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  • What the ATO is seeing in the small business market

      Deputy Commissioner Deborah Jenkins

     Speech to the Institute of Public Accountants 2018 national congress

     Sydney, 2 November 2018

     (Check against delivery)


    Good afternoon and thank you for inviting me to talk today at IPAs National Congress. It is an exciting time for accountants as Australia hosts the World Accounting Congress. As accountants, you play a pivotal role in the Australian economy and in the tax system. And we, at the ATO value our relationship with you and your association. I’d like to acknowledge the contribution that Tony Greco makes as part of this. Together, we ensure the smooth operation of our tax and super system that contributes to the economic and social wellbeing of all Australians.

    As Deputy Commissioner for Small Business at the ATO, I am responsible for the Small Business Line as well as the Small Business Experience - right across the ATO. We deliver services, education and support to small business as well as working to help them to understand and comply with their tax obligations.

    In partnership with tax practitioners, business advisers, business, industry bodies, and stakeholders across the ATO and other Government agencies (like ASIC), we strive to create an environment that supports sustainable and viable small businesses to thrive.

    Today I am going to cover some of the key things that the ATO is focused on when it comes to small business and finally some observations about the future.

    Who are small businesses? What are we seeing in the market? The Black Economy, the challenge of cash flow and debt, single touch payroll, tax gap and finally small business disputes.

    The small business client base

    Let’s get a bit of context around small businesses – we define them as those entities with annual turnover less than $10 million.

    • There are around 4 million small businesses in Australia. They account for 99% of businesses in Australia, contribute $380 billion to the economy and employ approximately 5.6 million Australians. And they are a diverse group.
    • 78% of small businesses have no employees
    • 70% have turnover less than $75,000
    • Around 70% pay their tax on time.

    44% of this population are sole traders. The next largest group are companies followed by trusts and partnerships.

    In addition, there are 1.88 million individuals linked to small business entities. They may be responsible for, or derive income from, small business activities.

    With that many small businesses to engage with, we rely heavily on our relationships with associations such as the IPA and its members, you.

    So what are we seeing in this client segment and what are we doing about it

    I’d like to share some of the insights into this group that we come across in our work:

    • There are a lot of them and they are not homogenous
    • They are time poor, generally not tax literate and often have limited business acumen – but they have a lot of passion
    • Cash flow tends to be a big challenge
    • To them, tax and super seems complex and overwhelming
    • They often use intermediaries – most commonly tax agents or book keepers
    • Most use smart phones but are slower to adopt technology when it comes to their business operations – that takes time and time is something they don’t have.

    With such a large and diverse population, how do we balance the ATO’s obligation to serve the needs of small businesses while also discharging our responsibilities as a trusted and fair regulator?

    • We focus on prevention measures and engaging with our clients early, as well as on contributing to key ATO initiatives that will improve the small business experience.
    • We undertake compliance activity to address instances when taxpayers have deliberately done the wrong thing. When mistakes occur unintentionally, we work with taxpayers to correct the error.
    • We know that both prevention and correction are effective compliance strategies.

    So what are the things we are paying particular attention to with small businesses at the moment that you should be aware of? You are unlikely to be surprised by anything I’m about to say. The key issues continue to be:

    • claiming private expenses in the business
    • the attribution of personal and business use
    • a lack of understanding of how tax applies for different and often complex business structures, and
    • omitted income.

    Some of the unintentional and basic mistakes we have observed in our recent work include:

    • forgetting to check all bank accounts for interest
    • forgetting to correctly report dividends and franking credits
    • unable to substantiate small business expense claims
    • not completing an annual reconciliation of income tax return information and business activity statements
    • little calculation errors, transposition of figures
    • claiming business expenses at the GST inclusive rate rather than GST exclusive (when registered for GST)
    • over claiming agent fees, where the agent fees relate to more than one entity or taxpayer
    • not including income from coupon sales.

    At the more egregious end, we see a range of behaviours that indicate businesses operating in the black economy. Some examples include:

    • Deliberately omitting income that has been diverted to personal bank accounts and mortgages
    • deliberately omitting cash income
    • not all sales put through the till or invoiced
    • not reporting income from weekend sales
    • paying staff in cash from cash takings that are not reported.

    One of the more common adjustments we make relates to the incorrect claiming of private expenses in the business. This can be either a deliberate action or error. Private expenses we observe being over claimed include:

    • motor vehicle
    • expenses associated with home offices
    • overseas travel.

