Day says the small business sector contributed more than $900 billion in total business income, more than $91 billion in income tax and collected $21 billion in GST “on behalf of the community every year”.
As of 30 June 2024, Australia had more than 4.7 million active small businesses, with about 710,000 employing almost 7.3 million employees.
The ATO’s latest assessment reveals a small business tax performance of 87 per cent. Day said this means “about 87 per cent of the total theoretical tax that should be paid by small business is paid either voluntarily or following our compliance activity”.
There was a net tax gap or shortfall of 12.6 per cent or approximately $17.7 billion by small businesses in 2021–22. Unpaid small business tax debts rose to $35.6 billion in 2024, or about two-thirds of the total $54 billion debt.
The ATO will share quarterly focus areas where small businesses are potentially getting things wrong in an initiative, called “Getting it Right” to address potential compliance issues. This quarter, Division 7A issues under the microscope involved business versus personal income, inappropriate claims of deductions and concessions and shadow economy activity. Day said Division 7A breaches were commonly the result of shareholders or associates not understanding a company was a separate legal entity and owners were not entitled to company money and assets.
“We know many Division 7A dividends arise due to failing to keep private expenses separate from company expenses and failing to keep proper records of these private transactions,” he said.
Small businesses claiming non-commercial losses was another target area, whether from failing to grasp tax rules, or deliberately claiming contrived losses. In 2022–23, an estimated 232,000 taxpayers claimed $4.5 billion in non-commercial losses.
Shadow economy operators accounted for 60 per cent of the small business tax gap, or around $11.2 billion. About $8.9 billion of this was associated with under-reporting of income and over-claiming of deductions, with the remainder in hidden wages and people operating outside the tax system.
The ATO’s immediate focus was on ride-share operators that did not register for GST. “We know too many ride-sourcing drivers are not GST-registered and therefore not paying GST – essentially, they are operating totally outside the tax system.”
Five per cent of small businesses are “making clear and deliberate attempts to avoid paying the right tax”, Day said. However, their impact on honest businesses and overall tax collections remains significant.
Day said the tax gap and debt book were “both symptoms of a less than optimal system”. “As joint stewards, we need to ensure the system is healthier and sustainable so there is a level playing field that supports the profitability and success of small businesses, and the right amount of revenue is collected for the Australian community,” he said.
“We are being transparent and sharing with you early what these concerns are, to give you a runway to address any issues and help your clients get their affairs in order.”
Income guidelines, super changes and community tip offs
During the subsequent Q&A with IPA Technical Policy General Manager Tony Greco, Day spoke about personal services income guidelines. He says the ATO was “keen to have more examples of different commercial arrangements” before finalising the draft Practical Compliance Guideline.
Regarding upcoming superannuation changes, Day confirmed the government’s decision to discontinue the ATO’s small business superannuation clearinghouse from July 2026. He noted about 80 per cent of current users have access to compatible software.
Community tip-offs have become a crucial compliance tool. Day says the ATO receives around 1,000 community reports weekly, with 90 per cent being actionable. “Fairness in tough times becomes even more important,” he said.
ATO’s digital strategy to streamline compliance
The ATO is also developing a digital-first tax ecosystem. Day said this was progression from “Tax Administration 1.0” of paper returns to “Tax Administration 3.0” to reduce the compliance burden.
To support this vision, the ATO launched the “Essentials to strengthen your small business” website, offering more than 30 free training courses that over 125,000 small business owners have already accessed.
“We envisage in this digital future that accountants will have access to greater real time data and information that will allow them to shift their focus to more strategic advisory roles for small business – providing them with the guidance they need to run their business and thrive,” Day said.
This would help accountants “invest your expertise and effort into areas where you provide the most value – offering guidance and advice to ensure your clients operate efficiently and meet their obligations”.
The ATO was committed to publishing a small business blueprint by 30 June 2025, with incremental progress made this year including:
- Encouraging and moving more small businesses from quarterly to monthly BAS lodgment to better align to their natural business decisions and processes and support better cash flow management.
- Commencing a pilot to embed a pay as you go instalment calculation methodology into accounting software.
- Assessing how to best use third-party data to support sole traders prepare and finalise their income tax returns, including using Taxable Payments Annual Report information to pre-fill their returns.
ATO, accountants and small business collaboration
Day said tax compliance involved collaborative partnerships between businesses, advisors and the taxation authority. Accountants will remain “essential in helping small businesses navigate complex tax obligations” and will be critical partners in small business success.
“We know small business is serious business and there are many challenges and complexities they need to navigate to survive and thrive,” he said. “We recognise the complexity of the tax system is just one of these challenges, but navigating it is essential to be successful. We must continue working together as joint stewards of the system so small businesses can succeed today, tomorrow and into the future.”
The ATO was focused on creating a “significantly easier and more productive tax experience for small business”. Tax collection is not just a bureaucratic function. “Collecting revenue is not just our job, but what the community expects us to do,” Day said. “The mission is to create a significantly easier tax experience for small businesses. An experience that benefits small businesses now and for many years to come.”
Want to learn more about the latest developments and issues affecting the accounting landscape which was discussed at the 2024 National Congress? Read the next article in the 2024 National Congress series: Tax Practitioners Board alleviates some of the concerns over TASA reforms
