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Commercial – The legal demise of physical cash …?

Physical cash is dead (almost), crypto currency’s life is in jeopardy, long-live (traceable) digital cash! The Black Economy task force has spoken and Parliament is expected to take heed in new legislation.

 

Parliament is presently considering a bill (Currency (Restrictions on Use of Cash) Bill 2019) that will make it illegal to pay physical cash of (or make a series of physical cash payments totalling) $10,000 or more. It will also be illegal to accept such physical cash payments.

In addition, the bill will provide for similar outlawing of crypto-currency transactions. However, for the time being the extension of controls on making and accepting payments equal to $10,000 or more in crypto-currency will likely be suspended. It is envisaged that this additional control will be activated when circumstances warrant.

The bill aims to promote payment being made in a traceable form that will facilitate monitoring by law enforcement authorities. The object is close down the black economy (tax avoidance) and reduce scope for moving funds for other illicit purposes such as terrorism and money laundering.

Assuming the bill is enacted, it will commence to apply within approximately two months, namely from 1 January 2020.

Why is the change in the law relevant to the NFP sector?

One might anticipate that accepting cash payments caught by the $10,000 limit, as discussed below, could, to a limited degree, be problematic in the NFP sector. NFPs making cash payments in breach of a $10,000 limit might be much more of a rarity.

For example, it is possible that some smaller NFPs might be faced with a request from a contractor who wants to be paid in cash (or is willing to accept a discounted fee for cash) and the applicable payment is $10,000 or more. Hopefully, internal good governance arrangements would already preclude acting on this request. In any event, the diversity of activity in the NFP sector makes it difficult to rule out occurrence of such cash payments entirely.

However, the key considerations prompting this article are the stringency and scope of the prohibition.  Although the circumstances may be limited or rare, the consequences of (even inadvertently) overlooking it are very serious.

Stringency and scope of the prohibition

The points leading to these key considerations are:

  • The bill applies to an extensive range of entities, including individuals, bodies corporate, bodies politic, trusts, partnerships, unincorporated associations, etc. It does not matter whether the entity is liable to pay income tax. The bill also provides that the Crown will be bound ‘in each of its capacities’, although it cannot be prosecuted for an offence.
  • The $10,000 limit (the cash payment limit) applies to both payments made as consideration for supplies as well as payments made as donations/gifts. The explanatory memorandum for the bill (EM) indicates that the cash payment limit also applies to amounts made as loans.
  • It will be a criminal offence even to accept payments which breach the cash payment limit. Moneys received by the NFP in breach of the limit as well as payments made in breach of the limit will constitute a criminal offence.
  • The prohibition extends to a series of payments that in aggregate meet or exceed the $10,000 limit (the cash payment limit). Essentially, one has to consider whether a series of cash payments (each under the cash payment limit) are made as part payments for a single supply or as part payments of a single donation/gift/loan. For example, if a donor pledges payment of an amount equal to or exceeding the cash payment limit and pays that pledged amount in instalments by physical payments of cash (cash payments), both the payer and the recipient are committing an offence. The whole of the pledge need not be paid in cash – it is sufficient that the aggregate cash amount breaches the cash payment limit.
  • Under the bill there are two levels of criminal offence – a basic level and a more serious (more highly penalised) level. As the EM explains, the basic level offences are ‘committed regardless of whether the entity intended to or was reckless about whether the payment or series of payments included’ an amount equal to or exceeding the cash limit. The bill also creates more serious offences which apply ‘if the entity intends or is reckless about making or accepting such a payment or series of payments’.

In summary, the basic level offences will be committed where:

i. an entity intends to make/accept a payment (or to make/accept a payment as part of a series of payments for a supply or gift, as explained further below);
ii. in the case of a payment that is made as part of a series of payments for a supply or gift, the entity must also intend that the payment is made/accepted as a part of such series;
iii. the relevant payment has been made/accepted in cash, although the entity did so inadvertently rather than intentionally/recklessly;
iv. the value of the cash which was paid (whether as a single payment or as part of a series) equalled or exceeded the cash payment limit, although this occurred inadvertently on the part of the entity, rather than occurring intentionally/recklessly.

 

If there was an intention/recklessness mentioned in either (iii) or (iv), but not both, a basic level offence would still occur.

In short:

‘Effectively, once an entity intentionally makes or accepts a payment, the entity commits the offence if the payment includes cash of an amount equal to or in excess of the cash payment limit This applies whether or not the entity was aware that the payment included this amount of cash.’

Basically, an organisation has to ensure that it does not, in fact, pay or accept payment in breach of the cash payment limit.

