Introduction

2.1 This chapter provides essential background for this review by defining terms, examining the proportion and make-up of the small business sector's collectable debt and outlining the general environment in which small businesses operate.

Background

Definition of 'small business'

2.2 The Inspector-General was told that there are as many as 39 different legislative definitions of the term 'small business'.

2.3 Tax practitioner bodies define the term on the basis of the number of employees—for example, in its small business survey CPA Australia defines 'small business' to mean an 'independently-owned and operated business employing fewer than 20 people'.1

2.4 The standard Australian Bureau of Statistics small business definition generally refers to management units with fewer than 20 employees in all industries except those in the manufacturing industry where they have fewer than 100 employees, and the agricultural industry where they have an estimated value of agricultural operations of between $22,500 and $400,000. This definition was also used by the Small Business Deregulation Task Force. The Australian Bureau of Statistics states that in June 2003 there were about 1.2 million small businesses in Australia.2 Its data for June 2004 is not available.

2.5 The Australian Bureau of Statistics has also defined small businesses as tax-paying legal entities that operated as trading businesses for at least some time during the financial year and whose total income or expenses were $10,000 or more, up to a limit of $5 million.3

2.6 Based on experimental estimates, and using information sourced from the Tax Office, the Australian Bureau of Statistics reported that from 1995-96 to 2000-01 the number of small businesses grew by 3.4 per cent to 1,505,924. Over the same period the increase in total income for small business was 18 per cent, expenditure 18.6 per cent (including wages 29.9 per cent) and profit 13.4 per cent. The average income for small business increased by 14.1 per cent to $279,270 while average expenses rose 14.7 per cent to $247,292.4

2.7 For the purposes of this review, the Inspector-General defined 'small businesses' as those businesses with an annual turnover of under approximately $10 million. This turnover threshold ensures that this review takes into account a very broad base of business taxpayers.

2.8 The Tax Office does not report separately on tax-paying entities with an annual turnover of less than $10 million. However, within this category would be included businesses classified by the Tax Office as micro-businesses, which are business taxpayers with an annual turnover of less that $2 million, and small to medium enterprises (SMEs), which are those business taxpayers that have an annual turnover of between $2 million and $100 million. The Tax Office has stated that over 85 per cent of the SMEs have a turnover of less than $10 million, use simple business structures and are typically a single entity.

2.9 The Tax Office states that there were 2.5 million micro-businesses as at 30 June 2003. As at 30 June 2004, there were 2.3 million. The Tax Office reports that these micro-businesses make up 96 per cent of all businesses registered in the revenue system. Micro-businesses also incorporate 300,000 small superannuation funds, the majority of which are self-managed funds. Most micro-businesses are sole traders or family businesses. Most are operated from home. Most have an annual turnover of less than $200,000.

2.10 For the purposes of identifying the number of micro-businesses reported in the Compliance Program 2004-05 the Tax Office states that these numbers are sourced from its tax return database for the year ended 30 June 2002.

2.11 The Tax Office advises that this database is based on the lodgment of income tax returns. For example, the Tax Office indicates that where a partnership return is lodged and the partnership has two partners who each lodge an income tax return, three records are counted on the database. Likewise, if a trust return is lodged and each of the five beneficiaries lodge individual income tax returns, six records are counted on the database. On the other hand, where a trust income tax return is lodged and the trustee is assessed and the beneficiaries do not lodge returns, only the one record is counted, that being the trust return.

2.12 For the micro-business segment, the Tax Office reports that there were 3,500,975 taxpayers who completed the business income label in the income tax return. Of that number, 87,999 returned no business income, 1,082,756 returned 'passive' business income and 2,330,220 returned 'active' business income. The Tax Office defines a 'passive' business income taxpayer as an individual whose only business income is a distribution from a partnership or trust of business income with the remainder being considered as 'active'.

