The Australian government’s prohibition on credit card surcharges, which took effect on October 1, has placed small businesses under pressure to cover higher payment processing costs while delivering an estimated annual savings of $1.6 billion to consumers. Unable to shift these fees onto card users, many retailers are now adopting cash discount incentives—a development that could reverse a long-term decline in cash transactions and swell the informal economy.
Cash payments create fewer audit trails, enabling businesses to underreport revenue and avoid tax obligations. The Australian Taxation Office collected $4.36 billion in goods and services tax from cafes, restaurants, and takeaway outlets during the 2024–25 fiscal year, but even modest levels of unreported income could diminish these collections. The Reserve Bank of Australia has estimated that undeclared economic activity represents about 3% of gross domestic product, equivalent to roughly $80 billion in 2025, while lost tax revenue from undeclared sales and wages amounts to $11 billion annually.
Digital payment systems have historically made tax evasion more difficult by generating verifiable records. According to Reserve Bank data, cash transactions fell from 69% of all payments in 2007 to just 15% in 2025, while card usage climbed from 26% to 73% over the same period. Industries such as dining and public transport experienced the most pronounced declines in cash usage as electronic payments expanded. Research from European economies further supports the link between higher card adoption and increased tax compliance, as digital records discourage underreporting.
One unintended outcome of the surcharge ban may be a revival of cash transactions, which lack the same level of oversight. Although no direct evidence yet connects the policy to higher tax evasion, the risk remains that businesses seeking to avoid processing fees could encourage cash payments, exploiting gaps in monitoring. The Australian Taxation Office currently relies on third-party data to verify income declarations, but cash payments bypass these verification methods entirely. Underreporting not only creates unfair competitive advantages but also reduces the revenue available for public services.
Government officials have outlined potential measures to address these concerns. One proposal involves pressuring financial institutions to reduce merchant service fees, a change that studies suggest would encourage greater card usage. Federal ministers, including Kristy McBain, have argued that banks should absorb some of these costs to alleviate pressure on small businesses. Another approach focuses on enhancing digital record-keeping requirements for all sales, a system the tax office already employs to identify discrepancies. Electronic transaction histories make evasion more difficult by providing clear, traceable documentation.
Tax officials have begun testing new compliance tools designed to detect patterns of suspicious cash transactions. The Australian Taxation Office now cross-references cash deposit data with known spending trends to identify potential underreporting. Pilot programs in high-risk sectors, such as hospitality and retail, have already flagged discrepancies in declarations where cash usage has spiked unexpectedly. These measures aim to close loopholes while minimizing disruption to legitimate businesses that rely on cash payments for operational reasons.
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