The penalty for basic level offences can be up 60 penalty units – which currently translates into a fine of up to $12,600 (see s. 4AA Crimes Act 1914), with the fine for a corporation being increased to five times this amount. However, where intention/recklessness exists in each of conditions (iii) and (iv), the more serious level of offence arises and attracts a potential penalty of 2 years imprisonment and/or a fine of up to 120 penalty units (vis. $25,200), with the later escalating in the case of a corporation to 600 penalty units (vis. $126,000). The unstated ‘penalty’ is the damage to reputation following prosecution and for, ACNC entities, adverse reflection on governance and associated standing with the ACNC.

Where an organisation either makes or accepts cash payments, it will need to ensure payment arrangements do not allow the cash payment limit to be breached, including especially appropriate monitoring and contractual controls in relation to cash receipts. We surmise that failure to take appropriate precautions raises the spectre of a serious offence being committed when the cash payment limit is, in fact, breached.

It is beyond the scope of this article to consider defences which may be available in relation to the commission of an offence.

It is also beyond the scope of this article to consider whether an individual personally commits an offence where the individual is involved in making/accepting (e.g. counselling making/accepting) a cash payment on behalf of another entity.

However, where an offence is committed by a trust, partnership or unincorporated association/body, each trustee, partner, or member of the committee of management is prima facie taken to commit the offence. Discussion of the circumstances of relief from liability for these entities is beyond the scope of this article.

Exceptions to the cash payment limit

The bill provides for the Treasurer to make rules that exempt cash payments being caught by it. The EM foreshadows exceptions for ‘transactions in which neither party is acting in the course of a business or other enterprise and certain payments that are subject to reporting obligations under the … [Anti-Money Laundering and Counter-Terrorism Financing Act 2006]’.  While not all NFPs act in the course of a business, the second limb of acting in the course of enterprise is expected to leave scope for application to NFP entities generally.

Draft Rules, explanatory materials in relation to the draft rules (EMDR), and a fact sheet in relation to the bill have been published on the Treasury website. It is only practicable to refer briefly to the draft rules and these other resources in this article.

While providing for valuation of foreign currency and digital currency, the draft rules primarily provide exemptions from the cash payment limit. Four of exemptions should be mentioned:

  • The draft rules except compliance with the cash payment limit where payments are made or accepted in circumstances which are covered by the reporting regime under Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML/CTF Act) – proposed s. 8. Basically, the regime ‘broadly includes financial services such as accepting deposits, payments made as a withdrawal and foreign currency exchange’ and requires persons to deal with the service supplier in good faith. Under the latter requirement, as explained in the EMDR, you must not be aware that the relevant service provider has failed to comply with the enrolment requirements of the AML/CTF Act. It follows that, as a practical matter (and per the fact sheet): ‘You will still be able to deposit and withdraw $10,000 or more cash into and from your accounts’.
  • The draft rules provide that the cash payment limit will not apply in relation to certain payments involving public officials in the performance of their duties – proposed s. 10. Note especially s. 10(1)(b)(ii) and (c), which respectively relate to the need for the official’s belief for the necessity of the payment to be made/accepted in cash and the limitation that the official is ‘not accepting the cash solely for the discharge of a debt owed to the Commonwealth, a State, a Territory, or a local governing body’. The choice of examples accompanying s. 10 indicates the scope of the exemption may have limited practical relevance.
  • The draft rules adopt the GST definition of ‘enterprise’, which is a broader concept than ‘business’. They provide exemptions for making or accepting payments relating to personal or private transactions, with these transactions being characterised by reference to the absence of an ‘enterprise’. Notably, payments relating to the supply or acquisition of real property are outside these proposed exemptions and will be subject to the prohibitions of the bill. In some respects, the draft rules appear more lenient than the exceptions foreshadowed in the EM.
  • Certain payments of digital currency – proposed s. 12. The proposed digital currency exemption is very broad.

Note: The bill is concerned with making or accepting payments of cash, not with possession of amounts in cash.

What is ‘cash’ for purposes of the prohibition?

The EM notes that, for purposes of the bill, ‘cash’ is:

 ‘… physical and digital currency within the meaning of the … [Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act)]. It includes notes and coins that are legal tender and circulated as a medium of exchange in Australia or a foreign jurisdiction and digital tokens that have similar characteristics.’

The EM foreshadows that the Treasurer will exempt ‘most transactions involving digital currency from the cash payment limit … until such time as the use of digital currency changes and it presents a material risk of facilitating the sorts of avoidance of obligations currently facilitated by physical currency’. As noted above, the draft rules provide for this exemption.

The bill is concerned with the face value of legal tender and to the extent cash may have a value other than as a medium of exchange (e.g. as a collectable coin) this will not be relevant. The value of cash payments not made in Australian currency will be ascertained according to methods determined by the Treasurer.

What constitutes a series of payments that need to be considered in aggregate?

