated with a business deliberately using cash transactions to hide their income to avoid paying tax, or to avoid meeting tax, super or other responsibilities for their employees”. Penalty rates are included in the “other responsibilities” or entitlements as indicated by the ATO.

Why do companies do it?

Using cash is not illegal for companies who use this method for convenience and to save money on electronic overheads.

But the obvious concern is that companies with high cash turnover will use it to avoid reporting their entire sales proceeds to the ATO, or lower their annual turnover to avoid tax, including GST. According to the ATO, other reasons may include payment of less than the correct award wages - including penalty rates - non-payment of tax by the employer from the employee salary, non-payment of super contributions and non-coverage of the employees concerned with the workers compensation insurance.

How big is the problem?

The services sector provides almost 80% of Australia’s GDP and employs 85% of the workforce. The cash-in-hand economy is apparently widespread especially among small enterprises from restaurants through to home cleaners. According to a recent estimate by ATO, more than 270,000 companies are avoiding GST and business tax payments by not fully reporting their actual earnings.

Within the household service sector, many self-employed people, especially in repair work, personal care and domestic services, avoid or under-report their first or second jobs while concealing income and working for cash.

In a recent move to bring billions of dollars back into the tax net, the ATO has geared up its investigation of small service sector businesses using cash-in-hand, including cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building trades, road freight, waste skip operators and cleaners. Earlier in 2012, an ATO investigation estimated that small business tax dodgers were using the cash economy to avoid paying billions of dollars a year in undeclared income.

Cash-in-hand wages have further exacerbated the situation. More than half a million workers are involved in cash-in-hand payments, with young people aged between 18 and 29 being the most likely to accept this form of payment.

A 2012 national survey, conducted by Essential Research, found that 13% of workers had worked for cash-in-hand in the previous three years, and 5% were working cash-in-hand in one of their existing jobs.


There are multi-pronged effects of the misuse of the cash economy by businesses and individuals.

The government loses significant revenue income. A report by the Australia Institute suggests that the reduced GST income alone may leave Australian state governments poorer by $2.7 billion each year. The report also indicates billions of dollars in tax revenue is stripped from government coffers each year. It also becomes difficult to grasp the actual worth of the entire economy where the actual black economy of a country is hard to measure. The cash economy also negatively impacts on low-wage earners who are often relatively less educated, young and vulnerable workforce with little or no bargaining power, especially in a relatively weak job market.

It is difficult to identify or predict any consequences for abolishing or significantly reducing the penalty rate on cash economy and tax avoidance. But the two different scenarios could be predicted.

The first argument is that if penalty rates are abolished or lowered, employees may become reluctant to work during weekends and holidays. Subsequently, employers may decide to spend extra cash-in-hand to lure them back to work during those days.

The alternative is that in a weak job market with abundance of unemployed people and job seekers, it could be easier for employers finding low-paid workers willing to be paid cash-in-hand payments without any penalty rates. This leaves workers open to being paid less than their minimum entitlements.

Way forward?

One of the arguments business groups offer to abolish penalty rates is the low profit margin and high cost in an increasingly competitive marketplace. The profitability of the hospitality industry may be considered as one of the lowest within the services sectors. The weekend and holiday trading may have some negative impacts on profitability and employment level because of the added cost pressure. However, the profit and cost figures of the industry may be inaccurate due to the presence of a high volume of cash-in-hand transactions.

On the other hand, the average weekly earnings of hospitality workers are one of the lowest among all groups of employees in Australia despite the presence of the penalty rate. With a low wage growth, there is hardly any chance of improving the situation. Australian wage growth was just 0.6% in the September quarter with the annual growth of the wage price index of only 2.5%. If compared with the growth of consumer price index, the real annual wage growth would appear to be almost non-existent (0.2%).

Overall, using cash transactions as an exploitative tool is difficult to stop. It is also difficult to eliminate tax frauds, especially when people feel that the tax rate is high and the associated reporting formalities are not easy to observe. Individual customers are also responsible as they often collude with business-people when offered a discount for cash.

There are some ways around this. For instance, the government may decide not to allow any businesses to pay wages in cash. Instead, a direct electronic transfer of wages to designated employee accounts should be maintained even for small businesses. In addition, there should be some control on cash payments by customers and more oversight is needed by the ATO and other agencies to monitor the activities of businesses within the services sector.

Individual businesses and their costumers also need to be fair in business dealings and keep correct records of all transactions. Adjusting the penalty rate or streamlining income tax law may not be the only solution. Government alone cannot do the job.

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