The ATO's current focus areas for the small business market

Deborah Jenkins
Deputy Commissioner Small Business

Chartered Accountants Australia and New Zealand, Strategic Planning Day,
29 October 2020.

(check against delivery)

Strategic planning is challenging at the best of times but even more so in the middle of a pandemic! So I am pleased to be with you today to share some insights from the ATO about current focus areas for small business, to assist you in your planning. I will be covering the small business market and Assistant Commissioner Jade Hawkins will be talking about the private wealth market. I am Deborah Jenkins, Deputy Commissioner for Small Business at the ATO. I also have responsibility for the GST and Black Economy programs.

In the spirit of reconciliation I would like to respectfully acknowledge the traditional owners and custodians of the land on which we all meet across the country. I would also like to pay respect to the elders past, present and emerging. I would specifically like to acknowledge the Gadigal of the Eora nation, the traditional owners of the land I am presenting from today. I would also like to extend that respect to other Aboriginal and Torres Strait Islander people watching.

I have presented at this conference the last few years and was scheduled to be with you again earlier this year in person. But thank you Michael and team, for having me virtually to maintain our connection with Chartered Accountants Australia and New Zealand.

It has been a difficult year for the whole community and arguably none more so than small businesses. I know many of you are small businesses yourselves and your own businesses have been impacted, with different challenges and various stimulus measures to understand, in very compressed timeframes.

At the ATO we had to shift focus on getting stimulus benefits out the door as quickly as possible to support so many businesses in need.

As we move to implement measures recently announced in the Federal Budget we will be continuing to balance our role in supporting taxpayers through this very challenging time with recommencing our work to address key risks to the tax and super system.

I am proud to say it’s the strength of our tax and super systems that has put all of us in a position to deliver stimulus to the community this year. And that demonstrates the need for us to continue to protect it.

As you would be aware, small businesses are a very diverse group. We define small businesses as those below a $10 million turnover, there are 4.2 million of them, nearly 6.3 million when we include associated entities.

They employee 5.8 million people but it’s important to note that 78% are not employers. Sole traders make up just under half of the small business population.

They contribute significantly to the economy and total tax collected. They have also been key recipients of stimulus support throughout the year. The three-month review of JobKeeper undertaken by Treasury showed that around 618,000 small businesses were receiving JobKeeper.

And importantly many of them turn to you as tax professionals for advice, guidance and support.

We know that many businesses who were doing well are now struggling and in some cases have had to close. They will need advice and support in deciding whether to exit, or to continue and trade their way through these challenging times. However, the impacts of this pandemic are not uniform across an industry or even a location.

And, many businesses are actually doing quite well because of their industry or because they have successfully adapted (or pivoted) to the new business environment. Many shops in my local area have adapted and changed their business model and are doing well. These business owners will need advice on how to handle the growth and to ensure they continue to meet their obligations, tax and super included.

The support each business needs right now is so varied, which makes it challenging for us (and I am sure for you too). Because of that, we need people to let us know if they continue to need our help.

Our vision for small business in 2019–20 was:

We are fair and reasonable, trusted and respected by the Australian community and key stakeholders. Tax system performance is improving with the small business and GST tax gaps trending down, and small business confidence in the ATO is up.

This is was written in a pre-COVID world but I think it rings very true in terms of where we want to land by the end of this financial year. We want to keep building confidence by supporting small businesses when they need it, but we need to start shifting the focus back to ensuring good compliance for the health of the system, as I was talking about earlier.

ATO support so far

Since March (and realistically before that due to bushfires and floods) the ATO has been supporting small business owners who are under incredible amounts of stress and facing uncertainty like never before. We know that tax obligations have not been at the top of their mind and probably are still not.

They have been dealing with issues like:

• drastic reductions in their business.
• struggles with managing their cash flow (many making a loss for the first time); and
• challenges in retaining staff and paying them

In navigating the pandemic, we at the ATO provided a range of support to businesses who needed help with their tax and super obligations, in partnership with you. We are committed to continuing to help small businesses who need it and we want them to know that it’s never too late to speak with you (or us) if they need help.

Some options we have made available to assist businesses adversely impacted by COVID-19 since March include:

• Extra time to lodge and pay
• Remitting certain interest and penalties
• Helping them enter into low interest payment plans.
• Allowing businesses to vary PAYG instalment amounts to zero.

The important message I want to leave with you today though is that we want people to keep lodging, even if they are not in a position to pay straight away. Of course if they can pay, they should. But staying in the system and meeting lodgment obligations will make things a lot easier for businesses as they come out of the pandemic – they will know their true financial position, will have kept good records and, as you are aware, not staying up to date with your obligations may impact on eligibility for future stimulus measures.

