In the 2017/18 financial year the Australian Taxation Office audited 120,000 small businesses. It focused on small business owners who report minimal profit but seem to be maintaining a lifestyle that exceeds personal income.
The ATO compares data across businesses in similar industries to identify unlikely or implausible deductions.
The audits also related to undeclared income, incorrect reporting to GST and other obligations.
The ATO will turn up the heat on small businesses this year. It is concerned that the “tax gap” in the sector may be as high $10 billion.
There are approximately 3.8 million small businesses (the ATO counts a small business as one with annual turnover of less than $10 million). Of those businesses, 1.6 million are sole traders.
Deborah Jenkins, deputy commissioner for small business at the Australian Taxation Office says small businesses owe $15 billion in debt to the ATO, which makes up two-thirds of all debt owed to the ATO.
She says the tax gap is the difference between the income tax collected from small business taxpayers and what the ATO estimates would have been collected if every taxpayer was fully compliant.
Work in this area includes a random sample of businesses. The results are combined with the estimates of the impact of people outside the system, unreported wages and data on debt.
Indications are that the small business income tax gap is much larger in percentage terms than other segments – at between 10 and 15 per cent. It is in the order of $10 billion.
“Our program has identified some common risks and behaviours that we need to focus on,” Jenkins says.
“Behaviour that is contributing to the small business tax gap includes omitting income. Business owners deposit income into private accounts or mortgages, or do not declare cash sales.
“Businesses fail to account for private use of business assets. They may claim an excessive business portion for something they use both personally and for business. They claim private expenses as a business expense.”
Involvement in the black economy accounts for about 60 per cent of the gap. The ATO is establishing a black economy hotline that will operate from July 1. If people are offered discounts for cash they will be able to use the hotline to contact the ATO.
The ATO expects tax practitioners to do some checking to ensure clients have included everything they need to. Problems often occur when business structures change. This is an area where tax professional can play a role.
Jenkins says: “I acknowledge that over the past year or so the ATO has received negative media attention over our treatment of small business. While we don’t agree with all the criticisms, there are always ways we can improve.”