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  • Trends and latest findings

    The small business net tax gap has ranged between 12.2% and 11.5% over the three-year period from 2015–16 to 2017–18. In the last three years, we have seen an increase in tax collected for this population. Through this period of increasing tax payments, the overall tax gap percentage has decreased slightly.

    Internationally, tax gaps are difficult to compare. There are large variations in legal and tax systems across tax jurisdictions. Market definitions, availability of data and the methodologies used to estimate gaps vary across countries.

    Our findings are not directly comparable due to the administrative and legal differences between tax jurisdictions. But they are in line with research from other countries that also measure tax gaps, such as the United Kingdom.

    Table 1 shows the tax reported, adjustments, gross and net gaps from 2015–16 to 2017–18.

    Table 1: Income tax gap – small business income tax groups, 2015–16 to 2017–18

    Element

    2015–16

    2016–17

    2017–18

    Population (m)

    4.71

    4.75

    4.91

    Gross gap ($m)

    11,720

    12,103

    12,016

    Amendments ($m)

    903

    903

    936

    Net gap ($m)

    10,817

    11,200

    11,080

    Tax paid ($m)

    77,712

    78,730

    85,674

    Theoretical liability ($m)

    88,530

    89,930

    96,754

    Gross gap (%)

    13.2%

    13.5%

    12.4%

    Net gap (%)

    12.2%

    12.5%

    11.5%

    Figure 1 displays the gross and net gap for small businesses as a percentage over the same period.

    Figure 1: Gross and net tax gap percentages, 2015–16 to 2017–18

     Figure 1: Displays the gross and net gap in percentage terms as outlined in Table 1.

    Tax gap components and the small business population

    The main components of the small business income tax gap are:

    • omitted income
    • over-claimed deductions
    • people outside the tax system, for example, cash-only businesses operating without an Australian business number (ABN)
    • non-pursuable debt, that is not economical for us to pursue.

    The extent to which these components impact the tax gap shifts depending on the segment of the small business population.

    The following three charts split the tax gap by small business population and the main drivers of non-compliance for each of them.

    Figure 2: Small companies

     Figure 2: Doughnut chart showing small companies had: 48% omitted income, 38% overclaimed deductions, and 13% non-pursuable debt.

    For the companies component of the gap, we see that omission of income accounts for almost half of the overall gap (48%). Over-claimed business deductions also represent a significant portion of the gap (38%).

    Figure 3: Individuals in business

     Figure 3: Doughnut chart showing individuals in business had: 72% omitted income, 16% overclaimed deductions, 9% outside the system, and 3% non-pursuable debt.

    For the individuals in business component, the main driver of the gap relates to omission of income (72%). We also recognise the influence of people outside the system contributing to the overall gap.

    Figure 4: Combined small business

    Figure 4: Doughnut chart showing combined small business had: 68% omitted income, 19% overclaimed deductions, 8% outside the system, and 5% non-pursuable debt. 

    The final combined view shows the overall influence of omitted income on the gap (68%).

    Findings from the random enquiry program

    The small business random enquiry program contributes to the calculation of the tax gap estimate and helps us to identify the most common issues and behaviours driving the tax gap.

    Our findings are based on the outcome of 2,098 reviews and audits conducted across a representative sample of the small business population for 2014–15, 2015–16 and 2016–17.

    We used data from the 2015–16 and 2016–17 reviews and audits in conjunction with lodgment data from 2017–18 to give us the estimate of the small business income tax gap for 2017–18.

    Our observations from our reviews and audits highlight three key areas warranting our attention – the need to:

    • address shadow economy activity (deliberate attempts to avoid paying the right tax – also known as black economy activity)
    • continue to provide education and support
    • make it easier to comply with the law, particularly where there are multiple layers of complexity

    Small business behaviours observed

    Most of the small business taxpayers reviewed in the sample were found to have reported correctly or were considered to have genuinely attempted to do so.

    Where incorrect reporting was identified, the most common issues we saw included:

    • undeclared income
    • business owners failing to account for private use of business assets or funds
    • inadequate record keeping systems or business owners not keeping the required records.

    We observed a range of behaviours relating to adjustments, including:

    • misunderstanding or misapplication of tax law
    • carelessness
    • poor record keeping and lack of reconciliation processes
    • business owners appearing to deliberately avoid paying the right tax (for example, making minimal effort to comply with their obligations)
    • deliberate attempts to avoid paying the right tax (this behaviour is known as shadow economy or black economy behaviour).

    Shadow economy behaviour observed

    The tax effect of the shadow (black) economy for small business in 2017–18 is estimated to be $6.7 billion (or around 56% of the gross income tax gap). The majority of this activity ($5.2 billion) is associated with deliberate under-reporting of business income and over-claiming of business deductions.

    While shadow economy behaviour contributes significantly to the tax gap, only 4% of the small business taxpayers reviewed as part of the random enquiry program sample clearly made deliberate attempts to avoid paying the right tax.

    Tax practitioner behaviours observed

    Tax practitioners can play a role in shaping the reporting behaviours of small business as most small businesses have some form of tax practitioner representation.

    In the random enquiry program, we saw many examples of tax practitioners helping small businesses to report correctly. However, we also identified:

    • some mistakes as a result of tax practitioners failing to show reasonable care
    • a small number of tax practitioners aiding a taxpayer's deliberate attempt to avoid paying the right tax.

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      Last modified: 19 Oct 2020QC 59986