If people can’t pay, we can work with them (and you as their advisers) but my message today is that they should still try to lodge where possible. As we shift the dial back to our more traditional activities, it is even more important that people let us know if they continue to need help. However, I would encourage them to work with you to determine what sort of help they need, for example, if a payment deferral is the right thing for them and their business.

We have been working really closely with tax professional associations to support our partners in the profession. We appreciate that there has been additional pressure on your time and energy in assisting your clients to access various stimulus measures, both at the Commonwealth and state or territory level, while continuing to manage the usual reporting requirements.

Our approach through COVID

At the outset of the pandemic we had to swiftly change our approach to both deliver on the Government’s stimulus package and take into account the sensitivities related to tax collection at such a difficult time. We paused much of our new business as usual compliance activity, and turned our focus to pre-issue refund integrity work, both to ensure correct payments were made and to identify and stop attempted fraud. We moved several thousand staff who would normally be tasked with compliance work to help facilitate stimulus payments.

Across all markets, taxpayers with in-progress audits were pro-actively contacted and offered assistance. In the small business market, where clients advised us they were suffering impacts from COVID, engagements were deferred, initially until the end May 2020 and then until 31 August 2020. But interestingly initially we did see about 50% of cases request that we continue, and this percentage grew over time as we maintained contact with the clients and their agents. In the larger markets this percentage was even higher.

Since 1 September, we have stopped providing blanket extensions to small business audit cases and we have recommenced activity where the client is either not adversely impacted by COVID or is now in a position to progress.

I want to emphasise that we will continue to be empathetic to each client’s situation and provide additional time if they need it.

We have now started commencing new audit work but are very aware that we need to sensitively balance the ongoing impacts with our role as a revenue authority.

As we reached the end of September, we saw the end of (or changes to) some of the stimulus measures. We are now focused on supporting the eligible small businesses and sole traders to access JobKeeper under the adjusted rules, and working through what the Budget announcements mean in practice.

Budget measures

Measures such as Temporary full expensing (some call this a further extension of the Instant Asset Write off), Temporary loss carry-back and changes to the small business entity turnover threshold are some of the measures impacting on small businesses.

• In relation to the JobMaker Hiring Credit, the announcement is now proceeding through the legislative process and we will communicate to you after passage of any legislation
• We are focussed on ensuring eligible businesses and their tax agents are aware of these (and many other) measures and understand them so they can utilise them if they choose to. We will publish a range of material across a range of sources to assist.

As there are always a small number that seek to abuse the system unfairly and inappropriately, we will also be developing risk models associated with these measures, individually and, where they interact, collectively.

That’s a very quick snapshot of some of the measures relating to small business and I know Jade will cover some more details on our focuses for Budget measures in her presentation.

Tax gap

We know we have compliance risks that we need to address in the small business market, that are further complicated by the greater pressure many of them now face. The small business income tax gap random enquiry program has given us a great understanding of these challenges.

Our research program estimates tax gaps across all the taxes and programs we administer. While no tax system can eliminate tax gaps completely, we are working towards sustainably reducing tax gaps over time, and this program helps us to measure our progress.

Last week we released our Annual Report, which for the first time included estimates for all 15 income and transactional-based taxes. This allows us to report the total estimated tax gap for the Australian tax and super systems.

For 2017–18, we can see that around $423 billion was paid voluntarily (across all market segments), and this is around 93% of the revenue we expected to receive. Its an outstanding figure and also reflects your support in maintaining the health of the system as well.

That reflects a healthy revenue collection system – but a lot of work goes into maintaining this, and tax professionals play a significant role in helping us achieve these results.

The 2017–18 tax gap for the Australian tax and super system was estimated to be approximately $31 billion or 6.9%. Think about how many schools, roads and hospitals that equates to.

But, the gap has been trending down since we first started measuring.

One thing to keep in mind is that these estimates are all for periods before COVID, and we’re yet to fully understand the impacts this crisis will have on the global and local economy, on Australians, and flowing on from those impacts, what it will mean for our revenue collection system.

Certainly, pre-COVID, we can see that overall, the Australian tax system was in pretty good shape and things were moving in the right direction.

In the Annual Report we also published updated estimates of the small business income tax gap, so we can clearly see how our small business taxpayers fit into the overall performance of the system.

I spoke to you about the small business income tax gap last year, but I think it is worth covering again, as the data and insights are so important for both us and you to understand to assist us in addressing risks in the system and taxpayer behaviour.

Small businesses contribute significantly, and for the most part, willingly to the revenue collected. In 2017–18 they voluntarily contributed around $85 billion in income tax, or just over 88% of the revenue we expected from them.

The net small business income tax gap estimate for 2017–18 sits at 11.5%. Looking at what’s happened with the gap over a three-year period, we’ve seen it reduce by 0.7%.

So like we’ve seen with the system-wide performance, and noting again this was pre-COVID, there has been an overall improvement in the income tax performance for small business. But there is clearly more work to be done.