2.13 The Tax Office advises that the 2.3 million micro-businesses referred to in the Compliance Program 2004-05, relates only to those taxpayers who derived 'active' business income. Table 2.1 sets out the entity types for these 2.3 million micro-business taxpayers.

Table 2.1: Entity types within micro-business segment based on tax return database figures
Entity type Number
Company 617,710
Individual 874,644
Partnership 413,657
Superannuation fund 222,852
Trust 201,357
Total 2,330,220

Source: Tax Office

2.14 Given that the 2.3 million figure reported by the Tax Office as the number of micro-businesses excludes individuals whose only business income is a distribution from a partnership or a trust of business income, it suggests that the 874,644 individuals reported in Table 2.1 are likely to be operating as sole traders or contractors.

2.15 The Tax Office states that there are approximately 82,000 SMEs (consisting of 108,000 business entities). Based on Tax Office information, this would mean that, as at 30 June 2004, there were approximately 69,000 SMEs (consisting of 91,000 business entities) that have a turnover of less than $10 million. Aggregated Tax Office figures suggest that, as at 30 June 2004, there were approximately 2.4 million small businesses that had a turnover of less than $10 million.

2.16 For the purposes of identifying the number of SMEs reported in the Compliance Program 2004-05 the Tax Office states that these numbers are not sourced from the tax return database. Rather, this is determined by starting with the number of active entities which are classified as SMEs and then adjusting for grouped entities. The Tax Office advised that an 'active' entity does not mean that the entity is deriving active business income but rather that client activity is reported to the Tax Office.

2.17 Table 2.2 provides a reconciliation of the number of SME entities reported in the Compliance Program 2004-05 on the basis of client activity.

Table 2.2: Entity types within SME segment based on client activity
Entity type Number
Company 73,371
Individual 23,486
Partnership 9,845
Superannuation fund 3,202
Trust 712
Sub-total 110,616
Less grouped entities 39,053
Plus number of groups 11,133
Total of SMEs 82,696

Source: Tax Office

2.12 The Tax Office also advises that when using numbers sourced from its tax return database, it arrives to a similar figure to that reported in the Compliance Program 2004-05. Table 2.3 sets out the entity type for SME taxpayers for both the 2002 and 2003 income years using tax return information.

Table 2.3: Entity types within SME segment based on tax return database figures
Entity type 2002 2003
Company 58,499 56,228
Individual 2,051 2,173
Partnership 6,204 6,286
Superannuation fund 786 726
Trust 16,879 16,959
Total 84,419 82,372

Source: Tax Office

2.19 The Tax Office publication Taxation Statistics 2001-02 reports that based on 2002 annual income tax returns there were a total of 1.7 million taxpayers that were classified as a company, partnership, trust or superannuation fund. However, included in this figure would be entities that have an annual turnover of greater than $10 million.

2.20 In trying to develop a clearer understanding of the characteristics of a small business from an entity perspective, these numbers must be treated with some caution.

2.21 First, a business may involve more than one entity, for example, a business may operate through a trading trust with a corporate trustee and also have a self managed superannuation fund as part of its business structure. A micro-business may also include dependent contractor arrangements. The figures provided by the Tax Office may include other entities closely related to the small business deriving active income—such as other companies, trusts, partnerships and dependent contractors—notwithstanding that these closely related entities are part of the one economic unit.

2.22 Second, these figures may also include entities closely related to, or a part of, businesses with annual turnovers of more than $10 million—such as partners of large firms where they derive 'active' income from another source.

2.23 Although the issue may seem academic, it does mean that the Tax Office's figures will also include other entities that are not the focus of this review.

Review focus on collectable debt

2.24 This review focused on collectable debt owed by small businesses to the Tax Office. Collectable debt is that component of tax debt with no legal impediment to recovery. It does not include debt arising from a liability that is disputed. Disputed debt generally means outstanding tax for which taxpayers have lodged an objection to their assessment or an appeal to the Administrative Appeals Tribunal or a court.

