The small business income tax gap — the difference between what was owed and what was actually paid — stands at some $11.1 billion, while the total amount of lost tax slipping through the ATO’s hands now exceeds $31 billion, latest data from the Tax Office has shown.
Around 7 per cent of personal and income tax went unpaid in 2017–18, racking up a total loss of $31.2 billion.
“Rapid changes in the economy, society and technology mean the issues driving tax gaps continue to evolve. No tax system can fully eliminate tax gaps, as the cost of doing so would be excessive. Instead, we aim to sustainably reduce tax gaps over time,” said the ATO in its annual report.
Data on individual tax gaps uses the prior financial year as the base of analysis, meaning the results are not directly comparable.
Nevertheless, the data has revealed that some $423 billion in tax has been paid voluntarily in 2017–18, with the small-business space contributing $85 billion or 88 per cent of taxes expected of them.
As such, the tax gap in the small-business space stands at 11.5 per cent, hovering above that in the medium-business space where the percentage of unpaid taxes hangs around 6 per cent.
By contrast, large corporations had an estimated tax gap of 4 per cent in the same year.
But not all is grim for small businesses, with the Tax Office revealing that the tax gap has in fact decreased from 12.2 per cent in 2015–16, on the back of a tougher compliance approach.
Digging deeper into the small-business space, the ATO carried out a small-business enquiry program and observed that while most of the taxpayers were found to have reported correctly or to have genuinely attempted to do so, where incorrect reporting was identified the most common issues were:
- undeclared income
- business owners failing to account for private use of business assets or funds
- inadequate record-keeping systems or business owners not keeping the required records
The findings, based on the outcome of 2,098 reviews and audits, observed a range of behaviours relating to adjustments, including misunderstanding or misapplication of tax law; carelessness; poor record keeping; business owners appearing to deliberately avoid paying the right tax; and black economy behaviour.
The ATO further disclosed that the tax effect of the shadow economy for small business in 2017–18 could be worth up to $6.7 billion, with the majority of this activity or $5.2 billion associated with deliberate underreporting of business income and overclaiming of business deductions.
Where are funds being withheld?
A breakdown of the ATO’s figures revealed that it missed out on $8.3 billion in tax revenue from individuals, not including Australia’s high-net-wealth individuals, who posted a tax payment gap of $808 million.
Taking a closer look at the net tax gap estimates for income-based tax revealed the following figures:
- Income tax for individuals – 5.6 per cent or $8.33 billion
- Income tax for large corporations – 3.7 per cent or $2.03 billion
- Small super funds – 2.5 per cent or $41 million
- Large super funds – 1.2 per cent or $149 million
- Medium business – 6.2 per cent or 860 million
- Small business – 11.5 per cent or $11.08 billion
- Petroleum resources rent tax – 1.7 per cent or $21 million
PAYG withholding by employers yielded a tax gap of 1.8 per cent or $3.48 billion. In other words, the ATO estimates that around 98 per cent of the total theoretical PAYG withholding tax payable was paid in 2017–18.
Looking forward, the ATO is expected to scrutinise JobKeeper and JobSeeker recipients, with the impacts of COVID-19 on tax collection said to become apparent in next year’s report.
However, preliminary data has revealed net tax collections of $405 billion in 2019–20, down by $21 billion (5 per cent) over the previous year as a result of the economic impact of bushfires and COVID-19.
As for the ATO-administered stimulus measures, for the year ended 30 June 2020, the Tax Office issued JobKeeper subsidy payments of $31.56 billion and cash flow boost payments of $23.62 billion.