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Address by Michael D'Ascenzo, Commissioner of Taxation
to the Council of Small Business of Australia
at the NAB National Business Summit in Melbourne
on Wednesday 1 August 2012
Introduction
Australia has almost 3 million small businesses1 nationwide, employing about one in five of the Australian workforce - and there is a great variety of personal circumstances2. Most operate as sole traders or family businesses and they are sometimes referred to as the backbone of the Australian economy.
In supporting small business, we recognise their diversity and tailor our services accordingly.
At the heart of what we do is helping businesses to understand their rights and obligations, and making it as easy as we possibly can for business to properly participate in Australia's tax and superannuation systems.
Our support for businesses broadly falls under three key themes. Firstly, we support businesses through tangible assistance, for example, our business assistance visits3 and our empathetic approach to businesses in short term financial difficulties. We encourage businesses to come and talk to us upfront so that we can provide small business practical guidance, or talk to us if they have a problem - we might be able to help out. Our small business assistance program has directly helped approximately 10,000 small businesses through one-on-one assistance visits4. Our approach to tax debts has seen us help taxpayers through tailored payment arrangements for 266,209 small businesses in the last financial year.
Secondly, we are constantly seeking to make it easier and cheaper for businesses to comply, through better ways of reporting information to us, for example through the use of Standard Business Reporting5. We believe there is scope to reduce the regulatory burden on small business and to help them be more efficient by promoting online dealings. We also apply user-based design principles to ensure our products and processes are user friendly.
Finally we help businesses from unfair competition from those that seek to abuse our tax and superannuation systems. Our compliance and firmer debt action activities ensure honest businesses are not disadvantaged by the non-compliant behaviour of a few, levelling the playing field for those businesses making good and honest choices6.
Helping business get it right from the start
Good habits are best learned early. We know that if we can help small businesses from the start they will develop good reporting habits that will hold them in good stead for the future.
It has been our experience that the great majority of Australians willingly meet their tax and superannuation obligations.
To this end, we partner with others including tax agents, government agencies and community organisations to improve understanding and engagement with Australia's taxation and superannuation systems, with a focus on those new to business, young Australians and migrants.
In supporting Australia's large and growing proportion of the small business community that are new to Australia, we host a range of seminars to help them. For example, the DVD Your Business and Tax, is in eleven languages and uses real-life case studies to explain topics such as business structures, registrations, goods and services tax (GST), business activity statements, record keeping and employing people.7
We also work with Indigenous Business Australia and the Office of Registrar of Indigenous Corporation and the Victorian Indigenous Chamber of Commerce to produce tailored and relevant materials8.
To establish good habits early, we invest in helping to educate Australia's youth about taxation and superannuation matters. Last month we released an online learning tool, Tax Super + You9. This product is aimed at students to positively influence attitudes of young Australians entering these systems.
One of the common goals we share with small business is that we both want to get off to a good start. Running a business is not easy and the ATO tries to help demystify some of the tax and super aspects by specifically tailoring guidance materials to people just starting their business or in a growth phase. This includes:
- a checklist for people starting a new business
- information about tax assistance visits
- tip and fact sheets about a range of business topics, and
- an easy-to-use small business tax calendar to plan and manage your tax obligations10.
We also contact businesses that register for pay as you go withholding when they take on staff for the first time or register for GST when their turnover exceeds the $75,000 threshold, to help them get it right from the start.
Tailored assistance for small business
Our nationwide small business assistance program aims to make our support practical and accessible, and can include free on site support from ATO staff.
Recently, in collaboration with local councils, industry associations and other government agencies we offered assistance to small business operators in Western Sydney. These sessions were instrumental in providing a vehicle for businesses and the ATO to work together.
For example, in Penrith, the sister-in-law of a couple operating an earthmoving transport company, who in their first year in business earned $100,000 with the turnover increasing to around $2.6 million in the second year, attended a seminar and got the couple to ask for an assistance visit.
