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  • Small businesses

    In 2016–17, there were 3.8 million small businesses registered in the tax system.

    In this report, small businesses are businesses that have an annual turnover of less than $2 million. They typically interact with the tax and superannuation systems to lodge a business activity statement (BAS) and make payments for GST, PAYG instalments and withholding, fringe benefits tax (FBT) and other taxes. Those with employees also pay quarterly super contributions. Each year, they lodge an income tax return and other statements, such as a PAYG withholding report and FBT tax return.

    Small businesses vary greatly in their financial and tax management capabilities and processes. In 2016–17, 92% lodged their income tax return through their tax agent.

    Indicators of participation

    Correctly registering in the system

    Businesses register in the tax system by getting a tax file number (TFN) and an Australian business number (ABN). Analysis of registration and economic data suggests a very high proportion of those required to be registered are registered, driven by the need to quote their ABN on invoices, and sometimes to suppliers. ABN details are available via the searchable Australian Business Register (ABR), allowing businesses and consumers to verify the registration status of businesses.

    The main registration integrity risks relate to the failure of those participating in the share economy to register for tax and superannuation responsibilities, misuse of ABNs and over-registration – in particular, individuals invalidly getting or keeping an ABN – and inaccurate ABR records due to businesses not keeping their details up to date. The integrity of the ABR is assured through a program of risk-based compliance checks. The integrity level is measured through an annual program where a sample of ABN holders are contacted to confirm their entitlement to an ABN and the currency of their details. In 2016–17 we used a more accurate methodology to measure the number of ABNs in use, meaning a comparison to the 2015–16 numbers is not possible

    Lodging tax information on time

    For income tax returns due during the 2016–17 year, 79% of small businesses lodged their returns on time, which is an improvement on the previous year; and by 30 June 2017, 87% of returns were lodged.

    For 2016–17 activity statements, 75% of small businesses lodged their statements on time, which is lower compared to the previous year. This increased to 80% lodged within four weeks of being due; and by 30 June 2017, almost 87% were lodged.

    Over the past 12 months, we have trialled a text message strategy to alert small businesses who missed their quarterly business activity statement (BAS) lodgment and payment obligations. This approach has engaged with small businesses who prepare their own statements, with some having an agent assist with the lodgment of their tax return. Results from the trial have shown significantly improved lodgment outcomes. In 2017–18, we will engage with tax intermediaries to see how this initiative can assist and be integrated into their business practices to more effectively engage with their clients.

    Reporting complete and accurate information

    The proportion of income tax returns received electronically from small businesses is 96%, which is a slight increase on 2015–16. The accuracy of income reporting continues to improve with the use of third-party data, income tax return data and business analytics to identify businesses that require intervention. During the year, the government also announced the extension of the Taxable Payment Reporting System to include courier and cleaning sectors. We are also improving our capacity to data match business income with new third-party data sources such as merchant data, ride-sourcing data, government grants and other online payments becoming available. Our expanded data-matching capacity will eventually support the pre-filling of income information and allow us to further reduce errors.

    For tax deductions, there is limited third-party data available and we rely on analytics to help identify errors and irregularities where we may have concerns. Where our concerns are confirmed, we take direct action. Mistakes mainly involve private expenditure being claimed as a business expense.

    Paying tax obligations on time

    We make it as easy as possible for taxpayers to pay their tax on time using a wide range of tools, payment channels and self-serve payment options. In 2016–17, 70% of small businesses’ tax liabilities were paid on time, and 87% were paid within 90 days of the due date, which is consistent with last year.

    At 30 June 2017, small businesses owed nearly $13.9 billion in collectable tax debt, an increase of 7% from last year.

    Small businesses accounted for around 67% of total collectable debt. Supporting our clients in debt has been a primary focus for the ATO, with a number of tools and options available. Earlier intervention, upfront debt conversations with clients, and the application of realistic and sensible payment arrangements that support the viability of small businesses, are assisting small businesses to meet payment arrangements on time.

    Across small businesses, the construction industry has the lowest rate of payment on time and the highest proportion of collectable debt. We are working with the construction industry to improve levels of compliance.

    We have implemented a streamlined approach to dealing with PAYG withholding that provides small business with timely and fair outcomes where mistakes have been made. This supports viable small businesses to meet their obligations in a way they will be able to maintain into the future.

    How we are making it easier

    Using online services to improve support

    The ATO aims to provide accessible and convenient transactional services that integrate with business systems and processes, as well as information that synchronises with business events. Central to an optimal client experience is our support for tax professionals in their advisor role as the main channel for lodging tax returns and other reports.

