Many small businesses are failing to pay their fair share of tax, according to a leading ATO official.

Deputy commissioner Deborah Jenkins said the small business sector is paying about 10-15% less tax than the ATO estimates it should be paying.

Ms Jenkins, in a speech to the Chartered Accountants Australia New Zealand Strategic Tax Planning Day, said that this “small business income tax gap” added up to about $10 billion.

The tax gap is caused by three main behaviours from small business owners:

  • Omitting income – such as not declaring cash sales, or depositing income into private accounts or mortgages
  • Failing to account for private use of business assets or funds – such as claiming an excessive business portion for something they use both personally and for business
  • Claiming private expenses as business expenses

The ATO is taking action to close the small business income tax gap, according to Ms Jenkins.

“We’re already using insights from the tax gap program to inform out strategies to tackle the black economy,” she said.

“We audit small business owners who report minimal profit but seem to be maintaining a lifestyle far exceeding their personal income.

“We’re matching third-party data to tax returns and making amendments where we see omissions.

“We also compare data across businesses within similar industries to identify unlikely or implausible deductions or where income is not being reported.”

The ATO audited about 120,000 small businesses across Australia during the 2017-18 financial year.