Using the 2015–16 financial year as the foundation of its analysis, the ATO estimated that small businesses collectively had a tax gap — the difference between what was owed and what was actually paid — of 12.5 per cent or $11.1 billion.
By contrast, large corporations had an estimated tax gap of 4.4 per cent or $1.8 billion in the same year.
Data on individual tax gaps used the prior financial year (2014–15) as the base of analysis, meaning the results are not directly comparable. Nevertheless, they suggest that the tax gap for the small business sector is larger than even that of individuals, who collectively had an estimated tax shortfall of 6.4 per cent or $8.76 billion.
Almost 90 per cent of SMEs pay tax voluntarily
Despite the findings, the ATO expressed gratitude at the high number of businesses fulfilling their tax obligations — around nine in 10 SMEs.
“Considering how much small businesses have on their plate, we’re grateful for the level of work they put in to get their tax right,” said deputy commissioner Deborah Jenkins.
“We’ve found that some small businesses are making mistakes with their tax, but these are often unintentional errors which are easily fixed. Our objective is to support these honest small businesses to better understand their obligations and to help them get it right the first time.”
Biggest problem areas
The research lends support to the government’s aggressive approach to tackling the so-called black economy, which the dedicated Black Economy Taskforce said could be worth up to $50 billion, or 3 per cent of Australia’s GDP.
As previously reported, the ATO has also embarked on a program of proactive business visits — up to 10,000 each financial year — designed to combine inspections of suspicious activities with education in a bid to boost compliance.
“Hiding income, exaggerating expenses and operating outside the system are all considered to be black economy behaviours. Businesses doing the wrong thing are about to attract our full attention,” Ms Jenkins said.
“Small business operators that engage in black economy behaviour are not competing on a level playing field. They have an unfair advantage over those doing the right thing.”
The ATO research identified a number of areas of greatest concern around the black economy:
- Small businesses
- Individuals not in business
- Superannuation guarantee
- PAYG withholding
- Tobacco excise
- Alcohol excise
Where are funds being withheld?
A breakdown of the ATO’s figures reveals that GST accounts for the biggest shortfall in taxes owed — to the tune of $5.26 billion.
Employees’ superannuation guarantee contributions also feature prominently, with employers underpaying this by $2.79 billion.
The full list, from largest to smallest tax gap in percentage terms, looks like this:
- GST - $5.26 billion or 7.9 per cent
- Income tax for individuals - $8.76 billion or 6.4 per cent
- Tobacco tax - $594 million or 5.6 per cent
- Superannuation guarantee - $2.79 billion or 4.8 per cent
- Income tax for large corporations - $1.8 billion or 4.4 per cent
- Small super funds - $39.9 million or 3.2 per cent
- Petroleum resource rent tax - $18 million or 2.0 per cent
- PAYG withholding by employers - $3.36 billion or 1.9 per cent
- Fuel excise - $326 million or 1.9 per cent
- Large super funds - $127 million or 1.5 per cent
- Wine equalisation tax (WET) - $5 million or 0.5 of a percentage point
Fuel tax credits actually came in above what they should have been, meaning taxpayers had actually paid more than was needed, to the tune of $19 million or 0.3 of a percentage point.
How Australia compares internationally
According to Ms Jenkins, “tax gaps are difficult to compare” internationally.
However, the ATO said that publicly released figures on tax gaps in the small business sector by other countries have varied considerably, ranging from 9 per cent to 30 per cent. So, a gap of 12.5 per cent would actually be on the lower end of the spectrum compared with many other nations.
A full breakdown of the ATO’s tax gaps research can found on its website.