    We have partnered with industry associations and other government agencies in developing a comprehensive suite of products to help small businesses understand their obligations. We actively raise awareness of the information and tools available by promoting this information, as appropriate, on other government agency and industry websites.

    While the vast majority of businesses lodge their tax returns through a tax agent, many self-prepare and lodge their BAS through the Business Portal or via cloud-based software, in some cases with the assistance of registered BAS agents.

    During 2016–17, our digital service focus has been on implementing more convenient tools and options for business users to access ATO online services:

    • Sole traders can now log into the Business Portal and other government online services using their myGov account or credential instead of an AUSkey. Some 155,200 individuals had connected their myGov credential to 171,700 ABNs.
    • Businesses using cloud-based software enabled with Standard Business Reporting (SBR) can now securely transact with the ATO without an AUSkey, following a simple one-off process to notify the ATO of their SBR cloud-based software.
    • This year, we have adopted a range of strategies to improve client satisfaction and perceptions of fairness. Initiatives have been developed by having regard to feedback obtained through Fix-it Squads and through insights we have gained through research. The latest data indicates that these initiatives have been effective in making it easier for small businesses to meet their tax and super obligations, with the most recent findings showing that dealing with the ATO is getting easier (up from 46% in February to 59% in May 2017). Similarly, satisfaction with the helpfulness of ATO information increased from 54% in February to 64% in May 2017.

    One-stop shop business registration

    In collaboration with other agencies and digital service providers, we are offering a wider range of options for prospective businesses to register in the tax and superannuation systems. This is part of a whole-of-government One-Stop Shop strategy for small business.

    The following new services were introduced during the year, making it easier for businesses, while also improving the integrity of the registers:

    • We published a range of application programming interfaces (APIs) for business registration on the SBR site to assist software developers to integrate business registration functions in their products.
    • An integrated online business registration service, released as a beta version for testing in April 2017, enables prospective businesses to register with the Australian Securities and Investments Commission (ASIC) and the ATO in one place. It allows prospective sole traders, partnerships and companies to apply for a business name, an ABN, company and tax registrations in one process without re-entering information. It is a joint initiative of the ATO, the Department of Industry, Innovation and Science, ASIC and Treasury.
    • Improvements to the ABN registration system made in October 2016 saw the number of ‘on the spot’ registration decisions increase from almost 74% in 2015–16 to 86%.

    We work with the Department of Industry, Innovation and Science to provide timely and relevant information to those who have just started their business through a series of emails. This gives them with useful information they may not otherwise know in the crucial first 12 months of business operation.

    Simpler BAS

    Processes for the simpler business activity statement (BAS) were finalised during the year. From 1 July 2017, businesses with a turnover of less than $10 million need to complete just three labels on their BAS, instead of seven. The simpler BAS was developed with input from tax professionals, software providers and small business representatives, ensuring that tax agents and bookkeeping software will fully support simpler BAS reporting from July 2017. To help smooth the transition, businesses starting up after 1 January 2017 could begin using the simpler BAS reporting method from their first BAS.

    The simpler BAS reduces the amount of GST information required, by simplifying the GST classification of each business transaction to either ‘GST Yes’ or ‘GST No’. Small businesses have previously told us that they struggled with getting the classification of GST transactions right and that it deterred them from taking advantage of accounting software automation options. The simpler BAS is expected to improve accuracy in reporting and reduce compliance costs.

    MyTax and ATO app now support sole traders

    We expanded the scope of myTax for Tax Time 2016, enabling sole traders who self-prepare their income tax returns to lodge online.

    An update to the ATO app released in December 2016 extends the use of the myDeductions tool to sole traders. The update enables them to capture transactions ‘on the go’, including business income and expenses such as details of vehicle trips, and images of invoices and receipts. Users can send the information to their agent or enter it directly into their online tax return.

    Small business clients have told us they struggle with record-keeping. This new functionality will help sole traders with simple tax affairs to develop good record-keeping behaviours, saving them time. It also means their tax agents have more opportunity to provide value-added services.

    Fix-it Squads put focus on small business needs

    Small Business Fix-it Squads are rapid-design projects where small business owners, federal, state and local government agencies, and intermediaries work together to examine and resolve problems affecting small business owners.

    To date, with the help of our partners, we have consulted with more than 300 small business owners across a number of areas, such as the sharing economy, drought assistance and building and construction. As a result, 41 recommendations have emerged, with 28 implemented, saving Australian small business owners an estimated 1.7 million hours per annum.