During the visit we worked together to discuss the company's need to move from cash to accrual accounting; how to better plan their cash flow; and how to manage its tax liabilities associated with much higher levels of income.
Another example is that upon reading an article in a Darwin newspaper about small business assistance visits on offer, a builder who registered for an Australian business number and for goods and services tax in July 2000 'because he thought he had to', sought an assistance visit as he had a significant amount of unopened mail from the ATO, causing him 'sleepless nights'.
As he had operated his business for only a short period and was an employee for the rest of the time, we helped him tidy up his un-lodged quarterly business activity statements. He also cancelled his GST registration which he no longer needed.
The best way for people to keep on top of their business and to facilitate a range of business obligations, including tax and super is sound record keeping. The section on our website 'record keeping for small business' provides helpful pointers on how to keep good records.11
Also, in times of unexpected circumstances, we have been able to support business in getting back on track. For example, we recently supported a small business to rebuild more than fifteen years worth of business records lost in the natural disasters in north Queensland.12 We have also deferred lodgment obligations in areas affected by natural disasters, fast tracked refunds and provided more time to pay debts13.
Reaching small business
Our website contains a range of tools and calculators to assist business such as the capital gains tax small business concessions calculator, the superannuation guarantee charge statement and calculator, and the GST property tool.
More and more we are using online tools - such as webinars (seminars online)14 and YouTube videos15 - to help small businesses. As community preferences are starting to shift to online, webinars allow us to reach business in areas we would otherwise reach less frequently. For business people, webinars give small business the flexibility to attend seminars from the convenience of their business.
After our recent webinar program outlining the new reporting arrangements for the building and construction industry, we received feedback that this approach ensured that participants were 'available to deal with anything that comes up in the office while listening and taking notes.'16
Encouraging online dealings is one way we can tailor our services, help to minimise compliance costs and improve the efficiency of Australian businesses.
When things change
It is important to be aware that sometimes obligations or the information small business needs to report to the ATO will change. There are a number of new tax measures that were recently introduced to take effect from 1 July 2012.
Information about changes and proposed changes to the system can be found on our website, in our monthly small business newsletter,17 which is distributed to 1.4 million small businesses, and from our online small business forum.18 Through the forum business people provide us direct feedback on their experiences with the tax and super systems, and make suggestions about how we can do things better.
We regularly work with the community on matters affecting them, a good example being the new reporting requirements for contractors in the building and construction industry.19 There was a lot of collaboration with businesses, industry groups and the tax profession in shaping and delivering our assistance and education program20 on this change.
Another recent palette of change includes superannuation.21 Our research in this area to date 22 has suggested that overall awareness and understanding about the superannuation changes needs to be improved. In consultation with businesses and others we have improved the information on our website in relation to these changes.23
Supporting agents to better support small business
Tax practitioners and business activity statement agents play an important role in helping small business with regulatory requirements. We know that the vast majority of businesses rely on around 28,000 registered tax and business activity statement agents to help manage their taxation and superannuation affairs. Essentially, around 90% of these small business tax returns and 50% of business activity statements are lodged through agents.24
Our recently released Tax Practitioner Action Plan25 developed in consultation with stakeholders sets out our plan for working with the industry over the next three years. The plan covers a range of improvements to consultation and support for agents, including improvements to portals, online tools, and premium phone services.
Employee or contractor?
We have identified trends where the Australian business number is not being used correctly. In 2011-12 we conducted approximately 1,100 audits on businesses where we suspected that the business may have incorrectly treated employees as contractors.
From our audits we have collected details of approximately 51,000 payments made to around 41,000 contractors, about 18,000 of which were individuals. We found that 48% of businesses that engaged contractors were wrongly treating individuals as contractors. These workers were legally employees but were missing out on employee entitlements such as superannuation.
