THE Australian Taxation Office is clamping down on an "unfair" and "illegal" tax loophole some Aussies use to "deliberately hide income".

The ATO has warned that from July 1, unreported "cash in hand" payments made by employers to workers will not be tax deductible.

While cash transactions are often a legitimate part of many businesses, the tax office claims many are doing the wrong thing on purpose in a bid to pay less tax.

According to the ATO, it will be cracking down on cash payments to employees that do not comply with pay as you go (PAYG) withholding obligations.

Payments made to contractors where the contractor does not provide an ABN and the business does not withhold any tax will also not be tax deductible from 1 July.

Assistant Commissioner Peter Holt said the new rules would be fairer on businesses that did the right thing while also tackling the "black economy" - or economic activity which is unrecorded and untaxed by the government.

The change has come about based on recommendations from the recent Black Economy Taskforce established in December 2016, and will come in effect on payments made after July 1, for income tax returns lodged for the 2020 income year onwards.

"It's fairly straightforward: do the right thing and you can claim a deduction. Deliberately do the wrong thing and you'll miss out on a deduction and risk being penalised," Mr Holt said.

"The Black Economy Taskforce estimates that the black economy is costing the community as much as $50 billion, which is approximately 3 per cent of Gross Domestic Product (GDP). "This is money that the community is missing out on for vital public services like schools and roads. Businesses that operate in the black economy are undercutting competitors and gaining a competitive advantage by not competing on an even footing."

The ATO is watching out for people who do the wrong thing in order to pay less tax. Picture: iStock
The ATO is watching out for people who do the wrong thing in order to pay less tax. Picture: iStock

Mr Holt stressed that some industries legitimately relied on cash transactions.

"But when cash is used to deliberately hide income to avoid paying the correct amount of tax or superannuation it's not only unfair, it's illegal," he said.

"Our objective is to support small business to help them get it right. But anyone caught deliberately doing the wrong thing will lose their deduction."

Employers who mistakenly classify their employee as a contractor will not lose their deduction where their worker provides them with an ABN.

This year, the ATO is also cracking down on Australia's $8.7 billion dollar "tax gap" which means hundreds of thousands of Aussies could receive a "please explain" letter.

On the hit list in 2019 is dodgy, work-related claims like dry cleaning and car expenses as well as investment property deductions, earnings from cryptocurrencies and sharing economy platforms like Uber.

Last year, false claims on clothes and laundry bills cost the system $1.5 billion - and so this year, the ATO will be scrutinising those types of claims very closely.

The tax man will also be scrutinising people who make money through platforms like Uber, Airbnb or Airtasker to make sure people working in the sharing economy are correctly reporting their income and expenses.

And the ATO has also announced it will be paying close attention to excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.

The ATO urged members of the public who had concerns about "cash in hand" payments to report it online or by phone on 1800 060 062.