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Measuring small business tax performance

By measuring the income tax performance of small business taxpayers in Australia, we see that this population contributes over $89 billion in income tax – this is around 87% of the revenue we expect from them.

We have a program that measures:

• tax performance across all taxpayer populations
• the effectiveness of the tax and superannuation systems.

As part of this, we measure tax gaps (estimates of the difference between the tax collected and the amount that would have been collected if everyone was fully compliant with tax law).

The latest estimate of the net small business income tax gap for 2019–20 is $11.9 billion or 11.6%. This is a preliminary estimate and will be revised in future years using updated data.

We work out our estimate by reviewing the tax returns of a random sample of small business taxpayers – we call this the random enquiry program.

The random enquiry program helps us to:

• understand the taxpayer behaviours contributing to the tax gap
• identify the support businesses need to get their tax right
• devise strategies to increase willing participation in the tax system
• target our resources to combat shadow economy behaviour most effectively.

Recent events have impacted our random enquiry program. This has reduced the size of the sample used in the 2019–20 preliminary estimate. For this reason, the reliability rating of our estimate has also been reduced.

Tips for small business owners

We see common behaviours among small businesses that get their tax right. These tips will help you to pay the right tax.

Seek advice and support

A tax professional can help keep you on track and avoid costly mistakes.

Make sure you:

• choose a tax agent or BAS agent who is registered with the Tax Practitioners BoardExternal Link or a reputable bookkeeper
• keep your tax professional in the loop – regular contact will help them understand your business and give you the right advice
• talk to your tax professional or come to us if you're unsure of something or considering making changes to your business.

Check your business structure

Unnecessarily complex business structures can overcomplicate tax obligations. Talk to your tax agent to ensure your business structure suits the needs of your business.

Keep good records

Keeping good records is essential and will make it easier to report to us:

• Talk to your software provider or tax professional to check that your record keeping processes meet current requirements.
• Make sure you conduct regular reconciliation processes by cross-checking figures with your bank statements and source documents (for example, till tapes, tax invoices and receipts).
• Use suitable digital systems to run your business, such as point of sale software, accounting systems and mobile apps. These products can save you time and help you report accurately.

Get your income and expenses right

Ensure what you report is accurate:

• Report all your business income, even if it has been paid in cash, or into a private account. We use data matching and benchmarking to help us identify hidden activities.
• The figures you report need to be exact – so keep up to date records from the start and don't try and 'guestimate' after the event.
• Make sure your deductions relate to your business, and that you have the required evidence to support your claims.

Tips for tax professionals

Most small businesses have some form of tax professional representation. We see many examples of the support and assistance tax professionals provide to small businesses.

Here's how you can help your small business clients report correctly:

• Understand their business, not just their tax. Where possible, get to know your clients and their business so you're better positioned to help them report correctly.
• Check that they have chosen a business structure that best suits their needs.
• Talk to them about good record keeping practices and digital solutions (like accounting and point of sale software) to suit their business.
• Make sure you get all the information you need to report correctly. Your clients aren't tax experts and they don't know what they don't know. Ask them some questions to ensure you have the full picture. This is particularly important for the clients you don't have regular contact with.
• Where possible, work with the other tax professionals they use. Then you can ensure you are all on the same page and your figures match up.

What we're doing to reduce the gap

To reduce the tax gap, we identify and help businesses that are not paying the right tax.

Improving small business tax performance

We are exploring ways to deliver quality services and provide ongoing help to improve the tax performance of small businesses, taking into account that the environment they are operating in is rapidly evolving.

Balanced compliance approaches are in place to support those in need and ensure fairness in the tax and superannuation systems.

It is important to recognise the role Australia's tax system plays in supporting the community. Protecting the integrity of the tax system and maintaining its effectiveness is critical.

Given the impact the shadow economy has on the tax gap and on honest small business owners, we will continue to focus on businesses that actively avoid paying the right tax.

We're enhancing our enforcement strategy to better target people doing the wrong thing. With increasingly sophisticated technology and data capabilities, it's getting easier to identify businesses that avoid paying their fair share. We have a range of approaches to address this behaviour, from applying penalties and interest, right through to prosecution.

Getting the right amount of tax paid in the first place is the most efficient way to administer the tax system. We foster willing participation by considering how we can make it easier for businesses to comply.

We provide a suite of support tools and services to help small businesses meet their tax obligations. We look into what drives the kinds of mistakes businesses make so we can better target our products and make it easier for them to work with us.

Newly registered businesses are subscribed to the New to Business EssentialsExternal Link email service. This delivers timely and helpful government information to them over the first 12 months of operation. Through this service, new business owners are introduced to a range of government services and support.

Working with tax professionals and our other partners

We understand the value our partners provide to the small business community. We work closely with them to help small businesses understand their obligations.

Key partners we work with include:

• tax professionals (Tax agents, BAS agents, bookkeepers and business advisors)
• other business advisory groups (such as Financial Councillors Australia)
• industry associations
• financial institutions and legal advisors
• education providers

other departments across all levels of government, including the  < >Australian Securities and Investments CommissionFair Work OmbudsmanDepartment of Prime Minister and Cabinetstewardship forums and other key stakeholders such as the  < >Small Business Family Enterprise OmbudsmanSmall Business CommissionersSmall Business Champions.Helping business owners who have made mistakes

Tax can be complicated, and we know that business owners can make honest mistakes.

If you make a mistake, we'll explain where you've gone wrong and how to get it right next time. As part of our audit process we consider the nature of the error and whether the taxpayer is a candidate for penalty relief.

If you’ve done the wrong thing but you want to turn things around, come to us. We can help business owners who voluntarily disclose to get back on track.

Looking to the future

Helping business owners under difficult circumstances

It has never been a more challenging time to be a small business owner. If you're going through a difficult time, whatever the reason, we have options available to help you.

We can arrange payment plans, lodgment and payment deferrals if you are struggling to meet your tax or superannuation commitments. You can speak with us directly or ask someone to do this on your behalf.

We want to work with you before your situation gets more difficult. But it’s never too late to ask for help.

Improving small business tax performance is a key focus area in our Corporate plan.

We will achieve this by collaborating with partners to build a digital first tax ecosystem, enabling seamless tax reporting from business source systems.

By enhancing our use of data and introducing new tools and systems we will help small business owners by:

reducing their compliance costs ensuring they have timely information available to help with decision making

Products like Single Touch Payroll and eInvoicing, pave the way for a future with increased automation and a more seamless experience for small business taxpayers.

• reducing complexity and minimising the likelihood of mistakes.
• creating a level playing field and reducing opportunities for tax avoidance.

ato.gov.au