    Our message to small business is always to substantiate business deduction claims. We have three golden rules to help small business figure out what business deductions they can claim:

    1. The money must have been spent for your business – not a private expense, for example you can't claim child care fees or clothes for your family.
    2. If it's a mix of business and private use, only claim the portion related to your business.
    3. You must have a record to prove your expense like bank statements or receipts so you can demonstrate how you calculated your claim – including working out the business portion of the expense – substantiation.

    Remember to include all income. This includes any cash, EFTPOS, credit or debit card and online sales. There may be other sources of business income to declare, depending on the circumstances.

    Also, if you’re a sole trader you still need to lodge a tax return even if your income is below the tax-free threshold ($18,200 for the 2018-19 income year).

    Aside from these golden rules it is important to remember that:

    • income earned through the sharing or gig economy is income and needs to be declared. We are continuing to broaden the data we are getting from sharing economy platforms, so not declaring that income isn’t going to go unnoticed.
    • You should be aware of the concessions that are available to small business – for example Small businesses with a turnover below $10 million are eligible for a range of tax concessions including the $20,000 instant asset write off
    • Getting your employee obligations right is important - deducting and send us the PAYG withholding, paying super guarantee and paying the correct amount of FBT
    • You need to lodge activity statements or income tax returns on a regular basis.

    Black Economy and Mobile Strike Force teams

    What we know is that there are those in the tax system and there are those outside the tax system. In addition there are those are in the system but who leave some of their economic activity (such as cash jobs on the weekend) outside of the system.

    Tackling the black economy was identified as a key Government priority with the formation of the Black Economy Taskforce last year. The ATO was identified as a key stakeholder for the taskforce and a significant contributor to shaping its work.

    The definition of black economy is: the part of a country’s economic activity that is unrecorded and untaxed by its government.

    The black economy has a huge impact on small business as it creates an unfair environment and threatens the survival of those businesses that do the right thing.

    The Taskforce Final Report outlined 80 recommendations, with the government announcing 10 measures. These measures are designed to assist with encouraging taxpayers to do the right thing and make it more difficult for those involved in the black economy to continue their activities.

    We have a lead role in implementing a number of these measures, and this work will have a significant impact in addressing the behaviours we are seeing. It will also make a significant difference tackling community perceptions of the black economy.

    We are already actioning a range of measures, including our mobile strike approach to protect honest businesses from unfair competition by addressing black economy activities.

    The mobile strike team visits provide real visibility of the ATO within the community, which positively impacts on small business and community perceptions. It supports the ATO’s commitment to protecting honest businesses that are being undermined by their competitors who get an unfair advantage when they do not report all of their income. It also sends a strong message to those who are deliberately doing the wrong thing that there is a high risk of being detected. Also, visible mobile strike teams that provide help and education have significant community appeal. This is supported by mobile business visits to assist businesses with their obligations and identify businesses who may not be complying.

    This financial year, we are planning to visit 10,000 small businesses in 30 locations (10 metro, 10 regional and 10 remote). Already this year we have contacted over 3,000 businesses in 6 locations from Cairns to Canberra. (also Darlinghurst, Surry Hills, Bunbury, Busselton)

    Currently we are visiting businesses in Box Hill, Adelaide CBD, and Broadbeach. Soon we will visit Alice Springs, Darwin, Katherine, Launceston, Geelong and Wollongong.

    Our town hall information sessions are very popular. Last week in Haymarket, we had concurrent presentations in English and Mandarin.

    Our staff love getting out into the community and meeting ‘real’ small businesses. These visits show the community that we are active and we are visible.

    Debt and cash flow

    Some of you may know that the ATO released its annual report last Friday. If you looked closely, our data showed that Small Business debt formed two thirds of the total collectable debt.

    As you will all know, many small businesses struggle to manage their financial commitments and this means they end up in debt. To address this, we are focussed on two separate, but complimentary, approaches:

    Firstly, by making it as easy as possible for small business taxpayers to pay their tax on time using a wide range of tools, payment channels and self-serve payment options. Including offering payment plans tailored to individual circumstances.

    Secondly, supporting businesses by preventing the debts occurring in the first place, which is where improved financial acumen comes in – including initiatives like the Cash Flow Coaching Kit (and I will talk about this in a minute).

    We offer a range of services to make it easier for small businesses to meet their tax and superannuation obligations, including:

    • enabling pre-payments of activity statement liabilities
    • issuing preventative SMS payment reminders
    • making ATO accounts available online
    • expanding our automated phone service that allows taxpayers to set up payment plans providing a business performance benchmarks check tool.

