For 2021–22, we estimate a net income tax gap for medium business of $1,387 million or 7.3%. This means that we expect to collect more than 92% of the total amount income tax we should collect from medium businesses.
Medium business population
We define the medium business population as:
- companies with a group turnover between $10 million and $250 million
- the individuals controlling these companies.
Most companies in our analysis had a turnover of less than $50 million.
Entities linked to a high wealth group are excluded from this analysis and are included in the high wealth income tax gap. We recognise the tax effect where income earned from trusts and partnerships is distributed to companies or individuals in the medium business population.
The medium business income tax gap forms a part of our overall tax performance program. Find out more about the concept of tax gaps and the latest gaps available.
The medium business population represents a diverse group of businesses. As a result, the risks and behaviours driving tax errors differ greatly across the population.
Historically we have focussed on specific tax risks. This may shift as we take a more holistic approach to the compliance of medium business.
The medium business population includes:
- publicly listed businesses
- internationally controlled businesses
- privately-owned businesses
- not-for-profit organisations.
Medium businesses cover a wide turnover range between $10 million and $250 million. Approximately 80% have a turnover of less than $50 million.
Some medium businesses are well established and closely resemble large businesses in their structure and behaviour. Publicly listed companies have additional regulatory and governance requirements that influence their tax decisions.
For medium businesses with international dealings, incorrect tax outcomes may be the result of how they interpret tax law or navigate complex international transactions.
Small businesses that experienced recent growth into a medium business may be at risk of incorrect tax outcomes because their systems, controls and governance no longer provide sufficient support for their expanding business.
Reasons businesses could be at risk of incorrect reporting, include:
- inadvertent omission of income
- overstated expenses
- not accounting for private use of business funds or assets
- miscalculation of capital gains.
Overview of the latest estimates
The net tax gap estimate for the latest year has slightly increased to 7.3%. Our analysis tells us that the net tax gap has remained relatively steady since 2016–17, even as the number of medium businesses in the population has grown over the 6-year period.
|
Element |
2016–17 |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
|---|---|---|---|---|---|---|
|
Population |
38,344 |
39,545 |
40,358 |
41,143 |
43,625 |
46,086 |
|
Gross gap ($m) |
1,228 |
1,215 |
1,157 |
1,244 |
1,404 |
1,568 |
|
Amendments ($m) |
303 |
195 |
196 |
181 |
181 |
181 |
|
Net gap ($m) |
925 |
1,020 |
961 |
1,063 |
1,223 |
1,387 |
|
Expected collections ($m) |
12,979 |
13,220 |
12,339 |
13,150 |
16,053 |
17,634 |
|
Theoretical liability ($m) |
13,904 |
14,240 |
13,300 |
14,213 |
17,276 |
19,022 |
|
Gross gap (%) |
8.8% |
8.5% |
8.7% |
8.8% |
8.1% |
8.2% |
|
Net gap (%) |
6.7% |
7.2% |
7.2% |
7.5% |
7.1% |
7.3% |
Figure 1 displays a trend of the medium business tax gap as a percentage over the same period.
Figure 1: Gross and net tax gap (percentage) − medium business, 2016–17 to 2021–22
What's driving the gap
Most medium businesses pay the right amount of tax on time. When they make mistakes, they readily correct them. When we identify errors during a review, they often make a voluntary disclosure.
Where medium businesses make mistakes, it is generally in how they interpret tax law or because they do not understand their tax obligations.
The most common issues we see are:
- incorrectly recording transactions or not reporting transactions outside the normal course of business, including large one-off or unusual transactions
- arrangements that extract wealth from private companies while avoiding the appropriate amount of tax omitting domestic or foreign-sourced income.
A very small number of businesses seek to evade paying the right amount of tax. They take advantage of closely held structures and use artificial and non-commercial arrangements intentionally designed to evade tax. Where we detect deliberate tax evasion, we apply firmer actions such as penalties and prosecutions.
With improved data analytics, it is increasingly difficult for taxpayers to evade tax without detection.