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  • Trends and latest findings

    Our small business income tax gap estimate for 2015–16 is based on a sample of 1,398 taxpayers. We are working to build a bundled sample of over 2,000 random enquiries. In this way we will look to provide a trend over time as we continue to progress the random enquiry program.

    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.

    The most common issues we observed from the random enquiry program included taxpayers:

    • not declaring all income
    • failing to account for private use of business assets or funds
    • not understanding their tax obligations.

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

    • poor record keeping and lack of reconciliation processes
    • carelessness
    • 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 (that is, exhibiting black economy behaviour).

    The vast majority of small businesses have some form of tax practitioner representation. We saw many examples in the random enquiry program of tax practitioners helping small businesses to report correctly. However, we identified some mistakes as a result of tax practitioners failing to show due diligence.

    When we did need to make adjustments to tax returns, we saw three key areas warranting our attention:

    • the need to address black economy activity
    • the need for continued education and support
    • the need to reduce complexity – law, multiple taxes, business structures.

    The tax effect of the black economy for small business in 2015–16 is estimated to be $7.7 billion (or around 64% of the gross income tax gap). The majority of black economy activity ($6.5 billion) is associated with deliberate under-reporting of business income and over-claiming of business deductions.

    For clients that deliberately under-report income and operate in the black economy, we have a continued focus on treatment strategies, both prevention and correction. Where we detect deliberate omission of income and over-claiming of expenses, we can apply correction strategies such as penalties and prosecutions.

    Findings from the random enquiry program highlight the need for continuous education. This is to support good record keeping practises, keeping evidence of expenses and the proper setup of systems. Our findings support the work we are doing to make it easier for taxpayers to comply and hard not to. For example, through recent initiatives such as Single Touch Payroll and e-invoicing.

    Table 1: Income tax gap – small business, 2015–16

    Income tax

    $m

    %

    Gross gap

    $12,058

    13.6%

    Amendments

    $972

    n/a

    Net gap

    $11,087

    12.5%

    Tax paid

    $77,398

    n/a

    Theoretical liability

    $88,485

    n/a

    Figure 1: Amount paid and net gap – small business, 2015–16

    Bar graph showing that small business income tax paid in 2015–16 was around $77 billion and the net gap estimate is around $11 billion.

    Tax gap by population and drivers – Small business income tax, 2015–16

    The following three charts split the tax gap by small business population and the main drivers of non-compliance for each of them. These relate to: omission of income, over-claimed deductions, people outside the tax system (for example, cash-only businesses operating without an ABN), and non-pursuable debt (that is not economical for us to pursue).

    For the companies component of the gap, we see that omission of income accounts for almost half of the overall gap (47%). Over-claimed business deductions also represent a significant portion of the gap (39%).

    Figure 2: Small companies

    Doughnut chart showing small companies had: 47% omitted income, 39% overclaimed deductions, and13% non-pursuable debt.

    For the individuals in business component, the main driver of the gap relates to omission of income (76%). We also recognise the influence of people outside the system contributing to the overall gap.

    Figure 3: Individuals in business

    Doughnut chart showing individuals in business had: 76% omitted income, 14% overclaimed deductions ,7% outside the system, and 4% non-pursuable debt.

    The final combined view shows the overall influence of omitted income on the gap (71%).

    Figure 4: Combined small business

    Doughnut chart showing combined small business had: 71% omitted income, 18% overclaimed deductions, 6% outside the system, and 6% non-pursuable debt.

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      Last modified: 03 Oct 2019QC 59986