What the ATO is seeing in the small business market from Deputy Commissioner Deborah Jenkins Speech to the Institute of Public Accountants 2018 national congress Sydney, 2 November 2018

The small business client base

Let’s get a bit of context around small businesses – we define them as those entities with annual turnover less than $10 million.

• There are around 4 million small businesses in Australia. They account for 99% of businesses in Australia, contribute $380 billion to the economy and 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.

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.

With that many small businesses to engage with, we rely heavily on our relationships with associations such as the IPA and its members, you.

So what are we seeing in this client segment and what are we doing about it

I’d like to share some of the insights into this group that we come across in our work:

• 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 book keepers
• 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.

With such a large and diverse population, how do we balance the ATO’s obligation to serve the needs of small businesses while also discharging our responsibilities as a trusted and fair regulator?

• We focus on prevention measures and engaging with our clients early, as well as on contributing to key ATO initiatives that will improve the small business experience.
• We undertake compliance activity to address instances when taxpayers have deliberately done the wrong thing. When mistakes occur unintentionally, we work with taxpayers to correct the error.
• We know that both prevention and correction are effective compliance strategies.

So what are the things we are paying particular attention to with small businesses at the moment that you should be aware of?
You are unlikely to be surprised by anything I’m about to say. The key issues continue to be:

• 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 we have observed in our 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, we see a range of behaviours that indicate businesses 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 of the more common adjustments we make relates to the incorrect claiming of private expenses in the business. This can be either a deliberate action or error. Private expenses we observe being over claimed include:

• motor vehicle
• expenses associated with home offices
• overseas travel.

Our message to small business is always to substantiate business deduction claims.
We have three golden rules to help small business figure out what business deductions they can claim:

1. The money must have been spent for your business – not a private expense, for example you can’t claim child care fees or clothes for your family.
2. If it’s a mix of business and private use, only claim the portion related to your business.
3. You must have a record to prove your expense like bank statements or receipts, so you can demonstrate how you calculated your claim – including working out the business portion of the expense – substantiation.

Remember to include all income. This includes any cash, EFTPOS, credit or debit card and online sales. There may be other sources of business income to declare, depending on the circumstances.

Also, if you’re a sole trader you still need to lodge a tax return even if your income is below the tax-free threshold ($18,200 for the 2018-19 income year).

Aside from these golden rules it is important to remember that:

• income earned through the sharing or gig economy is income and needs to be declared. We are continuing to broaden the data we are getting from sharing economy platforms, so not declaring that income isn’t going to go unnoticed.
• You should be aware of the concessions that are available to small business – for example Small businesses with a turnover below $10 million are eligible for a range of tax concessions including the $20,000 instant asset write off
• Getting your employee obligations right is important – deducting and send us the PAYG withholding, paying super guarantee and paying the correct amount of FBT
• You need to lodge activity statements or income tax returns on a regular basis.

To read more on this go to www.ato.gov.au/media-centre/Speeches.