    In 2017–18, we will focus on implementing the final squad recommendations and will review how squads can be best used in future.

    Special assistance programs

    In 2016–17, the ATO continued to work with mental health support services, small business owners and their representatives in supporting small business operators affected by mental health issues. Initiatives include a new website and video and relevant training for ATO staff. ATO support is available for business operators facing health issues and includes deferred payment and lodgment arrangements where this will help them get back on their feet.

    We responded quickly to support small businesses affected by Tropical Cyclone Debbie in April 2017, with a range of support measures, including:

    • tailored repayment arrangements
    • remission of interest where appropriate
    • interest-free repayment arrangements for eligible businesses.

    Delivering contemporary and tailored services

    Using data to prevent non-compliance

    Financial transaction data provided to the ATO by financial service providers, such as banks, enables us to match payments to Australian businesses against what they have reported to us. This helps to identify those that are not registered or reporting all of their income or not meeting other tax and superannuation obligations.

    From 1 July 2016, third-party data reporting has been extended to:

    • business transactions made through electronic payment systems, such as credit and debit cards and electronic funds transfer
    • transfers of securities
    • payment of grants and other financial benefits by government entities.

    Service providers currently provide us with financial transaction data on request, but they will be required to provide this information automatically from 1 July 2017.

    Supporting payment on time

    Cash flow problems are an endemic issue for small businesses, yet evidence shows that those who manage their cash flow effectively are more likely to succeed, and more likely to meet their tax and superannuation obligations.

    We have worked with key stakeholders in developing a program to help small businesses manage their cash flow. There is strong support and interest from tax professional bodies and industry associations, and we are working with them on plans for full implementation.

    The Cash Flow Management Program, based on adult learning and behavioural insights principles, is designed to empower small businesses to take action to improve their cash flow situation, enabling them to pay on time.

    Supporting the sharing economy

    From an income tax perspective, sharing economy activities – such as providing ride-sourcing services and renting out part or all of a dwelling on a short-term basis – are taxable business activities. From a GST perspective, people carrying on an enterprise in ride-sourcing services that constitute taxi transport need to register for and remit GST.

    The ATO has provided detailed guidance on the tax implications of sharing economy activities, including extensive website information with specific guidance on ride-sourcing and using a home to produce income. Declaratory proceedings in the Federal Court supported the ATO view of the application of GST provisions to ride-sourcing, and clarified the law for small business operators in the ride-sourcing industry.

    Based on third-party data, we estimate that about 125,000 individuals have received a payment for a ride-sourcing service since August 2015. We wrote to 60,000 drivers between September 2016 and March 2017, focusing on those who had not registered for GST, with advice on what they should do to meet their tax obligations.

    In collaboration with industry associations, intermediaries and other regulatory agencies, we have developed a comprehensive campaign designed to help drivers and facilitators to meet their obligations. The campaign includes updated web content, videos, presentations and webinars, and direct contact with drivers.

    We are also working with the states and territories, and the taxi and hire car industry, to help them understand the income tax and GST implications of structural reforms. This includes transitional assistance payments to taxi and hire car licence holders and passenger levies charged to fund the reforms.

    Tackling the cash and hidden economy

    In relation to the small business sector, failure to participate in the tax and superannuation systems reaches its most extreme form in the cash and hidden economy. This involves people operating entirely outside the tax system or deliberately misreporting their activities with the aim of evading tax and other obligations, or getting benefits they are not entitled to.

    During 2016–17, as part of our cash and hidden economy program, we contacted more than 11,000 businesses where we had concerns about black economy activity, raising more than $190 million in tax liabilities and penalties. We also visited over 24,000 other small businesses to show them the range of tools the ATO has to assist them with running their business.

    In addition, we work closely with other government agencies, such as the Fair Work Ombudsman, where they identify attempts to evade employer obligations through unrecorded cash payments and sham contracting.

    The 2017–18 Budget provides for further work to tackle a number of aspects of the black economy.

    Dispute resolution

    A number of strategies have been implemented to ensure we deal with disputes with small businesses in an open and transparent manner. For example, we are resolving disputes earlier and without the need for litigation. Settled disputes with small businesses accounted for 50% of all settlements – overall we are engaging with small businesses more frequently and using settlements as an effective means of resolving disputes. See Resolving disputes for more information.

      Last modified: 30 Oct 2017QC 53650