The small business tax gap is 12.5 per cent, or $11.1 billion, making it significantly larger than the corporate tax gap at $1.8 billion, or 4.4 per cent, and the individuals not in business tax gap at $8.7 billion, or 6.4 per cent.
However, of the shortfall in taxes being paid, 64 per cent, or $7.7 billion, is estimated to be due to the black economy, where businesses deliberately hide or under-report their income, and deliberately over-claim business expenses.
With the economic impact of the black economy estimated to be as large as $50 billion, accountants believe the latest tax gap report will help justify the whole-of-government approach to tackling the issue.
“It vindicates the government’s position on what it has been doing in response to the black economy,” said Tony Greco, Institute of Public Accountants general manager of technical policy.
“We are still very early in the implementation of a lot of the measures, we've had some implemented and there many more under consultation.”
The timing of the release of the tax gap report comes as a controversial black economy measure to introduce a $10,000 cash payment limit for business is being considered.
Speaking with My Business sister title Accountants Daily, Tax Institute senior tax counsel Professor Robert Deutsch (pictured) said that tax agents and the small business community can now expect stronger audit activity in light of the report.
“I think they will look at other ways in which they might have legislative amendments to try and tackle this but quite frankly, it has got to be practical and feasible and at the moment, I can't quite see what more they can do,” said Professor Deutsch.
“I know the Commissioner has, in many speeches, talked about the phasing out of cash transactions, but I don’t think one can get to the point where cash is completely excluded or banned.
“Detecting and unearthing that behaviour has been a problem for decades, and other than intensifying audit activity, I'm not sure there's any real way in which the problem can be tackled directly.”
Likewise, CPA Australia’s Paul Drum believes clients can expect more door knocks from the ATO as it looks to shrink the $11.1 billion gap.
“You can do a lot of digital checks, data matching, but sometimes nothing replaces the good old door-to-door foot soldier approach,” said Mr Drum.
“The reality is that it can be very impactful on behavioural change, not only to those that the ATO visit but those as the story goes through the markets.”
Accountants can do more: ATO
ATO deputy commissioner Deborah Jenkins had earlier said that the tax profession could do more to reduce the gap, including by asking more probing questions and not accepting client information at face value.
While 96 per cent of small businesses utilise a tax professional to manage their tax affairs, the profession has hit back at suggestions that it is to be blamed in contributing to the sizeable tax gap, particularly with the black economy aspect.
“The lion share of this tax gap is coming from black economy activity and I don't think accountants can really share much of the blame for that,” said Professor Deutsch.
“If a business takes cash and fails to declare it, it will usually be done without the knowledge of the accountant, and unless it is a huge discrepancy from a previous year or from a normal benchmark, which might cause alarm bells to ring for accountants, you wouldn't detect it.”
Mr Drum shared a similar view, noting that accountants could demonstrate reasonable care in accordance with Tax Agent Services Act, but could not go beyond their engagement remit.
“If your engagement letter says to prepare the tax return, and you don't have access to all their bank accounts and all their financial records, then you are only as good as the information you've got, but you've got to take reasonable care and make reasonable enquiries,” said Mr Drum.
“In the Accounting Professional and Ethical Standards Board [APES 220], it states that if you make reasonable enquiry and you are not satisfied with getting to the truth of the matter then you should step away from the assignment, but it doesn't say keep asking endless questions.
“Obviously if the client fronts up driving a new Maserati but they are only putting down $20,000 in income a year, that's going to raise a few eyebrows and require a few extra questions.”
Weeding out the dodgy ones
While the majority of tax professionals and their clients are compliant and in the clear, the ATO has made it clear that there is a minority of tax agents who knowingly participate in the black economy.
With the report now in hand, Professor Deutsch believes the profession can expect the ATO and the Tax Practitioners Board to come down harder on egregious practitioners.
“If we owe it to the accountants that are doing the right thing to make sure that those who are doing the wrong thing are excluded from practice, then I think that needs to happen sooner rather than later,” said Professor Deutsch.
“The ATO has identified a number of accountants they believe have been doing the wrong thing and they need to come down very hard and very fast on them.
“Historically, the TPB has been a little slow to act in a lot of these cases, and I think we will see a different approach now and that needs to happen.”