2.25 Many representations were made to the Inspector-General in relation to the Tax Office's manner of collecting disputed debt. In the Inspector-General's view, this concern is another potential systemic tax administration issue that may be one he chooses to review in the future.

Focus on fairness not efficiency

2.26 The Inspector-General's review is focused on the fairness of the debt collection policies and practices. It is not focused on the efficiency or effectiveness of those policies and practices. Issues of efficiency and effectiveness are matters which the Inspector-General considers are more appropriate considered by Tax Office management and other bodies.

2.27 However issues of efficiency, effectiveness and fairness overlap. Submissions raised issues of efficiency and effectiveness that also had a direct impact on the fairness of the policies and practices. Therefore, these issues have been canvassed but only to the extent that they impact on fairness.

Amount and proportion of small business collectable debt

Primary sources of debt figures

2.28 The primary sources for the debt figures used in this document are the Tax Office's June 2004 Operations, Debt and Lodgment Debt Report prepared as an internal Operations Business Line document, the Commissioner of Taxation's Annual Report 2003-04 and material provided in mid-September 2004 specifically requested in relation to higher debt level cases. In addition, information was sourced from longitudinal analysis developed by the Tax Office for the purposes of their ongoing analysis only and not intended by the Tax Office for reporting purposes.

2.29 Some figures provided by the Tax Office have been adjusted to reflect the definition of “small business” used for the purposes of this report. These adjustments are made on the basis that 85 per cent of businesses within the SME segment have an annual turnover of less than $10 million. Adjustments are as at 30 June 2004 and these adjusted figures are included throughout the report.

As at 30 June 2002

2.30 The Commissioner of Taxation reported that the Tax Office collected a total of $168 billion in taxes, including the goods and services tax (GST) and excise, in the 2001-02 income year.

2.31 As at 30 June 2002, the value of debt on hand was $13.89 billion, an increase of 35.6 per cent on the previous income year. Of this amount, $5.49 billion was collectable debt with a reported 1.168 million cases on hand. Cases on hand are taken to represent the number of taxpayers including entities that have a collectable debt owed to the Tax Office.

2.32 Collectable debt increased by 51 per cent, or $1.8 billion, on the previous year, with a 68 per cent increase in the number of collectable debt cases on hand.

As at 30 June 2003

2.33 The Commissioner of Taxation reported that the Tax Office collected a total of $185 billion in taxes, including the GST and excise, in the 2002-03 income year.

2.34 As at 30 June 2003, $17.21 billion remained outstanding of which $6.9 billion was collectable debt owed by 1.285 million taxpayers. Seven billion dollars is one per cent of Australia's gross domestic product and 4 per cent of the Commonwealth's total revenue.

2.35 The Commissioner reported that the $6.9 billion of collectable debt had increased from the previous year by 25 per cent. The Tax Office states that this increase was due to an increased liability raised through lodged activity statements. However, during this same period there was only a 9.9 per cent increase in the number of collectable debt cases on hand.

2.36 Of this $6.9 billion figure, the Tax Office reported that approximately 810,000 small businesses owed approximately $5.5 billion, or about 80 per cent, of that overall collectable debt. Approximately 500,000 small businesses owed less than $25,000 with approximately 140,000 small businesses owing less than $100. As at 31 January 2004, 62 per cent of the small business debt cases involved less than $2500 of collectable debt.

2.37 In 2003, although the small business sector owed about 80 per cent of the overall collectable debt it only contributed 10 per cent of the total Commonwealth revenue and remitted 16 per cent of all employees' Pay As You Go and superannuation withholdings.

As at 30 June 2004

2.38 The Commissioner of Taxation reported that the Tax Office collected a total of $198 billion in taxes, including the GST and excise, in the 2003-04 income year.

2.39 The Commissioner's annual report states that as at June 2004, $16.93 billion remained outstanding of which $7.53 billion was collectable debt. This collectable debt is owed by 1.395 million taxpayers.

