Small businesses are still figuring out ways to deal with the ban on credit card surcharges that took effect on October 1 and are searching for ways to manage the costs.
Author
- Md Akhtaruzzaman
Professor of Finance and Head of Discipline, Accounting and Finance, Australian Catholic University
While the ban is forecast to save consumers A$1.6 billion a year in surcharge fees, businesses continue to incur the card processing costs charged by the banks.
In response, some businesses have decided to offer discounts for payments in cash . This could lead to an increase in cash usage after years of decline - and brings with it risks of an expanded shadow economy and greater opportunities for businesses to underreport sales and evade tax obligations .
The shadow economy
Australian Taxation Office (ATO) data show that net goods and services tax (GST) collected from cafes, restaurants and takeaway food services reached $4.36 billion in the 2024-25 financial year. This highlights the contribution of the hospitality sector to the economy. Even a small proportion of unreported sales could result in significant losses in GST revenue.
The Reserve Bank of Australia (RBA) shows that increased use of cash is driven by the shadow economy, which refers to undeclared economic activity, which is not reported or taxed.
While difficult to measure, official estimates put the size of the shadow economy at about 3% of Australia's gross domestic product, or equivalent to $80 billion in 2025.
The peak accounting body, CPA Australia, has estimated undeclared income in the shadow economy created a net gap of $11 billion annually in missing taxes. Federal Treasury says the undeclared sales and undeclared wages are the critical components of the shadow economy.
Tax evasion is harder with card payments
Over time, the use of cash in Australia has declined significantly, while credit and debit card usage has surged. RBA data show cash payments fell from 69% of consumer transactions in 2007 to 15% in 2025 . Use of card payments increased over that time from 26% to 73%.
Among the biggest declines in cash use were for dining out and takeaway food , and transport, reflecting the increased use of card payments and digital payment methods.
However, the ban on card surcharges could unintentionally reverse this trend.
Unlike electronic payments, cash transactions lack independently verifiable digital records. This creates opportunities for businesses to underreport sales and potentially evade taxes.
European evidence shows that greater card payments hinder tax evasion because they build a trail for the underlying transactions, while cash transactions are associated with higher tax evasion.
A separate EU study shows greater use of card payments is associated with higher tax revenue.
These findings do not establish that Australia's ban on surcharges will increase tax evasion. However, they highlight the potential risk that could increase tax evasion arising from the ban.
Banks could take the hit
Following the ban on card surcharges, policymakers should consider measures to curb the shadow economy and reduce tax evasion.
First, banks and credit card companies could sharply reduce card processing fees . This would reduce costs for businesses and encourage businesses to accept more card payments. Evidence from academic research shows that the volume of card transactions increases when the card processing fees are reduced.
Even some government ministers, including frontbencher Kristy McBain , have suggested banks and credit card companies should absorb some of the card processing fees.
Second, improving how businesses record their sales electronically generally boosts tax compliance and reduces tax evasion by making income easier for the ATO to check. Digital records allow tax authorities to verify transactions and enforce tax obligations more effectively.
The tax office already collects information from a wide range of third-party sources, both public and private. These reports allow tax authorities to verify income and transactions, which makes it harder for businesses to underreport their sales and income.
Broader economic consequences
Businesses that understate their takings create unfair competition by undercutting businesses that comply with their tax obligations.
The potential consequences of the ban on card surcharges also extend beyond individual businesses. Any increase in unreported cash transactions could reduce government tax revenue.
And as the tax office has noted , reduced tax revenue undermines the funding of essential public services such as healthcare, education and infrastructure.
The ban on surcharges is an important measure to protect consumers from additional charges. However, policymakers should also consider the potential consequences for the broader economy. In particular, the ban could increase the risk of expanding the shadow economy and creating greater opportunities for tax evasion.
Md Akhtaruzzaman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