    While small business collectable debt as a proportion of total collectable debt is not growing, there has been significant growth in payment plans for these debts over the past two years. In that time total debt under payment plan has increased in the small business market segment by 39%.

    We believe this increase is due to the tightening of credit available in the market place, particularly for unsecured creditors, and the ease with which taxpayers can get payment plans with the ATO.

    Acknowledging the difficulties faced by small businesses in the market, the ATO has a growing program of work focused on helping them understand their tax obligations and more effectively manage their businesses, broader than just tax.

    • Almost half of small businesses are under financial pressure within the first year of starting business and this pressure increases in years 1-3 Footnote1.
    • More than 60% of small businesses cease operating within three years of starting Footnote2.
    • 90% of small business failures are due to poor cash flow Footnote3.

    After a successful pilot last year, I am really excited that we are currently working with tax professionals and other intermediaries to implement an educational coaching program called the ‘Cash Flow Coaching Kit’. This kit was co-designed with small businesses and tax professionals to quickly help small businesses to better understand, and easily identify, actions they can take to improve their cash flow and business performance.

    The kit is delivered to small businesses through business coaching conversations with their trusted advisor. Accountants, bookkeepers and business advisors who have used the kit found that it helped them to have effective conversations with their small business clients about cash flow. I’m pleased to say IPA has been a partner with us on this journey.

    Extensive research has guided the design of the Cash Flow Coaching Kit. It is:

    • designed for time poor small businesses
    • builds capability
    • flexible and suitable for all stages of the business lifecycle
    • empowers small businesses with the knowledge to make informed decisions
    • delivered through the natural small business ecosystem.

    The design and build of an interactive, digital version of the kit is well under way. It is expected to be available to tax professionals to use with their small business clients by the end of the year.

    It will be a tailored, contemporary and interactive coaching program, to support the trusted relationship that small business owners have with their public practice tax practitioner.

    As at 30 June, we had trained nearly 1,000 tax professionals and business advisors to use the Kit with their small business clients.

    We’ve had some great feedback from members of the IPA. They observed that the program “demonstrates cash in, cash out and putting money aside to meet financial commitments.”

    And another described elements of the kits as being “like ‘Hope’ cards – the light at the end of the tunnel. They assist the conversation with clients and my clients really love them.”

    Stay tuned for more on the digital cash flow coaching kit soon.

    Single Touch Payroll

    On 1 July this year, we saw one of the most significant changes to the way we collect real-time data from taxpayers. Single Touch Payroll became compulsory for entities that employ 20 or more people. Single Touch Payroll means that employers need to report data to us at the same time they pay their employees (known as event based reporting). Pending legislation, entities with fewer than 20 employees will need to report from 1 July 2019.

    Already, just short of 50,000 employers are reporting their payroll information for millions of employees to us each payday. 2018/19 is a transition year for large employers and we are working with them and their payroll software providers to get it right.

    We’re encouraging small employers with online or cloud-based accounting software to get on board now, if they want to – 15,000 have already. While, it’s not currently mandatory for small employers to report through STP, many small employers are already choosing to report through STP.

    We understand there is nervousness from the small business sector about Single Touch Payroll and we are working hard to assist small businesses to transition to Single Touch Payroll reporting. We know it isn’t going to be easy for everyone and we are working on low-cost solutions for micro small businesses that aren’t that digitally engaged.

    We have asked software developers to build low-cost STP solutions at or below $10 per month – including simple payroll software, mobile phone apps and portals. These options will be available by July 2019. We have received over 30 expressions of interest from software providers who would like to build low cost STP reporting solutions.

    We will publish details of this information on our website by the end of November. Micro employers (those with 1-4 employees) will have a number of alternate options – such as initially allowing their registered tax or BAS agent to report quarterly, rather than each time you run your payroll. They or their tax agents will be able to apply for this quarterly reporting option from April 2019. This will be through the Business Portal or Tax Agent Portal.

    We will publish more information on our website closer to that date. A recent webcast about this topic is available there too.

    Tax Gap

    Many of you would be aware that in recent years, the ATO has started a program of work around ‘tax gaps’ and have been working to estimate tax gaps for particular tax types and segments of the Australian tax and superannuation systems.

    The tax gap project arose from our desire to build a broad suite of effectiveness measures to assess our performance as the administrator of the taxation and superannuation system in Australia. The purpose of a tax gap is to get an estimate of the difference between the amounts the ATO collects and what we would have collected if every taxpayer was fully compliant.

