- The ATO is targeting the small business black economy in the new financial year
- The ATO wants to cut the small business tax gap, estimated to be about A$10 billion
- Tax professionals are vital in helping reduce black economy activity and cutting the tax gap
Cracking down on the ‘black economy’ will be a major focus for the Australian Taxation Office in the new financial year as it tries to reduce the A$10 billion small business income tax gap.
The ATO’s Deputy Commissioner of Small Business, Deborah Jenkins, who will present at the Chartered Accountants Australia and New Zealand’s Strategic Tax Planning Day on 31 May, says that while most small businesses pay the right amount of income tax, there are those that deliberately do the wrong thing.
“A small percentage of businesses deliberately avoid paying the right tax – what we call black economy behaviour – and it’s this group that contributes most significantly to the income tax gap,” she says.
The tax gap is the difference between the income tax collected from small businesses and what the ATO estimates it would have collected if every taxpayer was fully compliant. The ATO is finalising its small business tax gap estimate, but expects it to be about A$10 billion.
Jenkins says the black economy costs the broader community A$50 billion and has a huge impact on small business because it creates an unfair environment and “threatens the survival of those businesses that do the right thing”.
Tricks used in the black economy, Jenkins adds, include not declaring income, not putting all sales through the till or invoices, and not reporting income from weekend sales.
The Government has given the ATO funding to tackle the black economy and it has established a ‘mobile strike approach’ that will see it visit up to 10,000 businesses around Australia each year for the next three to four years.
The ATO is also using the taxable payments reporting system (TPRS), Jenkins says. Under TPRS, some businesses need to report the payments they make to contractors for services.
The TPRS strengthens the ATO’s ability to match income tax returns from contractors against what businesses report paying, allowing it to detect those trying to hide income and evade tax.
Jenkins says this prevented A$2.7 billion being lost in the building and construction industry in the 2015-16 financial year. From this financial year, businesses that supply courier or cleaning services need to report payments made to contractors. And from 1 July 2019, businesses in IT, road freight and security and investigative services industries will need to start reporting through TPRS.
“Tax professionals are also key to our effort to reduce the small business income tax gap and tackle the black economy.”
Another weapon in the ATO’s fight against the black economy has been its ‘small business income tax gap random enquiry program’.
The program began in July 2016 as part of its broader Tax Gap Program to help it calculate the small business tax gap. The program randomly looks at small businesses to see which ones are ‘getting it right’.
Jenkins says the program has also helped identify areas for improvement in reporting.
Jenkins says the program has highlighted five common issues:
- claiming private expenses in the business
- failing to properly attribute personal and business use
- not understanding how tax applies for different and often complex business structures
- omitting income (including income from coupon sales)
- insufficient records to substantiate small business expenses claims.
A strong role for tax professionals
“When we see businesses operating well, they get the basics right,” Jenkins says. “They keep good records, they run their business with the help of technology (such as point of sale software and accounting systems), and they seek advice from a tax professional when they need it. Insights also suggest that when small businesses have regular contact with a tax professional, they’re usually reporting correctly.
“We know there is more we can do to support small businesses in understanding what they need to do to get things right and tax professionals are a key part of offering better support to them,” she says. “Tax professionals are also key to our effort to reduce the small business income tax gap and tackle the black economy.”
Strategic Tax Planning Day
Sign up for Chartered Accountants Australia and New Zealand’s Strategic Tax Planning Day on 31 May.Click here