The ATO’s snapshot of the small business sector

 

The ATO defines small businesses as those entities with an annual turnover of less than $10 million. Its latest data collected on the sector has the following updated facts about this important market.

  • There are around 4 million small businesses in Australia, they account for 99% of businesses in Australia, contribute $380 billion to the economy, employ approximately 5.6 million Australians, and they are a diverse group
  • 78% of small businesses have no employees
  • 70% have turnover less than $75,000
  • Around 70% pay their tax on time.

The ATO has also found that 44% of this population are sole traders. The next largest group are companies, followed by trusts and partnerships.

In addition, there are 1.88 million individuals linked to small business entities. They may be responsible for, or derive income from, small business activities.

But apart from facts and data, the ATO has also been able to draw some conclusions about the small business sector.

  • There are a lot of them and they are not homogenous
  • They are time poor, generally not tax literate and often have limited business acumen – but they have a lot of passion
  • Cash flow tends to be a big challenge
  • To them, tax and super seems complex and overwhelming
  • They often use intermediaries – most commonly tax agents or bookkeepers
  • Most use smart phones but are slower to adopt technology when it comes to their business operations – that takes time and time is something they don’t have.

The ATO says the key compliance issues surrounding this sector are, not surprisingly:

  • claiming private expenses in the business
  • the attribution of personal and business use
  • a lack of understanding of how tax applies for different and often complex business structures, and
  • omitted income.

Some of the unintentional and basic mistakes it says it has observed in recent work include:

  • forgetting to check all bank accounts for interest
  • forgetting to correctly report dividends and franking credits
  • unable to substantiate small business expense claims
  • not completing an annual reconciliation of income tax return information and business activity statements
  • little calculation errors, transposition of figures
  • claiming business expenses at the GST inclusive rate rather than GST exclusive (when registered for GST)
  • over claiming agent fees, where the agent fees relate to more than one entity or taxpayer
  • not including income from coupon sales.

At the more egregious end, the ATO sees a range of behaviours that indicate businesses are operating in the black economy. Some examples include:

  • deliberately omitting income that has been diverted to personal bank accounts and mortgages
  • deliberately omitting cash income
  • not all sales put through the till or invoiced
  • not reporting income from weekend sales
  • paying staff in cash from cash takings that are not reported.

One perennial oversight the ATO says smaller sole traders keep making is mistakenly thinking they are not required to lodge a tax return if their income is less than the tax free threshold of $18,200.

The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector The ATO’s snapshot of the small business sector