The ATO like other businesses release an Annual Report, and one of the elements explored in this report is the Tax Gap. The details for the 2017-2018 year have recently been released and they show some interesting facts.
The Tax Gap is an estimate of the amount of tax collected by the ATO, and the amount that should have been collected if all tax returns were lodged correctly, to the letter of the law. The latest figures look at 15 different tax areas, providing the most comprehensive analysis so far. The Tax Gap has been calculated at $31 billion, or 7% of the total expected tax collection.
The ATO have identified the three reasons that a Tax Gap can exist:
· Reporting is different due to a misunderstanding
· Reporting is different by choice
· Reporting is different due to a different interpretation of the tax law.
While the Tax Gap is essentially an estimate, the ATO have many tools available to check the data we report and come up with this estimate. Realistically we will never have a zero Tax Gap, but the aim is to improve this gap each year. The trend does indicate that the gap is improving, and improvement comes from the ATO understanding where to target their compliance activity. As a small business owner, this is something you should be a little concerned about.
The largest contributor to the Tax Gap is Small Business, with a Net Tax Gap of 11.5%, or $11.1 billion. The ATO define a small business as a business with a turnover of less that $10 million, and includes companies, trust, partnerships and sole traders. There are over four million such entities in Australia and it is likely your entity fits into this category.
What this means is that small business will continue to be seen as a risk area and will continue to be a target for audit activity. We have had a hiatus on audit activity since COVID-19. The ATO have been extremely lenient and compassionate, but don’t expect this to continue into 2021. We are already seeing audit activity regarding the stimulus packages, and we will soon start to see other compliance activities resuming.
The ATO have been quite specific about their observations, giving us a clue as to the audit targets. Straight up they have identified the Shadow Economy as the main contributor to the Small Business Tax Gap, with 68% of the gap ($6.7 billion) being due to omitted income. Just a reminder that undeclared “cash” jobs are part of the shadow economy.
The other main observations are that small business owners may fail to account for the private use of business assets, and that small business owners may have inadequate record keeping system, and may fail to keep the required documents.
Think about your business. Are you a target for this kind of activity? Now is the time to get your house in order before the ATO come knocking on the door. If you are doing everything correctly you have nothing to worry about. The ATO have more and more information at their finger tips and can target audit activity. Don’t get caught out.
The information for this article came from the ATO website. For more information use this link https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-gap/