Deborah Jenkins
Deputy Commissioner Small Business
Chartered Accountants Australia and New Zealand Strategic Tax Planning Day
26 May 2021
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Introduction
In the spirit of reconciliation, in particular today on National Sorry Day, I would like to respectfully acknowledge the traditional owners and custodians of the land on which we all meet across the country. I would also like to pay respect to the elders past, present and emerging. I would specifically like to acknowledge the Gadigal of the Eora nation, the traditional owners of the land I am presenting from today. I would also like to extend that respect to other Aboriginal and Torres Strait Islander people watching.
I’d also like to acknowledge the evolving situation in Victoria.
Today I want to focus on the things that you as the tax profession, and we as the ATO, can do over the next 12 months to put small businesses in a better position, not just through technical tax advice, but through holistically considering their business and helping them thrive.
But first, I want to start by saying thank you for everything you did last year to support the ATO and the Australian community in a time of need. I know it hasn’t been easy for you. Like the ATO, you went above and beyond to help businesses get access to support and stimulus without you, many wouldn’t have made it through. And you did all of this while dealing with many of your own challenges, both for your business and on a personal level.
We want to continue this effective partnership; not only to ensure the integrity of the system, but so Australians are better placed to recover from the pandemic (or in some cases build on the business built during the pandemic) and keep on top of their obligations and debt, because the challenges aren’t over yet.
What my team and I have been reflecting on is, what lessons can we take from our experience in the last year to deliver better services to small businesses, and how you too can use that experience as you prepare for year-end conversations with your clients.
You have heard about the small business population from me before and how diverse the group is, but a quick reminder:
- We define small businesses as entities (which includes sole traders) with an aggregated turnover of less than $10 million. There are approximately 4.2 million small businesses.
- Small business accounts for around 15% of the ATO’s total income tax collection and around 30% of GST collections.
- Around one-third of Australian small businesses are owned by migrants.Footnote1
- The small business market is diverse in structure, size, turnover, industry, location, number of employees, maturity of business and acumen.
- The largest type of small businesses are sole traders (46%), followed by companies (26%), trusts (21%), and partnerships (8%).
We’ve all heard of the dual-speed economy. In my view, in the current environment it’s more of a multi-speed economy. Some businesses are recovering well, and others continue to struggle. Some haven’t seen much change at all.
Some struggled in COVID-19, while others thrived. Many small businesses operate in industries that were most affected by COVID-19 restrictions, like cafes, restaurants, arts and recreation.Footnote2 But neither industry nor location alone tell us how a business is doing right now.
Businesses who were able to work remotely or online, as opposed to relying on bricks and mortar only, generally performed better through COVID, but not always.
I need to call this out because this is why a blanket approach to anything is not appropriate and why we need business and their advisors to engage with us directly to tell us their story.
We’re seeing a boost in confidence relating to cash flow. In February 2021, over 40% of small businesses were worried about their ability to meet the next three months financial commitments. In March, this dropped to less than 20%.Footnote3
However, cash flow will remain a strong focus for small business, as we know it was always an issue even prior to the pandemic.
What is fundamentally driving our strategies and ongoing engagement with small businesses, is our understanding that successful businesses, even in a recovery phase, are those that:
- keep good records
- use technology to run their business, and
- have regular contact with their tax or business advisor.
This has framed up what I want to focus on with you today.
I know you had a range of Federal Budget sessions yesterday, so I won’t cover these.
Tax gap and how the results are driving us
To set the scene for our focus areas in 2021–22 it is helpful to share what fundamentally underpins and informs our strategies in the small business market.
The small business income tax gap estimate and the associated Random Enquiry Program (where we review the income tax affairs of randomly selected small businesses) continues to play a central role in helping us understand compliance challenges faced by small business.
The net small business income tax gap estimate for 2017–18 is 11.5% (or approximately $11.1 billion per annum).
Of the businesses in the Random Enquiry Program, we saw around 70% doing their best to report correctly and pay the right amount of tax. As I mentioned, attributes common to these small businesses were:
- good record keeping
- effective use of technology to manage their business; and
- ongoing engagement with a tax professional – especially before making important decisions or making changes to their business structure or buying or selling assets.
At the other end of the spectrum, we saw about 4% of small businesses deliberately engaging in shadow economy behaviour, but adding up to more than half of the size of the gap. The most common shadow economy behaviours observed were:
- deliberate omission of income
- deliberate omissions in record keeping, and
- overclaiming of deductions.