We want to support businesses in getting it right. Our new Employee or contractor homepage26 is on our website and offers a comprehensive range of information on the difference between employees and contractors. There is also industry specific information, as well as Employee/contractor decision tools.27 Since July 2009 the average monthly usage of the tool has more than doubled to around 8,000 hits.
As an example, a business had 400 employees and 50 contractors, which they classified as per industry practice or worker demand. Together we found that the contractors should have been classified as employees. The matter was rectified and when we revisited them some 12 months on, the business was thriving.
Tailoring our approach to debt
Our overall approach to managing and collecting tax debt focuses on early intervention28 so taxpayers and the ATO can work together early to put a plan in place to allow the business to better manage its tax and super debts.
There are a range of tools and calculators on our website which allow businesses to seek further information about assessing the viability of businesses and to calculate different payment scenarios based on individual circumstances.29 Debt is often a temporary problem, caused by unforeseen personal circumstances or a short-term business downturn. We can work with businesses on a case by case basis, taking into account their individual circumstances, to realistically assess the underlying viability of the business.
For example, we worked with a small construction company who had a $400,000 activity statement debt and funds were not able to be borrowed to pay the tax. Their profit was down on previous years, primarily due to writing off a large bad debt for a major client. Together with the business owner, we used our viability assessment tool to confirm the underlying viability of the business. We were then able to negotiate a mutually acceptable payment arrangement that saw their debt cleared in the shortest possible time.
It is important to note that we have a responsibility to ensure we assist viable businesses and tailor our support to match their individual circumstances. Conversely, if a business is not viable we have a responsibility to ensure that viable businesses are not disadvantaged by unfair trading.
If taxpayers choose not to engage with us we will use stronger measures where appropriate. Generally, we will provide taxpayers with the opportunity to clear their debt before we take firmer action and always encourage taxpayers to engage with us - even if their case has been escalated for firmer action. This supports a level playing field for all taxpayers.
Protecting honest businesses
Our most recent 2012 survey results for the small business sector have highlighted that the vast majority of respondents have reported to us that they believe ATO protects their interests, and thereby the interests of the nation. These results are pleasing, as protecting our taxation and superannuation systems protects all Australians.
We take various forms of action, tailored to the level of risk, the level of non compliance and on our understanding of the factors influencing compliance behaviour. Action could include more targeted assistance in the form of phone calls, letters, business assistance visits and in the more serious cases, using the full force of the law.
Our approach to managing non-compliance is open for all to see. Our annually published compliance program30 outlines our approach to our areas of concern.
Information matching
On an ongoing basis we 'match' the information contained in returns and statements with information provided to us by a wide range of third parties. Information we 'match' with returns and statements, typically includes:
- information from financial institutions
- payments by government agencies
- payments by businesses to contractors
- income from investments and partnerships and
- trust distributions
- property and share transactions, and
- cross-border transactions and international funds transfer.
Our information matching capabilities have grown substantially in recent years, from 409 million transactions reported by third party data providers in 2007-08, to more than 538 million transactions in 2011-12. This year we expect to match over 600 million transactions.
This increase has been accompanied by a commensurate increase in the number of discrepancies (identified by information matching) that we are acting on - from 266,000 in 2007-08 to over 540,000 in 2011-12.
An area where we are expanding our use of information matching is in relation to the receipt of taxable government grants and payments. This includes grants made direct to individuals and businesses, as well as contractor payments to individual and business entities from all three levels of government. In relation to these types of payments we matched records from more than 10,800 taxpayers in 2011-12, and identified businesses not reporting correctly through undeclared income or overdue returns raising more than $40 million in liabilities31.
For example, by working with other agencies such as the Department of Climate Change and Energy Efficiency, we were able to identify a government grant, of $200,000 that was not declared. Further information from the Department of Human Services highlighted the same taxpayer had also received a disability support pension, at the same time.
Small business benchmarks
Unrecorded and unreported cash transactions undermine the integrity of the tax system. This behaviour undermines community confidence in the system, puts an unfair burden on businesses that abide by the rules and undermines the level playing field.
