New figures released by the Australian Taxation Office (ATO) today estimate that almost 90% of income tax from small businesses is paid voluntarily or with little intervention from the ATO.
“This shows that the vast majority of small businesses in the tax system are trying to do the right thing,” Deputy Commissioner Deborah Jenkins said.
“Small businesses make up more than 99% of all Australian businesses. They contribute $380 billion to the economy each year and employ around five million people”, Ms Jenkins said.
“Considering how much small businesses have on their plate, we’re grateful for the level of work they put in to get their tax right.”
The ATO estimates the 2015-16 income tax gap for the small business sector to be approximately 12.5%, or $11.1 billion, with over $7 billion (or over 64% of the total value of the gap) being attributed to black economy behaviour.
Small business tax gaps that have been released overseas range from 9% to 30%.
Around 90% of small businesses use a registered tax professional to help them comply with their income tax obligations.
“We recognise the important role that tax professionals have in helping small businesses get their tax right and we would not have been able to achieve this result without the support of our tax professionals”, Ms Jenkins said.
“In addition to seeking qualified advice from a registered tax professional, we know that small businesses who keep good records and have invested in record keeping software are more likely to get their tax right”.
“We’ve found that some small businesses are making mistakes with their tax, but these are often unintentional errors which are easily fixed. Our objective is to support these honest small businesses to better understand their obligations and to help them get it right the first time.”
The ATO has a research program that measures tax performance across all market segments. This work helps measure the effectiveness of the tax system.
As part of this program, the ATO measures tax gaps – estimates of the difference between the tax collected and the amount that would have been collected if everyone was fully compliant with the law.
“Internationally, tax gaps are difficult to compare, but what’s clear is we are performing well in terms of small business compliance, and that is something worth celebrating.”
The ATO’s research shows a small percentage of businesses are deliberately avoiding their tax obligations, but by dollar value this adds up to a significant portion of the gap. This behaviour could be motivated by a desire to avoid tax, limit impacts on welfare payments, or to avoid law enforcement.
“Hiding income, exaggerating expenses and operating outside the system are all considered to be black economy behaviours. Businesses doing the wrong thing are about to attract our full attention,” Ms Jenkins said.
The Black Economy Taskforce estimates that the black economy costs community as much as $50 billion, approximately 3% of Gross Domestic Product (GDP).
“Small business operators that engage in black economy behaviour are not competing on a level playing field. They have an unfair advantage over those doing the right thing,” Ms Jenkins said.
“We’re implementing a number of initiatives to tackle the black economy. Changes like a ban on sales suppression software and a new tip off line where people can report suspected black economy behaviour to us.”
The ATO is also expanding their sophisticated data analytical tool that spots red flags indicating omitted income or other black economy conduct.
“We’ve stepped up our enforcement activities, including highly visible mobile strike teams. We visited close to 10,000 businesses around the country last year and we plan to visit another 30,000 over the next three years.”
The ATO provides free, educational resources, guidance materials and online tools and services on its website. The ATO also works with tax professionals and provides them with tools to educate and inform their small business clients to ensure they can meet their tax obligations.
More information
Tax gap estimates are an important feature of the performance and accountability story of any modern tax authority. Find out more at ato.gov.au/taxgap.
The ATO has previously released the net income tax gap for large corporates, estimated at 4.4 per cent or $1.8 billion in 2015-16, and the net income tax gap for individuals not-in-business for 2014-15, is estimated at 6.4 per cent, or $8.7 billion.
To measure the 2015-16 income tax gap for small business, we use findings from our random enquiry program to estimate the difference between what we expected to collect, and what was actually collected for the given year.
Initially, the ATO undertakes a detailed profile of the tax affairs for each taxpayer in the sample, which helps to identify all tax risks or issues for each taxpayer.
The ATO makes use of all information provided by the taxpayer as well as data collected by the ATO, for example, interest and dividend payments, and public domain data.
Where we find issues, we, escalate to an audit. The audit results contribute to the calculation of the tax gap.
This method is considered highly credible, and is commonly used in other tax jurisdictions for tax gap estimation in similar situations.
The small business income tax gap estimate provides a better understanding of compliance in this segment. This information helps the ATO better tailor our products, support and strategies to mitigate these risks, and improve the experience for taxpayers.
More information about the small business tax gap including how we calculated it is available through the ATO website at ato.gov.au/SmallBizTaxGap.
Tax gap estimates are an important feature of the performance and accountability story of any modern tax authority. Find out more at ato.gov.au/TaxGap.
About the Black Economy Taskforce
The Black Economy Taskforce was established to provide a whole-of-government approach to combat the black economy in Australia. It was established in December 2016 to develop a policy framework involving new proposals to tackle black economy activity. The Black Economy Taskforce’s Final Report was released in October 2017.
The ATO plays a significant role in leading and delivering on the Black Economy Taskforce recommendations accepted by the Government. Since 1 July 2018, the ATO has coordinated an extensive program of work to tackle the black economy. This program of work includes a multi-faceted approach.
The ATO is responsible for addressing the following aspects of the black economy:
- deliberate under-reporting income and over-claiming expenses
- ensuring businesses meet their employer obligations – so they don’t pay employees or contractors cash in hand, underpay wages, fail to withhold tax or not contribute to super
- addressing illegal phoenixing (together with Phoenix Taskforce partner agencies) – deliberately liquidating and reforming businesses to avoid obligations
- preventing tax fraud
- dealing with illicit tobacco, duty and excise evasion
- targeting intermediaries and agents who enable black economy behaviour.
