Small businesses pay the IRS 87 cents for every dollar in tax they theoretically owe, which is an improvement over recent years.

However, the latest figures show unpaid small business debts remain a significant problem for the Australian Taxation Office (ATO).

A new transparency reportreleased on Friday, addresses the small business tax gap – the difference between the amount of tax small businesses theoretically owe the ATO and the amount they actually paid.

In the 2021-22 financial year, the most recent period covered by the report, small businesses theoretically owed the ATO $139.9 billion, up from $121.1 billion the previous year.

The net tax gap was $17.7 billion, or 12.6% of the theoretical total, meaning small businesses remitted 87 cents for every dollar owed in 2021-22.

This is the lowest net tax gap percentage recorded since 2017-18.

Source: ATO

The percentage decreased in 2021-22 because the theoretical tax liability increased faster than the net tax gap in pure dollar terms.

Changing economic conditions and the ATO’s compliance activities may have contributed to this outcome, the ATO said in the report.

Although the overall percentage is declining, the $17.7 billion owed by small businesses makes up the largest single item in the overall tax gap of $44.5 billion in 2021-22.

For comparison, individuals not in business accounted for $10.6 billion of the total deficit, while large businesses were on the hook for $3.6 billion.

The estimated overall net tax gap was only 7.5%.

“The overall estimate of the corporate income tax gap is now trending upward, with both the gross and net tax gap increasing in each of the last two years,” the ATO said.

“Most of this increase comes from the small business population component of the income tax gap for small businesses and large corporate groups. »

Underground economy activities contribute to the small business tax gap

The report also details the pain points of small businesses.

For small businesses combined – which includes small businesses and individuals in business – most of the tax gap came from omitted income, followed by overclaimed deductions.

Source: ATO

Much of the omitted revenue was the result of underground economy activities or deliberate attempts to conceal the ATO’s responsibilities.

“While the impacts of shadow economy behavior are significant, taxpayers who deliberately engage in this behavior through the random survey program are in the minority,” the ATO said.

“Approximately 5% of taxpayers in the sample made clear and deliberate attempts to avoid paying the correct tax. »

The ATO’s full estimate of small business tax performance is available here.

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