The small business income tax gap for 2017–18 equates to around $11.1 billion, so that’s just over a third of the value of the system-wide tax gap.

And of course, small business taxpayers also contribute to some of the other tax gaps, including the GST gap, which is another significant component of the overall gap.

Thanks to our random enquiry program – where we’ve now reviewed the affairs of over 2000 small business taxpayers – we have a very good understanding of what is driving the small business income tax gap.

We can see that close to 70% of those taxpayers did the right thing and paid the right tax, or they tried to.

At the opposite end we saw only 4% of the taxpayers reviewed deliberately engaging in shadow (or black) economy behaviour. But this group (together with a cohort of business owners who operate entirely outside the tax system) had the biggest impact on the gap. They are responsible for around 56% of the value of the small business income tax gap (or around $6.7 billion). As a quick aside there’s some good news here too as this is down by about 9% compared to 2015–16.

But it’s still a big problem, and that’s why we have a continued focus on addressing it.

Putting the shadow economy behaviour aside for the time being, there is still over $5 billion missing as a result of behaviours other than deliberate shadow economy behaviour. This is:

• honest taxpayers making mistakes or being confused about their obligations.
• businesses without proper record-keeping systems in place.

And a fair component of it is opportunistic behaviour – here we don’t have clear evidence the behaviour was deliberate but it may be leading into shadow economy territory.

It’s this quarter of the population that we want your help to influence, and give them a subtle nudge in the right direction.

Because you play such a key role in providing advice to a large portion of the small business population there is such a significant opportunity for you to encourage, enable and support them to get it right, obviously with our help. From your perspective, it’s these cases where encouraging the right behaviours, asking the right questions and not relying on assumptions can make a big difference.

In the random enquiry program we get the opportunity to see those small business taxpayers who are getting it right in action, as well as how people are getting it wrong. I get a real joy from being able to see what it looks like when businesses are getting it right and it is good for our staff too.

Small businesses reporting correctly typically keep good records and conduct regular reconciliation processes. They’ll often use technology like point of sale or could-based accounting software to help them get it right. (Which is why we need to make the most of the gains we have made in the increase in the use of digital as a result of COVID).

Our reviews have also revealed another common theme – these business owners also get advice from their tax professional when they need it, especially if they are making changes to their business – changing business structure, taking on employees and buying or selling assets are all events where it might be a good time to touch base with a professional.

We’re working to encourage these behaviours in our small business taxpayers and these are some good points for tax professionals to discuss with their small business clients when they have the opportunity.

Additionally, tax professionals can help by just keeping an eye out for some of those obvious areas where we know small business taxpayers often go wrong – not declaring cash income or sales that have been directed to private accounts. Claiming personal expenses as a business expense or not recording director’s fees or drawings correctly.

We strongly encourage you to ask a few questions here, particularly if something doesn’t seem to add up or seems unusual.

You can also help your clients by drawing their attention to the types of events where it might be worth their while seeking some additional support from you. If the issue is really complex make sure you have the right networks in place so you too can seek help or advice.

Our risk focuses

Of course, the biggest immediate challenge we all have is how we can best support small business through COVID, while maintaining the integrity of the system throughout the crisis, and in the aftermath.

Because it is hard for us to identify who is still impacted we need to return to a normal setting for our work program. It’s not as simple as applying postcode logic - for obvious reasons. In bushfires we can use this approach to support impacted businesses.

A lot of businesses are going to need your support (and ours) if they need further help. Others will be fine and may just need to check something minor with you. We will need to get the balance right, while ensuring that people are meeting their obligations

We have recommenced and adapted our strategies to address compliance risks, being very conscious of the impacts still being faced by many businesses.

Over the past few months our focus has been on engaging particular segments of the small business market we had identified may be in greater need of proactive education and support to get things right. This included tailored help and engagement for businesses in industries we know to have been particularly heavily impacted by the pandemic and industries where business models have adapted rapidly. It also included tailored support on some risk areas we anticipate will be relevant to more businesses than usual this tax time including losses, disposing of assets, home office expenses and also motor vehicle expenses for ride sharing drivers.

We have also recently recommenced outbound engagement with taxpayers who have outstanding payment or lodgment obligations. Our aim is to remind taxpayers of their obligations, or work with them if they still need support to stay on track.

We know we need to provide the right help at this time to ensure people understand their obligations and are steered in the right direction to address unintentional mistakes. But we also need to hold people to account who are intentionally doing the wrong thing.

Looking ahead, we will be resuming our review and audit programs addressing shadow economy behaviour. We will be continuing our use of Taxable Payments Reporting system data to check that contractors in a range of industries are lodging and meeting their income tax and GST obligations in full. Taxable payments annual reports (TPAR) data allows us to match the payments reported by payers to contractors (payees) income tax returns to identify where contractors may have omitted income.