It was noted above that a series of payments for a supply or comprising a single donation/gift need to be aggregated. The bill adopts the same concept of ‘supply’ as exists for GST purposes. (Although the bill imports the GST concept of ‘supply’, this does not have the effect that bill only applies to persons registered for GST, it is not importing the concept of a ‘taxable supply’.)

Suppose that a supply (say, a surplus car is sold) occurs with payments made by instalments. If some of the instalments are paid in cash and in aggregate the cash payments meet or exceed the cash payment limit, an offence will be committed. It does not matter whether the same person pays the instalments.

However, where a supply is made for a period and payment for that supply is made on a periodic basis, the bill provides that each periodic component of the supply is a separate supply for purposes of the bill. For example, each payment of rent for a rent period under the lease is a payment for a separate supply of the use of the leased premises for the relevant rent period. As a result, if the rent for a rent period is below the cash payment limit, an offence does not arise where the total of the cash payments for several rent periods meet or exceed the cash payment limit.

It is conceivable that in some situations a periodic payment will itself be made by instalments. Where any of those instalments are made in cash, they would need to be aggregated to determine whether the cash payment limit is breached.

As a practical observation, care should be taken to ascertain whether there is one supply (say an annual licence granted by a Council for use of local sporting fields/tennis courts) that requires payment of an annual fee but the user pays this fee by say, weekly, instalments. The parties may focus on the weekly amounts without recognising that under the agreement these are not related to weekly periods of use but are technically expressed as part payments for annual use. If the aggregate payments made in cash breach the cash payment limit an offence occurs.

If an annual fee of $10,000 seems extravagant, consider the case of a Council that charges a fixed fee of, say, $19,800 to a sports club for a three year use of sporting fields, with that fee being payable by 36 monthly instalments (of $550) that are not related to any part of the three year usage term. If the club pays at least 19 of the instalments in cash, the cash payment limit would be breached (19 x $550 = $10,450).

While a series of cash payments will be aggregated, it should not be overlooked that a single payment may breach the cash payment limit and, according to the EM, ‘payment’ takes its ordinary meaning. This raises the question whether a discharge of multiple debts made simultaneously in a lump cash sum of $10,000 or more is a single ‘payment’ that breaches the cash payment limit. The EM (para 1.28 et seq) states:

‘ Payment is used in its broadest sense encompassing any transfer of financial value. It is not limited to payments “for” something and includes gifts and loans. …

Whether an entity makes or accepts a payment is a question of fact to be determined by the ordinary meaning of those words.

To constitute a series of payments, the payments must be for the same supply or part of a single gift. It is not sufficient that the payments occur between the same parties, even if they occur on a regular basis where distinct things are supplied.’ (underlining added)

Our initial cursory thought is to doubt that simultaneous discharge through a lump sum payment of multiple debts owed to the same entity is a single ‘payment’ for purposes of the bill. However, we do not express a concluded view at this stage.

Does the action constituting the offence have to occur in Australia?

While most of our subscribers will have a presence solely in Australia, there may be some which carry on activities outside Australia. In some (limited) circumstances cash payments made or accepted outside Australia can constitute an offence under the bill.

Timing of conduct constituting an offence – transition

It was noted earlier that the bill provides for commencement on 1 January 2020. Conduct occurring after that day determines whether an offence is committed – EM para 1.92.

However, a claim to be acting in pursuance of an agreement made prior to the day is not a defence – EM para. 1.93.

Where a cash payment which is made (or as the case may be, accepted) on or after the commencement day is part of a series of payments, which includes payments made (or as the case may be, accepted) before that day, that payment can be aggregated with all the earlier cash payments in the series for purposes of determining whether an offence has been committed – EM para 1.94.

Conclusion

This article has aimed to alert organisations to the broad thrust of the bill. While the initial response is to anticipate that it would have limited impact on payments by organisations with strong governance policies, there is less confidence that acceptance of cash payments (as distinct from oversight of accountability for cash receipts) will already be appropriately internally regulated. Given the diversity of activity in the NFP sector, it is not possible to anticipate all the circumstances in which cash payments will be affected.

There is a short lead time of two months within which the bill envisages it will become operative and this includes the intervention of the Christmas holiday period. While it is hoped that, on the assumption that the bill is enacted, the commencement will be deferred to allow time for any required commercial adjustment, we suggest that organisations/their advisers consider the bill in more detail, identify the organisation’s arrangements which may be within its scope and establish appropriate policies to ensure compliance with the bill.

As to the demise of cash, well, one might argue with a $10,000 cash payment limit that there is some life left in physical cash, but … the Black Economy Task Force Final Report (at p.55), after considering agitation for a lower limit on payment to trades people and ahead of noting the European experience (France has reduced cash payments from €3000 to €1000), observed:

‘The Government could consider lowering the cash payment limit of $10,000 once it has been in operation for a while to ensure smaller cash payments are also restricted.’

Some sources of further information:

 

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.