Small Business Tax Gap

The ATO has estimated the Small Business Tax Gap at $11.1 billion and the Government has given them an extra $10 million to combat the black economy.

The tax gap for small business is significantly greater than the corporate tax gap (estimated at $1.8 billion) and the individuals not in business tax gap (estimated at $8.7 billion).

Of the 1,398 businesses randomly selected in the 2015-16 income year, only 4% showed signs of deliberately avoiding payment of the correct tax, however, the adjustments to their tax returns accounted for 60% of the total adjustments. A further 18% made mistakes and 6% understated income.

Under the ‘small business income tax gap random enquiry program’ which has operated since July 2016, the ATO has identified 5 common issues:

  1. claiming private expenses in the business;
  2. failing to properly attribute personal and business use of assets / expenses;
  3. not understanding how tax applies for different and often complex business structures;
  4. omitting income (including income from coupon sales); and
  5. insufficient records to substantiate small business expenses claims.

The ATO has implemented an enhanced enforcement strategy to better target those doing the wrong thing. The strategy covers a wide range of ATO activities, including:

  • ensuring taxpayers meet their lodgment obligations;
  • protecting the rights of employees and their super, pay as you go (PAYG) withholding and fringe benefits tax (FBT) entitlements;
  • strengthening the integrity of the tax system and providing a level playing field for small business;
  • highly-visible mobile strike teams to protect honest businesses from unfair competition by addressing black economy activities;
  • prosecuting the worst offenders;
  • using data and technology to better target black economy participants through a new Tax Integrity Centre that will allow the community to report suspected or known black economy, tax evasion and illegal phoenix activities to a Black Economy Hotline and improve government data analytics; and
  • a continued focus on prevention and helping taxpayers make the right decisions and take action through education.

A few recent examples of the ATO implementing this strategy that we have seen, include expansion of the taxable payments annual reporting system to new industries, introduction of single touch payroll, the cross checking of merchant facility data to lodged returns, cross checking of property and assets sales to lodged returns and ATO community walk throughs (the ATO is expected to visit around 10,000 small businesses in the 2019-20 financial year).

If you are concerned about aspects of your compliance, it is always best to report your errors to the ATO upfront, as opposed to waiting for an audit or review. Please contact our office on (02) 4365 6789 if you have any concerns.