The 2022-23 small business income tax gap
For 2022–23 we estimate a net small business income tax gap of $27.2 billion or 17.4%. This means we estimate around 83% of the total theoretical tax will be paid. This gap forms part of our overall tax performance program. This estimate is preliminary and will be revised when further data is available.
Small business population
The small business population comprises a diverse range of structures and operations. It covers businesses with a turnover of up to $10 million.
Small business operating structures include:
- companies
- sole traders (individuals carrying on business in their own name)
- trusts
- partnerships.
The taxation of small business differs depending on the structure of the business. For example, the profit made by trusts and partnerships will generally be taxed in the hands of the beneficiary or partner, rather than the entity.
When calculating the income tax gap, our primary focus is on entities that have an income tax obligation. To estimate this tax gap, we estimate separate tax gaps for:
- small companies: companies with a turnover up to $10 million
- individuals in business: individuals associated with small business entities including partnerships, trusts and companies AND sole traders earning business income up to $10 million.
The published tax gap estimate is a combination of these two components. The small business income tax gap forms part of our overall tax performance program. Find out more about the concept of tax gaps and the latest gap available.
About the estimate
The estimate for the 2022–23 small business income tax gap is preliminary and will be revised when further data is available.
This estimate is based on a partially completed sample of 1,380 randomly selected cases. The estimate will be updated next year when the remaining cases are completed, which will give us a more informed and reliable estimate based on approximately 2,000 case outcomes.
We have also revised the estimate for 2021–22 (first published in the 2024 Annual Report as a preliminary estimate) using additional case outcomes. The revised estimate has increased when compared to the preliminary estimate, up from 12.6% to 15.9%. Table 1 shows the latest series of estimates.
As the small business population grows, the dollar value of the tax gap will generally increase, even if levels of compliance remains steady. The net tax gap as a percentage is a most meaningful measure of tax performance as it accounts for growth in the population.
Table 1 shows:
- We are seeing the small business income tax gap increase in both 2020-21 and again in 2021-22. Our preliminary estimate for 2022–23 suggests that this trend will continue.
- Growth in the small business taxpayer population and economic growth contribute to the increase in the theoretical income tax liability for small businesses.
- The expected tax collections have not kept pace with the amount owed (theoretical liability), reflecting higher levels of non-compliance, which has resulted in an increase in the net gap percentage.
More detailed information is available to explain the behaviours contributing to the tax gap as observed in the small business random enquiry program.
Figure 1 displays the gross and net gap for small businesses as a percentage over the same period, the dotted line between 2021–22 and 2022–23 reflects the fact that this estimate is preliminary.
Figure 1: Gross and net tax gap percentages, 2017–18 to 2022–23
Note: The estimate for 2022–23 is preliminary and subject to revision.
Tax gap components
The main components driving 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, such as debt that is uneconomic for us to pursue. This is most "self-acknowledged" amounts owing, for example, amounts of tax disclosed on a BAS, which the taxpayer is unable to pay. Only a relatively small component represents non-pursuable Commissioner-raised debt, i.e., from an amended assessment.
The extent to which these components impact the tax gap varies depending on the segment of the population.
The following figures split the gross gap by population and the main drivers of non-compliance for each of them.
Figure 2: Small companies
For the companies component of the gap, omission of income accounts for about half of the overall gap (49%). Over-claimed business deductions represent nearly all the remainder of the gap (48%).
Figure 3: Individuals in small business
For the individuals in small business component, the main driver of the gross gap is the omission of income (71%). Over-claimed deductions form 20% of the individuals in business gap (20%). 8% of the individuals in small business gap relates to people operating outside of the tax system. Non-pursuable debt forms a negligible part of the gap.
Figure 4: Combined small business
The final combined view shows the overall influence of omitted income on the gross gap (67%). 25% of the gap is caused by over-claimed deductions and 7% coming from people operating outside the tax system. These findings are similar to those published in 2024.
Findings from the random enquiry program
Through the small business random enquiry program, we check the income tax affairs of randomly selected taxpayers for the relevant year. This helps us calculate the tax gap estimate and identify the most common issues and behaviours driving the gap.
Our refreshed 2021–22 estimate is based on the examination of 1,928 taxpayer lodgments, conducted across a sample representative of the 2019–20, 2020–21 and 2021–22 small business populations.
As the 2022–23 random enquiry program is still underway, the preliminary estimate for 2022–23 is based on the examinations from the 2020–21 and 2021–22 years, used in conjunction with lodgment data from 2022–23. This estimate will be updated with outcomes from 2022–23 when this data is available.
Our observations highlight 4 key areas that require ongoing attention:
- continuing to address shadow economy behaviour (deliberate attempts to avoid paying the right tax)
- continuing to provide education and support to ensure small businesses are 'getting it right'
- providing clear guidance to help small businesses correctly apply the law to their circumstances
- digitalising the small business tax experience to reduce compliance costs, improve certainty, and make it easier to meet tax obligations.
Small business behaviours observed
Most taxpayers reviewed in the sample reported correctly or were considered to have genuinely attempted to do so – however there has been a decrease in small business taxpayers getting it right in our most recent random sample.
In our sample, we broadly observed small businesses getting it wrong in one of 4 ways:
- making mistakes due to misunderstanding tax obligations
- making errors because of poor record keeping
- not declaring all business income
- making incorrect claims, such as claiming private expenses as a business expense.
Our sample includes individuals in business who may also have income and expenses from sources outside their business activities.
Errors in reporting these non-business items contribute to the small business income tax gap. Common examples include:
- underreporting salary and wages from an unrelated entity
- underreporting passive income from rental properties, gross interest and dividends
- miscalculating and underreporting capital gains
- claiming personal expenses as work-related deductions, including car, clothing, travel and gifts or donations.
Shadow economy behaviour observed
In 2022–23, the shadow economy contributed an estimated $17.1 billion to the small business income tax gap, or over 60% of the gross gap. $14.2 billion of this is associated with deliberate underreporting of income and over-claiming of deductions as observed through the random enquiry program. The remainder is made up of an additional uplift to fully capture the effect of hidden wages and people operating outside the tax system.
This significant impact of shadow economy behaviour is largely attributable to around 6% of taxpayers in our random sample, who made deliberate attempts to avoid paying the right amount of tax.
For more information see accounting for the shadow economy.
Tax practitioner behaviours observed
Most small businesses engage a tax professional to help prepare and lodge their returns, but the nature of these relationships vary significantly. We observed that small businesses who reported correctly had more regular contact with a tax professional.
We also identified instances where tax professionals:
- made mistakes because of bookkeeping and accounting system errors
- provided incorrect advice
- failed to show reasonable care.
In approximately 40% of cases where there was evidence of shadow economy behaviour, the tax agent contributed either directly through deliberate actions or indirectly by not taking reasonable care in checking claims made.
For previously published tax gap figures, see Australian Tax Gaps - Data.gov.au Opens in a new window