As part of our ongoing strategy to deal with businesses that do not declare all their income, we developed small business benchmarks in 2009. Small business benchmarks are essentially financial ratios developed from information provided to the ATO in returns and statements. The benchmarks help businesses and tax practitioners compare their performance against the rest of the industry.
Our 2011 tax agent perceptions survey showed that 89% of agents surveyed were aware of the benchmarks, 66% refer them to clients and 76% refer to them personally as part of their business practice.
Members of the Cash Economy Advisory Group reported that benchmarks are used in assisting their clients in business purchases, and in determining the reasonableness of income reported by their clients.
To date we have found that approximately 90% of businesses in benchmarked industries fall within a benchmark ratio. We have also found that, 76,000 businesses reported income that is significantly below that of their industry peers32.
In addressing this, in 2010-11, we wrote to around 30,000 businesses and of these businesses 17% have since started reporting income commensurate with their peers. This means over 5,000 businesses have now lowered their risk profile with the ATO and may be less likely to be subject to audit.
The small business benchmarks, together with other available information, also inform our compliance activity. The plastering and café industries have been selected for review as part of our 2012-13 Compliance program in response to benchmark performance, referrals and expectations of the public and from historical trends.
Plastering
In addition to the use of cash, this industry was selected for a closer look due to historical weaknesses in tax compliance and high numbers of information referrals from the public. Following severe flooding in Queensland and natural disasters elsewhere in Australia, the public have been very clear that they have no tolerance for misuse of funds intended to rebuild communities affected by natural disasters.
Cafés
Working closely with the industry in 2011-12 gave us a better understanding of cash controls and other processes in cafes, allowing us to identify potential risks in both the franchised and non-franchised parts of the industry.
Building on this industry knowledge, the results of our previous compliance work and continuing information referrals from the community about non-compliance has allowed us to develop more targeted compliance activities.
In particular we are expanding our program of comparing information from coffee supplier trade accounts against their customers' purchasing records to detect cases where café businesses are skimming cash or are outside the system.
Wealthy Australians
Many of you may or may not be aware that 70,000 Australians, with net assets of more than $5 million, control over 400,000 entities, which are predominantly small businesses33.
We use a tailored framework34 to apply appropriate treatment strategies, depending on the individual risk profile of taxpayers. These strategies range from supporting those who want to do the right thing and being firm with those who don't. In lower-risk situations, our contact with taxpayers may involve basic integrity checks through letters, questionnaires and phone calls.
Where the suspected non-compliance is considered higher risk, we may arrange visits to businesses to conduct on-site reviews of financial statements and supporting documentation. In situations involving more complex arrangements or significant tax liabilities, we will conduct more intensive reviews or audits.
We are now able to better detect relationships between grouped entities and understand their complex behaviours through sophisticated analytics and data mining techniques and the use of third party information.
When something is too good to be true
Tax avoidance or evasion schemes require ongoing vigilance by the ATO. We remain vigilant but we continue to see some small businesses and their owners caught up in arrangements marketed by scheme promoters. Unfortunately for the taxpayers, we see them not only losing their initial investment, but also ending up with significant penalties, interest, and back taxes to pay.
We use our Taxpayer alerts35, to provide early warning of arrangements we are concerned about, and we regularly update the information about tax avoidance schemes on our website. Recently, we have seen small business involved with Division 7A36 schemes37, labour hire arrangements (splitting income from personal services through the use of a discretionary trust ),38 research and development abuse39 and foreign trust arrangements (foreign based discretionary trusts used to avoid taxation on Australian sourced income)40.
Information is available in our recently updated booklet Investigating tax-effective arrangements, and we host an annual awareness-raising campaign, including articles in the media, paid advertising,41 and social media strategies to further warn investors about the pitfalls of becoming involved in these schemes.