2.40 The Tax Office provided the Inspector-General with a break-up of 2003-04 debt figures for the 2003-04 income year which stated that 1.395 million taxpayers owed $8.343 billion in collectable debt as at June 2004.

2.41 There is some discrepancy, totalling $813 million or 11% of the total adjusted collectable debt amount, between the debt figures the Commissioner has reported in his 2003-04 annual report and the debt figures the Tax Office provided to the Inspector-General during the course of this review.

2.42 In respect to this discrepancy the Commissioner's annual report states that the collectable debt figures have been adjusted to reflect account posting corrections. 5 The Tax Office advises that:

… adjustments account for components of debt that report as collectable but due to timing or other issues have not had the appropriate actions undertaken as yet (e.g. 'dispute' indicator not input). Given the manual nature of the adjustment process it is only undertaken by the Tax Office at the overall level, not at segment level.

2.43 There was also some discrepancy in the number of collectable debt cases on hand as at 30 June 2004. The figure provided to the Inspector-General of 1.395 million taxpayers includes approximately 175,000 cases that had nil or credit balances and therefore no collectable debt.

2.44 It is not clear whether the collectable debt figures and number of taxpayers used in the Commissioner's previous annual reports have also included taxpayers with nil or credit balances.

2.45 The following, unless otherwise noted, is based on the break-up of figures provided by the Tax Office; collectable debt of $8.343 billion (unadjusted) owed by 1.224 million taxpayers.

2.46 On the basis of the break-up provided by the Tax Office, the overall collectable debt rose to $7.53 billion (adjusted), or $8.343 billion (unadjusted), with 1.224 million cases. On adjusted figures, this represents a 9 per cent increase in collectable debt on the previous year. On unadjusted figures ($7.59 billion in 2002-03) this marks a 10 per cent increase in collectable debt on the previous year. However, during this period there was a 4.7 per cent decrease in the number of collectable cases on hand.

2.47 The Tax Office reports that approximately 838,000 small businesses owe approximately $6.69 billion.6

2.48 Of this total, approximately 787,342 small business collectable debt cases, or 94 per cent of the total small business collectable debt cases, owe less than $25,000, approximately 505,537 cases owe less than $2500 (60 per cent) and about 147,152 cases (17 per cent) owe less than $100.

2.49 Table 2.4 shows the overall debt collection results for the past six years. It indicates an upward trend in the collectable debt on hand over the past six years. It also indicates that the total number of collectable debt cases has continued to steadily increase. The value of cases on hand appears to have eased.

Table 2.4: Debt collection results, 1998-99 to 2003-04
  1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04
Value of cases on hand at 30 June ($ billion) 7.37 8.55 10.24 13.89 17.21 16.93
Collectable debt on hand at 30 June ($ billion) 2.81 3.07 3.58 5.49 6.9
(7.59)(a)
7.53
(8.34)(a)
Number of collectable debt cases on hand at 30 June 332,309 502,921 694,091 1,168,726 1,285,283 1,395,491
(1,224,232)(b)

Source: Commissioner of Taxation Annual Reports 2001-02 and 2002-03 and 2003-04. These figures have been adjusted to reflect 'account posting corrections'.

(a) This figure represents the unadjusted collectable debt amount on hand at 30 June.
(b) This number of cases represents the unadjusted debt cases and excludes those cases that have nil or credit balances.

2.50 Table 2.5 summarises the collection of debt as a percentage of total collections. It indicates an upward trend in the collectable debt on hand as a percentage of total collections over the past six years.

Table 2.5: Collectable debt compared with total collections, 1998-99 to 2003-04
  1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04
Collectable debt on hand at 30 June ($ billion) 2.81 3.07 3.58 5.49 6.9 7.53(8.34)(a)
Total collections ($ billion) 122.52 151.31 165.8 168.8 185.04 198.63
Collectable debt on hand/total collections (%) 2.05 2.03 2.16 3.25 3.74 3.79(4.2)(b)

(a) This $8.34 billion figure represents the unadjusted collectable debt amount on hand at 30 June 2004.

