Small Business in ATO’s Crosshairs

The ATO has announced its latest enforcement priorities for small businesses to address the tax gap and rising unpaid tax debts, which reached $35.6 billion in 2024.

In a recent speech to the Institute of Public Accountants National Congress (28 November 2024) the ATO’s Deputy Commissioner Small Business, reflected on the importance of the sector to the Australian economy and the ATO’s role as the national revenue collection agency.

As at 30 June 2024, the ATO estimates that there were more than 4.7 million active small businesses in Australia, employing almost 7.3 million employees and with 2.5 million individuals linked to those businesses as directors, partners, trust beneficiaries and shareholders etc.  Combined, the small business population contributes more than $900 billion in total business income, over $91 billion in income tax, and $21 billion in GST every year – emphasising the importance of the sector.

In the latest ATO preliminary estimate, released last month, small business tax performance is about 87%. This means that the ATO estimates around 87% of the total theoretical tax expected from small business taxpayers was paid voluntarily or after some form of compliance activity, leaving a net tax gap or shortfall of 12.6% (approximately $17.7 billion) by small business entities in 2021–22.

While tax performance of 87% is encouraging, the ATO needs to reduce the revenue gap, while helping small businesses to avoid the accumulation of tax debts in the future. 

Focus Areas for ATO

Starting from November, the ATO will be sharing its areas of concern for small businesses and the issues on which they will be focussing from a compliance and collection perspective.

The key areas of focus currently include:

• ‘Don’t game your deductions and concessions’:  Focussing on non-commercial losses and capital gains tax concession risks.
• Division 7A Compliance: Ensuring business owners understand their legal obligations, such as separating personal and business finances.
• Shadow Economy: Addressing operators that may be evading tax, especially ride-share drivers not registered for GST.
• Other Areas:  Including a review of businesses where we see signs of incorrect R & D claims, and acting on community tip-offs.

The ATO's strategy will involve quarterly campaigns to improve transparency and help small businesses comply with their tax obligations – essentially encouraging them to get it right from the start and facilitating ongoing compliance.

Interestingly, we know from past experience that ATO information campaigns are often the first step before recovery action is taken (such as DPN’s or winding up filings), and more serious steps need to be taken.  If your client has received a DPN it is important to seek out specialist advisors such as Smith Hancock to assist.

The full speech by Deputy Commissioner Will Day is available on the ATO website:

https://www.ato.gov.au/media-centre/speech-to-ipa-national-congress-2024