This year saw us partnering with the Chair of the government's Financial Literacy Board, Paul Clitheroe, to produce an educational video about recognising and rejecting tax avoidance schemes on our YouTube channel. This has been well received and has been viewed over 11,000 times42 since we launched the video on 30 April 2012.
Stopping phoenix activity before it starts
We continue to focus on fraudulent phoenix activity - that involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt.
New legislation that commenced this year increases our ability to address this behaviour by making company directors of phoenix companies more accountable for the pay as you go withholding and superannuation debts of their companies.
Prosecution
Prosecution is our last resort for those small businesses who deliberately do not comply with their tax and super obligations.
The ATO, under the authority of the Commonwealth Director of Public Prosecutions (CDPP), prosecutes people for offences such as non-lodgment of activity statements or tax returns, making false or misleading statements, and failing to keep records.
In the last financial year, the ATO prosecuted 1,430 entities (people and companies) in the small business market for non-lodgment of tax returns/business activity statements, failure to comply with formal notices for information and making false and misleading statements.
The ATO also conducts investigations into cases of suspected fraud, such as lodging false returns, illegal early release of superannuation and organised crime activities and make recommendations to the CDPP for prosecution action. Last financial year, the CDPP prosecuted eleven cases in the small business market that were investigated by the ATO. The judiciary are increasingly taking a stronger stance and handing down longer custodial sentences.
By way of example, a NSW man was recently prosecuted for 57 counts of lodging false tax returns. He was sentenced to nine years imprisonment, with a non-parole period of six years, three months. He was also ordered to pay more than $550,000 in back taxes.
In handing down her sentence, the judge said there was 'damage to the Commonwealth and thereby to each and every member of the community of Australia', and in determining the appropriate sentence 'the Court must consider the deterrent effect that any sentence or order may have'.43
The big picture
Last year our compliance activity in the small business sector saw around an additional $1.97 billion in taxes collected.
Last year we saw some decline in the numbers of returns and statements lodged on time, and fewer income tax return liabilities paid on time. There has also been an increase in small business debt to 61.4% of the total ATO collectable debt. We believe this increase mostly reflects the cash flow impacts of the challenging economic environment.
As outlined earlier, whilst we continue to support viable businesses, in 2011-12 we took over 28,000 firmer and legal recovery actions in the sector. 2011-12 saw the compliance reviews of over 11,800 Self Managed Superannuation Funds (mainly micro enterprises) raising $21.9 million.44
In 2012-13, in relation to the small business sector we will be focussing on the following compliance risks:
- unrecorded and unreported cash transactions, including a focus on plastering and café industries
- employer obligations, including ensuring employees and contractors are appropriately classified
- GST refund integrity and GST evasion
- ensuring businesses are correctly registered in the tax system
- supporting businesses in meeting their lodgment obligations, and
- incorrect fuel tax credit claims following implementation of the clean energy measure.
Further information about our past and present Compliance Programs can be found on our website.
Listening to the community
In continuing to build upon the level of community engagement and participation in the tax and superannuation systems, and to assist in improving and in better tailoring our services, we regularly consult and co-design with the community, business and other key stakeholders. We have in place over 50 consultation forums and a program of regular research. As Commissioner, I chair the Small Business Consultative Forum.45
Our consultation forums have been referred to as significant and wide ranging, and involve senior representatives of the ATO and stakeholder representatives.46 Outcomes from our forums are available from our website.
Our most recent 2012 survey results for the small business sector have highlighted an overall rise in agreement that the ATO is providing the information and tools needed to manage their tax affairs and that our service has improved. This is pleasing as we regularly review these results and apply this feedback from the community with a view to improve and better tailor the services we provide.
An initiative which I will be formally launching in the next few weeks is an online tool which will over time map out the service improvements we are working on.