(b) This figure represents the unadjusted collectable debt on hand as a percentage of total collections for the 2003-04 income year.

Source: Commissioner of Taxation Annual Reports 2001-02 and 2002-03.

2.51 In respect to the amount of collectable debt on hand reported in the Commissioner of Taxation's annual reports for 2001-02 and 2002-03, the Tax Office states that collectable debt has been adjusted to 'reflect account posting corrections' and 'accounting modifications and extraordinary collection factors that increased the level of collectable debt reported'. The Tax Office further states that the adjustment allows for a direct historical comparison with the percentage of collectable debt to total debt for previous years.

Nature of the collectable debt

Background

2.52 As at 30 June 2004, $8.343 billion of unadjusted collectable debt remained outstanding with a total of 1.224 million cases.7

2.53 Of the $8.343 billion of collectable debt, $4.866 billion related to debt level 4 (cases with $25,000-$49,999 outstanding), debt level 5 ($50,000-$99,999 outstanding) and debt level 6 ($100,000 or more outstanding) amounts. By value, this represents 58.32 per cent of the total collectable debt and, by cases, 4.76 per cent of total collectable debt cases.

2.54 As at 13 September 2004, the Tax Office reports that $3.936 billion of collectable debt classified as debt level 4, 5 or 6 amounts was owed by businesses with an annual turnover of less than $10 million. This amount includes activity statement, income tax and superannuation debt.

2.55 The Tax Office was not able to produce a break-up of the total collectable debt for debt level 4, 5 and 6 amounts into the value of primary tax, interest and penalty amounts. This is because:

The Tax Office's accounting system operates on a running account balance account. Liabilities are posted and credits (payments) are applied to the balance of the account rather than matched to individual liabilities. Categories of primary tax, interest and penalty amounts cannot be readily identified.

2.56 The Tax Office was also not able to provide the total value of collectable debt trends for debt level 4, 5 and 6 amounts over the last 12 months:

[The Tax Office is] unable to present this information where it has not been gathered over time. This is because the data in [the Tax Office's] data warehouse is regularly refreshed.

2.57 Table 2.6 provides a summary of the small business collectable debt by debt levels.

Table 2.6: Small business collectable debt by debt levels
  Value
($m)
% of total
collectable debt
Cases(a) % of total
collectable cases
Total collectable debt 8,343 100 1,224,232 100.00
Total small business collectable debt 6,694 80.23 838,155 68.46
Total micro collectable debt 5,725 68.62 818,685 66.87
Total SME collectable debt 1,141
(970)(b)
13.68
(11.62)
22,906
(19,470)
1.87
(1.59)
Total debt level 4-6 collectable debt 4,866 58.32 58,242 4.76
Total small business debt level 4-6 collectable debt 4,002 47.97 50,812 4.15
Micro debt level 4-6 collectable debt 3,088 37.01 45,211 3.69
SME segment debt level 4-6 collectable debt 1,075
(914)(b)
12.88
(10.95)
6,590
(5,601)
0.54
(0.46)

(a) Case numbers exclude credit/zero balance cases.

(b) Figures in parentheses represent proportion of SMEs with an annual turnover of between $2 million and $10 million and have been calculated as 85 per cent of $2 million to $100 million entities.

Source: Tax Office. Information provided by the Tax Office as at 30 June 2004.