We have also been piloting a nudge approach where we have contacted some contractors ahead of their 2020 tax return lodgment to remind them to include their TPRS reported income this year.

From November 2020 we will be contacting tax agents and their clients who are contractors in the cleaning, courier and building and construction industries and may not have included all of their income in their 2019 tax return. We will be using a combination of emails and phone calls to contact tax agents in advance of their clients receiving letters.

For our shadow (or black) economy program more broadly, we are reconsidering the strategy as some of our previous approaches like visiting businesses in person are unlikely to be possible, at scale, in the coming year. We will continue to use a combination of review and audit programs, delivering help and education and building community awareness of our work to address the shadow economy – we will just need to do things a little differently.

We are also applying agent-focussed strategies to the Black Economy by taking the insights generated through our Tax Practitioner model and identifying agents with higher than normal levels of Black Economy risk in their client base. We have a range of strategies to engage with agents on this, from sharing risk profiles to help agents self-manage these risks, through to firmer tactics where we see intentional behaviour which ultimately could see agents removed from the system.

Other areas we will be closely monitoring are loss claims and unreported fund extractions from small business companies.

We are currently overhauling our GST high risk refund models to enable us to more effectively detect and action high risk refunds before payment.

Our broad focus now beyond the specific risks we are focused on is ensuring people are staying in the system. Businesses need to be lodging, and if they can pay, they should. Those who still need help just need to contact us and we will be here to support them. But we are conscious that many businesses are doing well so we need to be reminding them to meet their obligations.

Our future focus, digital and data

As we look to the immediate and long-term future, and how we tackle changing risks and support you and small business in better ways, digital and data are key to our strategies.

We know from our tax gap research that businesses who are digitally engaged perform better. When we work to integrate tax and super into natural business systems, (after the upfront investment of course) business owners and their advisers have more time back in their day to dedicate to growing, improving, and expanding the business rather than having to focus on tax administration. Digital and data are key to this and we are focused on delivering improved services with this in mind.

In the next year, we’ll be rolling out a new service – Online Services for Business. This will replace the business portal and the electronic superannuation audit tool, which you may know as eSAT.

Online Services for Business has undergone extensive user testing, and a small Private Beta is currently underway which is a helpful way for us to tinker with the design to make it as good as we can before we go to the public beta phase.

Other projects we are focused on include e-invoicing, the Modernising Business Registers program and Director Identification NumberExternal Link are other examples of how we are improving digital services and the digital experience.

How we’re using TPRS data is a good example how we are using data to help people get it right – contractors who operate as sole traders have their TPRS payments pre-filled in their tax returns each year, just like salary and wages for employees.

So far for 2020 we’ve had well over 130,000 businesses lodge their Taxable Payments Annual Report, with matched reporting on just over 970,000 payees so there are a lot of people we can help there by sharing that data.

I already mentioned some of the ‘nudge’ strategies we are rolling out for TPRS.

Our strong preference is to make use of data to help businesses and their advisers quickly identify red flags and put a fix in place before a problem gets worse.

Data also means you are freed up with more time to provide advice to your clients that is going to help them manage their business better, and focus on thriving and growing.

The way we can partner with you in improving the health of businesses is going to ensure the success of small businesses, particularly over the coming year.

This is demonstrated through the introduction of the Cash Flow Coaching Kit, where we saw an opportunity to assist small businesses with better managing their cash flow, to improve the overall health of the system. Noting that you are their trusted advisors, we knew that delivering this product through you would be the most logical approach. We have worked closely with Chartered Accountants on rolling out this tool and we are happy we are nearly ready to deliver the final digital version – stay tuned!

There is a key initiative in our Corporate Plan this year focused on driving improved tax performance of small businesses by enhancing how we receive and use verifiable data. We will engage and consult with our partners in the system, like all of you as well as Digital Service Providers, in the new calendar year, on building what that future can look like.

It is in all our interests, whether a business, a business adviser, a revenue authority or the community as a whole, for businesses to be successful, and we are looking at a long game for recovery from the events of 2020 so it is our responsibility to make it as easy as possible for businesses to recover and have that success.

Closing

Over the coming year we will drive better compliance through the way we engage with, educate and support small businesses, by returning to work programs that address key risks. We will also continue to take a sensitive approach, acknowledging the varied impacts of the current environment on businesses.

We will rely on you to help us and your clients with this shift. You play a central role in assisting small businesses to get back on track through providing broad advice about how to manage their business, and asking us for help when your clients need it.

Together we are a strong partnership to help small businesses recover and to maintain the health of the tax and super systems.

I will hand over to Assistant Commissioner Jade Hawkins now to take you through our focuses with private groups.

Speech by Deputy Commissioner Small Business, Deborah Jenkins at Chartered Accountants Australia and New Zealand Strategic Planning Day, 29 October 2020.