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ATO to crack down on small business ‘tax gap’

Small business and sole traders have become the focus of a drive by the Australian Taxation Office to close what it calls the tax gap.

30 November 2021

In a speech to the ATAX Tax Administration Conference on Monday, November 29, Jeremy Hirschhorn, Second Commissioner, Client Engagement for the ATO, said one of the drivers of the small business tax gap is the omission of income.

“The amount of omitted income is higher than what the community accepts as tolerable – so much so, that this is one of the key risks that underpins the investment in the shadow (black) economy taskforce,” he said.

“However, we find that it is not just shadow economy behaviours causing omitted income, although it is the largest behavioural driver. We also see opportunistic omission of income some of the time.

“But mostly, we see inadvertent under-reporting of income driven by errors and poor record-keeping. In fact, these behaviours account for around 90% of incidence of error, although only 20% of the under-reported tax.”

Mr Hirschhorn outlined the motives and future direction of the government’s tax gap program saying the move to more digital reporting, such as the upcoming Single Touch Payroll Phase 2, would allow the government to obtain broader context and insights so it could “consider our activities and the effect we can have on the system as a whole”.

“By trying to quantify the non-compliance behaviours across the whole tax and superannuation system and understand the drivers of the non-compliance, rather than just focusing on the entities the ATO treats, we can more effectively design strategies aimed at closing the gap and improving overall system performance,” he said.

Mr Hirschhorn said most taxpayers in Australia were inclined to do the right thing and the best way to manage or reduce tax gaps was to understand what drives client behaviour and make changes that made it as easy as possible to comply.

“Some of the most effective strategies from a system performance perspective may not relate to our compliance activities at all and instead may come from system, technology or automation changes,” he said.

“The other challenge is that tax gap insights can help drive macro decisions as to allocation of resources and strategies, but they are too high level and take too long to calculate to measure effectiveness of actions as they are taking place. This means that a range of supporting metrics are required.”

He said for the ATO to effectively manage the gaps and have an impact on overall system performance, it needed to create solutions at a whole-of-ATO level that considered the individual client’s experience in a holistic way.

“This improved understanding of system health is also critical in the ATO providing advice to Treasury and the government as to potential policy changes or funding of compliance programs – or in public service language, ‘New Policy Proposals’ (or NPPs),” he said.

“Data sharing and transparency, public advice and guidance, pre-fill, prompter letters, and text messages are all designed to ensure the taxpayer gets it right when they lodge and pay the right amount of tax and superannuation.

“While it is more challenging to accurately measure the impact that these upfront or reminder activities have on improving compliance, we know the more we can help to ensure taxpayers lodge, get it right up front, and make timely payments, the better that is for the system overall. Importantly, this ensures maintainable compliance and will sustainably reduce the gross tax gap.”

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