Separate to shadow economy behaviour, more than $5 billion of the small business income tax gap is the result of other, less deliberate behaviour – making honest mistakes, poor record keeping and perhaps being confused about, or misunderstanding obligations.
Our program has highlighted that tax practitioners continue to have a positive impact on small business compliance and behaviour. Small businesses that are getting it right regularly seek support and advice from a tax practitioner that understands their business and business model.
94% of small businesses use agents to lodge their income tax return, and 82% of the group in the Random Enquiry Program were compliant, which was higher than self-preparers.
Good record keeping practices, encouraged by tax practitioners, assist with accurate reporting.
However, in cases where shadow economy behaviours were identified, there was deliberate behaviour demonstrated by tax practitioners in not meeting professional standards or reporting the actions of the small business, or in deliberate issues with records not being adequately sighted. This is disappointing to us and I’m sure to you as well. This kind of behaviour is squarely on our radar.
Providing support to your clients
So how can you help to continue to provide holistic support for your small business clients?
Accurate and complete records allow small business owners to monitor the health of their business, as well as ensure they can meet their obligations now, and in the future. And,if this last year has shown us anything, it is that digital records provide everyone with a better, faster and more accurate indicator of business health than ‘pen and paper’. In particular, as COVID (and bushfires before that) taught us, cloud-based accounting software is actually part of a good business continuity policy.
I know you are constantly saying to clients – keep good records. If you can manage it, I’d really like to you be saying “keep good digital records”. I know it isn’t a sexy conversation, but as I said, the Random Enquiry Program has shown us that poor record keeping is a major issue that leads to errors – but a relatively simple one to address.
When tax and super obligations are integrated into natural business systems and records are easy to keep – through using digital systems, business owners and their advisers have better information and hopefully more time back in their day. We know businesses are often wary of the upfront investment. But time is money and digital automation when it comes to record keeping and cash flow will, in the long run, give your clients more time to reinvest in their business (or themselves).
Help them to help themselves when it comes to digital engagement, teach them what they need to know and see this as an opportunity – not a threat to the other value-added services you can provide to them.
You would be aware that we’ve just launched our new Online services for business (OSB) service, replacing the Business Portal, which was 17 years old and in need of retirement – but it served us well!
OSB provides most of the same services that were available in the Business Portal, but we’ve also added the ability to:
- view and print tax returns and income tax history
- create payment plans, and
- switch between businesses with a single log in.
We are in the process of transitioning users from the Business Portal to OSB. It is the default service when users log in now.
Online services for business is a great tool to compliment the services you provide to your clients. Your clients can use it for the small tasks that they don’t need to engage you for, like creating payment plans, managing debt and viewing previous tax returns. There is also great value in them being able to see the view you get to see of their position.
When I talk about the additional support you provide to your small business clients it is also about supporting them on key issues like cash flow. We know cash flow is a major issue for small businesses, and this flows on to their ability to pay their staff, their suppliers and the ATO.
4.2 million small businesses make up a large proportion of total taxpayers in Australia, so it is understandable that they also account for the largest portion of debt (around two-thirds of the total debt owed to the ATO). We also acknowledge that nearly 90% of all liabilities are paid on time, but for small business, on-time payment is closer to 70%. So we want to support small businesses to address this and we need your help.
After pausing last year, we have resumed our focus on following up with clients with outstanding lodgments and payments. We want all clients to have certainty – to know their net tax position, be aware of their obligations so they can make informed decisions, know what actions we may take when appropriate, and know what support options are available.
We have been reminding people of the help and support we can offer. We have an obligation to follow up where lodgment or payment is being ignored, to ensure there is a level playing field, so we have gradually restarted some of our firmer actions.
In this period of economic recovery, I encourage you consider what is your role in managing a small business client’s debt as well as meeting their other obligations. We acknowledge that many of you are small businesses yourselves, have faced the same pressures and also that many of you are not involved in debt discussions about your client with the ATO.
The longer a debt is left unattended, the more likely it is to grow, and the harder it becomes for a small business to get back on track.
For this reason, we strongly encourage small businesses to engage with us and consider setting up a payment plan, especially as confidence is starting to return.
We are always here to help with managing debts, and our message is that it is never too late. Engaging with us is better than sticking their head in the sand.
As part of your pre-recorded sessions for this event the ATO has delivered a joint 1 hour webinar with CAANZ on our digital Cash Flow Coaching Kit. I encourage you to view this session and use this as a tool to help have those cash flow conversations and in turn support your clients to better manage debts that arise.
