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Should you pay a tradie in cash? Andrew Whitelaw explains the implications

Newsflash 04 July 2011

Question:

I’m currently doing some renovations, and one of the tradies I’m using for a small job has asked if I can pay him in cash – for which he’ll charge me a lower price. While it hasn’t been explicitly spelt out, I assume this is because he wants to keep the income ‘off the books’, which is presumably tax evasion. Should I say no, and what are the potential risks if I agree?

Answer:

Undertaking a renovation can be a stressful and demanding process. It is important to ensure that you can focus solely on the renovations themselves and not be caught dealing with any legal ramifications. Building laws vary from state to state so it is important to consider what legislation and regulations apply in your area. Generally speaking, if you are building a new home or renovating, you must enter into a domestic building contract with the builder. The contract must comply with the legislation applicable in your state or territory and ought to be in writing, be signed and dated by the parties, state the date the works will commence, when the works will be finished (or how the end date is to be determined) and the contract price.

Builders are required to comply with statutory warranties regarding the quality of their work and may also be required to obtain certificates for home warranty insurance for certain works. Generally a certificate of insurance is required to be provided prior to any works being undertaken and prior to any money being paid for the works.

As for paying the builder or tradie, the building industry is still, to a degree, a cash industry. Once the parties have agreed to a contract and it is in writing, the builder can be paid in cash. However, the question which needs to be asked is why the price is cheaper if cash is to be paid.

The builder may be requesting cash to improve his payment terms and the cash flow of his business rather than waiting for a cheque to clear. In which case, this is a reasonable and law abiding request.

However, if the builder is requesting cash to avoid his GST compliance requirements, this is a different issue and one that should be carefully considered. The GST component for the supply of goods and services (currently 10%) is required to be remitted by the person receiving the payment to the Australian Taxation Office – ie, the builder.

The supply of building works, including labour and materials, is subject to GST being charged. The price of all goods and services provided by a builder are considered to be GST inclusive, unless specifically stated otherwise. Any payment by an owner to a builder is therefore also considered to be GST inclusive. If the builder fails to remit the appropriate GST to the Australian Taxation Office, the builder may be in breach of his legal obligations and liable to administrative, civil or criminal penalties including fines being imposed.

If an owner is agreeing to pay a lesser price for the building work, for cash, knowing the builder is offering the lower price to avoid tax obligations, the owner may be assisting in the commission of a fraud. The owner, too, may be open to investigation and penalties. As long as the owner is not paying cash to be part of a fraudulent act by the builder, the owner is in the clear. It is always best for any agreement to be in writing and the contract price (GST inclusive) stated clearly. The payment of the contract price can then be made in cash, by cheque, EFT, or any other way required by the terms of the contract.

A contract in writing also avoids the risk of the price increasing through a lapse in memory as to the original price. If the contract is not in writing, proving the terms of the contract, including the price, may be problematic as it is one person’s word against the other.

Disclaimer: No magazine article can consider your individual circumstances or personal needs in relation to your sale or purchase transaction. The information in this article is of a general nature only and should not be relied upon as legal advice. You should seek advice for your particular circumstances before entering into any transaction.

Andrew Whitelaw is a building and construction Partner at TressCox Lawyers.

This article originally appeared in the Legal Q & A section of the July 2011 issue of Your Investment Property.

To view a PDF version of the article published in the Your Investment Property magazine please click here.


Andrew Whitelaw, Partner
Melbourne

Newsflash 04 July 2011
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