    We use the tax gap estimates and their trends over time to provide useful insights into the longer-term operation of the tax and superannuation systems. It helps us to:

    • understand the performance and integrity of the tax system
    • gain insights into compliance behaviour, and
    • identify priority risks and opportunities.

    In July we released the gap for Individuals not in Business and it showed that over 93% of income tax received from individuals not in business is paid voluntarily or with little intervention from the ATO. The estimated net tax gap for individuals not in business in 2014–15 is $8.7 billion. This gap is primarily driven by incorrectly claimed work-related expenses.

    For our small business income tax gap, we have been undertaking a random enquiry program. The results of which, we are currently analysing to be able to estimate the gap. This program will give us significant insights on what to focus on in terms of improving compliance with small businesses.

    We are working to finalise the small business income tax gap and will publish the gap once we are confident that we have a reliable, credible and meaningful estimate of that gap.

    Already from the random enquiry program, we can see that there is a great opportunity to work with the accounting profession, industry and small businesses to avoid unnecessary errors and get clients’ tax right up front. 

    What we can say from what we have seen so far is that when we see businesses operating well, we see they have the basics right. They:

    • keep good records
    • seek advice when they need it,
    • use technology to help them run their business – from point of sale software, to cloud based accounting systems to mobile apps.

    Our early insights indicate that the income tax gap for small business is influenced both by those who make mistakes and those who deliberately hide income to avoid paying tax.

    For those who make mistakes, we are seeking to provide support and guidance and to identify areas where we can reduce complexity in the system including pre-fill or other options.

    However, we do hold those deliberately avoiding tax to account and use the full extent of our powers, including prosecution and application of penalties.

    What are we doing about small business disputes

    As you know, we don’t always agree and we have introduced or enhanced a range of contemporary services aimed at earlier and fair resolution of disputes for small business.

    These services have proven popular and effective for small business taxpayers to resolve disputes, but are also available to other segments. These services include: In-house facilitation, Dispute Assist, ATO Test Case Litigation and Fast Intensive Triage (FIT).

    The ATO Independent Review for Small Business Pilot commenced on 1 July this year.

    So far we have had 12 offers of Independent Review of audit cases been accepted by the taxpayer.

    We have also expanded the scope of the pilot to offer reviews to all states in Australia (not just SA and VIC) from 15 October.

    We introduced the Dispute Assist Program for unrepresented individuals and small businesses that are in dispute with the ATO and facing significant personal circumstances. In the 2017–18 year, we have received over 225 requests for assistance through Dispute Assist from individuals and small businesses.

    In recent years, we have invested heavily in developing support tools, reducing red tape and educating small businesses about their tax obligations.

    Towards 2024

    The reinvention journey we have been on for the last few years has allowed us to improve the experience for small businesses. However, as an organisation we recognise that it has only got us part of the way there, we still have plenty to improve on and we need to continue to evolve with the changes in the environment around us.

    So we have refocused by setting our vision for 2024 and are developing a roadmap to get there. In Small Business we have adopted the tag-line “Small Business in a Digitised Age”.

    The digital age offers us new and exciting opportunities to transform the experience for small business. Using digital solutions will make it even easier to comply, and streamline our processes to better tailor and target our enforcement and services.

    We want to:

    • Increase our use of digital technology and availability of tools and services; and
    • Reduce complexity for taxpayers confronted with large tax bills. All of this will save a lot of time, effort and money for small business.

    While small businesses will be the beneficiaries of this future state tax and superannuation system, we will also be improving the integrity of the system as there will be fewer errors and mistakes made during the preparation of tax returns. The use of data, and of moving compliance interventions upstream, is aligned with and supports our focus on prevention before correction.

    At the same time we will continue working with small businesses and their accountants to:

    • help them to navigate complexity and avoid mistakes, and
    • ensure they are meeting their obligations and take action when we see failure to comply.

    Before I finish, I would like to acknowledge the contribution of the Inspector General of Tax Ali Noroozi who will shortly finish his second term, I’d like to acknowledge the contribution that he has made to our tax system and our community as a scrutineer.

    Finally, I’d like to once again thank you for this opportunity to talk to you about what the ATO is seeing in the small business market, what we are doing about it, and how we are improving our products and services to increase the small business community’s trust and confidence in the ATO and the tax system more broadly. We are, of course, doing so with grace.

    Footnote 1

    (ATO Small Business Education Research)

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    Footnote 2

    ABS September 2015

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    Footnote 3

    Kate Carnell, Australian Small Business and Family Enterprise Ombudsman

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    Last modified: 07 Nov 2018QC 57299