Our risk focuses
Like our debt strategy, for the year ahead, we are increasing our focus on compliance activity after last year’s pause. We are doing so with empathy and are mindful of the variety of situations small business clients across Australia are facing – as I said some doing well and others doing it tough.
I want to reassure you and your small business clients that the ATO will be empathetic to, and understanding of, legitimate mistakes where good faith efforts have been made.
Our compliance focus areas for small businesses going into this tax time are:
- Using third party data like the Taxable Payments Annual Report data, to ensure that more than $390 billion of income from contract work is declared in tax returns.
- Monitoring loss claims, particularly for first time loss makers, and closely monitoring loss carry back and temporary full expensing measure claims, and
- Monitoring small businesses to ensure they are making appropriate distinctions between private and business activities and accounting for these accordingly. For example, that brand new ute that has just been purchased and might be eligible for a full deduction this year. If it’s being taken on fishing trips for the weekends, this needs to be accounted for.
You also need to make sure that JobKeeper and JobMaker Hiring Credits amounts are included as income in the tax return.
We have developed our final phase of our compliance approach for JobKeeper focusing on assurance and key risk clusters. We are also working to transition observations from JobKeeper behaviours and populations to inform how we approach other measures – for example it has reinforced to us the importance of taxpayers completing forms, such as the Business Activity Statement, correctly.
We continue to focus on shadow economy behaviours, like deliberately not declaring income, operating outside the system and not complying with payment and lodgment obligations.
We also remain focussed on the importance of talking with small business employers about their super guarantee obligations.
If for any reason employers can’t meet quarterly super guarantee entitlements for employees, it’s essential that employers lodge a super guarantee charge statement by the due date to avoid penalties, even if they can’t pay the full SGC – we can work with employers to establish a payment plan.
As previously mentioned, we’re also focusing on agent behaviours. We know that the majority of agents do the right thing and we will always do our best to support them and their clients. However, there are a small minority of agents who take advantage of their trusted position or seek to undermine the law. This is behaviour we are taking swift and firm action on.
With more data and insights gleaned from our tax gap program, and better use of the intelligence we hold, we are becoming more sophisticated in the way we identify and treat tax practitioner-level risk.
We can now draw that information together in a way that gives a more holistic picture of agent behaviour – across the tax practitioner’s own affairs, those of their practice and those of their clients.
For those highest risk practitioners whose behaviour threatens the integrity of the profession and system, and for those unregistered preparers operating outside the system, the ATO and Tax Practitioners Board are working together to achieve the best outcome for the profession and system overall.
I assure you though that while we are focusing on bad behaviour, we also acknowledge that many of you are still under pressure. We will continue to take a flexible and measured approach while acknowledging the ongoing challenges and difficulties that agents and their clients are managing. We encourage you to contact us if you need help, for example with your lodgment program.
How the ATO is supporting small business and addressing risk
Getting tax and superannuation understood and the right amount paid in the first place is the most efficient way to administer the tax system (we can’t audit our way to success). Our aim is to sustainably and sensibly improve small business tax performance through tailored strategies based on client behaviour and delivering improved digital experiences.
We tailor our approaches to addressing risks based on the behaviour of small businesses and focus primarily on preventing mistakes and increasing engagement. To take this approach, we analyse the population to understand the prevalence of different behaviours, and how they manifest into risk areas – including registration of business activity, lodgment, income, expenses, engaging labour and payment.
At the moment we are really focusing on our relative tolerance levels for these, so we can prioritise our investment across the spectrum of preventative, influencing and compliance actions.
The use of data is key to our future strategies aimed at tackling changing risks and supporting small businesses in better ways.
For example, we use TPRS data to check contractors in a range of industries are lodging and meeting their tax obligations. But we are using this data to help the contractors rather than take a heavy-handed approach. We have been applying a nudge approach to reminding TPRS contractors to include their income on their tax return. And our gentle nudges have proven to be successful.
We are also using JobKeeper data to help small businesses accurately report their JobKeeper payments. We will be contacting businesses, or their tax agent, that have enrolled for JobKeeper and have an eligible business participant including sole traders, companies, trusts or partnerships to let them know the total amount of JobKeeper payments they have received to help them prepare their tax return.
You should review and cross-check the payment amounts with your client’s own records though.
My team have also been considering how changes in the environment, as a result of COVID, and more generally since we started our Black Economy Program, will have impacted on shadow economy behaviour and evolved risks.
