Despite the rise in cashless transactions, many small businesses are still opting for cash only.

The ATO reports 45 per cent of businesses in the restaurant, café, takeaway and catering industry are potentially ‘cash only’.

H&R Block director of tax communications Mark Chapman says navigating the tax guidelines can be complicated at the best of times, and these small businesses participating in the cash economy need to be aware of the risks if they don’t keep finances in order.

Mark advises that operating on a cash-only basis is not in itself a problem. The issue arises where businesses don’t correctly disclose all their takings. The key to avoiding trouble is to keep good records disclosing all sales.

The ATO uses a benchmarking system to compare businesses with similar businesses. This shows what your expected turnover, expenses and profit margins should expect to be. If you’re outside the benchmarks, that is often a flag for the ATO to take action.

The ATO can also use third party information on your business to work out what your results should be. For instance, a while ago, the ATO approached coffee bean suppliers to provide data on their sales of coffee beans to coffee shops. From that, they could work out how many cups of coffee that shop was making and hence what their turnover should be. If recorded turnover was significantly less, the ATO would audit.