Of particular relevance to this audience is that we plan to provide the community with easy access to the services and information they need and which are important to them. Part of this vision will see business be able to find information that is personalised for them; they will be able to look after their own tax and superannuation affairs online; access information and services through a variety of devices including mobile devices; and have the ATO deal with them electronically, including ways and times convenient for them. An overview of our plans for future online dealings is as follows:
Now I can...
- access information through ATO online including:
- business tools and calculators
- using hyperlinks to register for an ABN & AUSkey
In 2013 I'll be able to...
- interact securely with the ATO
- access and update my obligations online
In 2014 I'll be able to...
- complete my obligations using a mobile device
- track my dealings online
By 2015 I can...
- access integrated payment services
- have personalised options available to me
- use cross-channel authentication as a solution.
Conclusion
We want to treat people as we would expect to be treated in their circumstances. We try to put ourselves in the shoes of others. We appreciate that running a small business is not always easy and that behind every small business are people. We're all human and we don't always make the right choices, or circumstances sometimes make it extra difficult for us. For people trying to do the right thing the ATO will try to get you over the line where we can. There is no need for sleepless nights.
Footnotes
1 Micro enterprises with annual turnover of 2 million or superannuation funds with less than 2 million in assets
2 Taxation Statistics 2009-10
3 Information on Small business assistance visits is on our website
4 Micro market dashboard
5 Standard Business Reporting is an Australian Government initiative to reduce business-to-government reporting burden.
6 See Promoting a level playing field for Australian businesses in the Compliance program 2011-12, and our Firmer action approach to debt collection fact sheet
7 See Your business and tax
8 For example, Tax basics for small business
9 See Tax super and you
10 See Starting a business essentials
11 See Record keeping for small business
12 See Reconstructing your tax records
13 We have a range of ways we can help after a natural disaster as outlined in a recent media release.
14 We have a range of webinars available
15 There are a large number of these available on YouTube now. Those with a small business focus include: Personal services income; Choosing the right structure; Registering your business; Deductions and offsets; Employing other people and Record keeping.
16 See our building and construction webinar
17 See our Small business newsletter
18 The ATO Online Small Business Forum is a new channel developed by the ATO to interact with and learn from micro small business operators. It was launched in September 2011 and currently has 400 members, in its pilot phase
19 Taxable payments reporting - building and construction industry
20 See Speakers and seminars and Building and construction essentials
21 In 2010-11 employers made close to 70% (nearly $72 billion) of contributions into superannuation
22 Super reforms communications developmental research: Executive summary
23 See www.ato.gov.au/yoursuper
24 ATO Compliance program 2012-13
25 See the Commissioner's speech - Tax Practitioner Action Plan - to CPA Sydney Professional Accountants Group Annual Dinner
26 Our new employee or contractor homepage released today on our website.
27 Employee/contractor decision tool
28 See Our approach to collecting debt
29 Help for small businesses experiencing short-term financial difficulties
30 The Compliance Program 2012-13 was published on 19 July 2012
31 Compliance Program 2012-13, Reporting of taxable government grants and payments
32 Compliance Program 2012-13, Small business benchmarks raise awareness
33 Numbers as identified by the ATO's data matching and sophisticated profiling system known as the Group Wealth System
34 Risk Differentiation framework for wealthy Australians
35 See Taxpayer alerts.
36 Div 7A is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates)
37 See Taxpayer alerts TA 2010/6, TA 2011/1 and TA 2011/4
38 See Taxpayer alert TA 2011/2
39 See Taxpayer Alert TA 2009/21
40 See Taxpayer alert TA 2012/2
41 ATP magazine (JS 22835)
42 11,000 as at 13 July 2012.
43 NSW District Court, sentence handed down 18 November 2011
44 Compliance Program 2012-13, Evaluating our performance 2011-12, Micro Enterprises
45 Commissioner's Small Business Consultative Group
46 Review of the Corporate Governance of Statutory Authorities and Office Holders (2004)
Last Modified: Thursday, 16 August 2012