While a lot has changed, what has remained the same is that when an opportunity presents itself, it is a risk we need to manage and mitigate. We are very conscious that the shadow economy will be increasingly digitised as we use less and less cash. The nature of work will also change, and we are evolving our strategies to address these shifts.
In facing new risks, we know one of the key answers will lie with digital and data.
Driving better digital and use of data
We are progressing a range of projects to improve our digital services and use of data to both increase our ability to detect shadow economy behaviour, but more importantly, to make things easier and help businesses and tax professionals avoid small mistakes.
I talked about Online services for business before. Our commitment to deliver this is one part of our overall commitment to improve digital services for business.
The emergence of new analytical tools, increased digitalisation and availability of data, offers significant opportunities to reduce the burden on small business. Innovations like pre-fill make it easy for small business.
Data window is one new concept we are developing with an initial release in the next financial year, focused on sharing more data with small businesses and their agents.
Our aspiration is to continue to open the curtains and share more data with you and your clients to improve your ability to get things right and for taxpayers to self-regulate.
E-invoicing is an important step in delivering a complete digital approach for running businesses. It is the automated digital exchange of invoice information directly between a buyer's and supplier's accounting systems. In Australia, unlike other countries, it is not a tax compliance or data collection initiative.
While the ATO has responsibility for delivering e-invoicing, it is simply because we have the right experience in delivering these sorts of systems, not because of the relationship to tax and tax compliance. According to Deloitte Access Economics estimates, every time an e-invoice replaces a paper invoice it can deliver up to $20 in cost savings to the businesses involved.
To find out how to start e-Invoicing, your clients need to contact their software provider to see:
- if their business is digitally ready,
- how and when the software provider can help, and
- what the business needs to do.
They may need to update their existing software or add an extra service.
The ATO is working with CAANZ to develop educational materials for members to increase understanding of e-Invoicing and support in discussions with their clients.
Speaking of digital we are also progressing with Single Touch Payroll Phase 2 which has a mandatory start date of 1 January 2022.
The aim of Phase 2 is to reduce the reporting burden for employers who need to report information about their employees to multiple government agencies and supports the administration of the social security system.
The additional data should already be information captured in the employer’s payroll system. They don’t need to do anything now, once an employer’s payroll solution has been updated to offer Phase 2 reporting, there will be some steps required to set up initially. The steps required to transition will be dependent on the payroll solution being used.
Employers can start reporting earlier if their payroll solution is ready.
Strategic initiative
Finally, in our 2020–21 corporate plan, the ATO focused on eight strategic initiatives that will deliver on our 2024 aspirations over the next few years.
The Improving small business tax performance through digital and data strategic initiative aims to build integrity into the tax and super systems and make it easier for businesses to participate in the system through digital and data services.
Based on our analysis of the small business population, we are prioritising focus on employers and companies because of their high level of interactions and contributions to the tax and super system. This gives us the biggest opportunity to improve small business tax performance.
Realistically to close (or maintain) the tax gap we need to work with others, like you, to increase use of digital accounting solutions and expand how we connect with that software. That’s why I am really encouraging you to talk to your clients about the benefits of going digital.
For us, success with this initiative would look like:
- Small business owners understanding their tax and super obligations and being guided to fulfil them.
- Most data assurance falling out of wholesale offerings and systems integrated with existing business processes.
- Using partner data, third-party data, and our own, to drive increased pre-fill, promote on-time payments and nudge businesses.
- Playing a more proactive role in encouraging uptake of digital tools, good cash flow management and business planning.
We are commencing engagement with our partners in the system, like you and Digital Service providers over the coming months.
Wrap up
As we continue to progress with better targeting our engagement strategies, evolving how we use data and improving our digital services at the ATO, I am asking you to work alongside us to progress on this journey as well.
Consider how you can continue to engage your clients with more holistic advice – advice on things that will really make a difference, encourage them to go digital, and never stop reminding them to keep good records. This builds on the goodwill you built with them during COVID.
I know you are facing your own challenges and we are here to support you with that. Your support in the short term is going to help small businesses get back on track, and in the long term it will help them become stronger, more resilient and more successful Australian small businesses.
I will hand over to Deputy Commissioner Tim Dyce now to take you through our focuses with private groups.
Speech by Deputy Commissioner Small Business, Deborah Jenkins at Chartered Accountants Australia and New Zealand Strategic Tax Planning Day, 26 May 2021.