2.58 Table 2.7 provides a summary of the small business collectable debt by revenue type

Table 2.7: Small business collectable debt by revenue type
    Value
($m)
% of total
collectable
debt
Cases(a) % of total
collectable
debt cases
Total collectable debt(b) Total for all segments 8,343 100 1,224,232 100
Total activity statement 4,415 52.90 633,551 51.75
Total income tax 3,187 38.20 531,739 43.40

Micro-business segment

(

Total micro 5,725 68.62 818,685 66.87
Micro activity statement 3,255 39.01 582,276(c) 41.64
Micro activity statement debt levels 4-6(d) 2,095 25.11 37,265 3.04
Micro income tax 1,967 23.58 304,268(c) 21.76
Micro income tax debt levels 4-6(d) 966 11.58 11,034 0.90

SME segment

($2 million-$10 million annual turnover)*

Total SME 970 11.62 19,470 1.59
SME activity statement 653 7.82 16,384(c) 1.17
SME activity statement debt levels 4-6 (d) 611 7.33 5,018 0.41
SME income tax 192 2.31 4,679(c) 0.33
SME income tax debt levels 4-6 121 1.45 812 0.07

(a) Unless specifically mentioned, case numbers exclude zero/credit balance cases.

(b) Information current as at 30 June 2004.

(c) Case numbers include zero/credit balance.

(d) Information current as at 13 September 2004. Percentages calculated using figures from different periods of time.

* Total SME figures are calculated as 85 per cent of the $2 million to $100 million annual turnover entities.

Source: Tax Office

Age of collectable debt

Income tax collectable debt

2.59 As at 13 September 2004, the Tax Office reports that for small business, $666.74 million of income tax collectable debt, classified as debt level 4, 5 or 6 amounts, was outstanding for a period greater than 12 months. This represents 61.3 per cent of the total income tax collectable debt classified by the Tax Office as debt level 4, 5 or 6 amounts, which totalled $1.087 billion.

2.60 Table 2.8 provides a break-up of the income tax collectable debt within debt levels 4, 5 and 6 as at 13 September 2004.

Table 2.8: Small business income tax collectable debt levels 4, 5 and 6 by age of debt
Income Tax Collectable debt Debt Level 4
($m)
Cases Debt Level 5
($m)
Cases Debt Level 6
($m)
Cases
Less than 1 month 9.88 282 9.23 131 23.05 87
Between 1 and 2 months 14.90 437 15.12 221 31.21 118
Between 2 and 3 months 11.82 353 8.37 119 30.68 73
Between 3 and 6 months 43.95 1294 28.41 418 66.04 272
Between 6 and 12 months 18.42 529 14.25 204 95.39 194
Greater than 12 months 149.04 4401 106.02 1553 411.68 1160
Total 248.01 7296 181.40 2646 658.05 1904

Source: Tax Office

2.61 The Tax Office indicates that the above figures may not accurately represent the amount of time a collectable primary tax debt has remained outstanding:

Income tax debt is aged by case based on time when a debt first established. Small amounts of General Interest Charge often remain on the account. This impacts the accuracy of the age profile. Amounts in dispute that subsequently become collectable also add to the overall age of debt holdings.

2.62 However, the Tax Office did not provide the Inspector-General with any further information as to the impact that these factors have on the age profile of income tax collectable debt or provide any other age profiling of debt undertaken by the Tax Office.

Integrated instalment account (or activity statement) collectable debt

2.63 As at 13 September 2004, the Tax Office reports that for small business, $1.603 billion of activity statement collectable debt, classified as debt level 4, 5 or 6 amounts, was outstanding for a period greater than 12 months. This represents 59.2 per cent of the total activity statement collectable debt classified by the Tax Office as debt level 4, 5 or 6 amounts, which totalled $2.707 billion.

2.64 Table 2.9 provides a break-up of the activity statement collectable debt within debt levels 4, 5 and 6 as at 13 September 2004.

Table 2.9: Small business activity statement collectable debt levels 4, 5 and 6 by age of debt
Activity Statement Collectable debt Debt Level 4 ($m) Debt Level 5 ($m) Debt Level 6 ($m)
Less than 1 month 50.71 43.30 95.08
Between 1 and 2 months 22.77 22.10 45.56
Between 2 and 3 months 21.61 21.04 35.83
Between 3 and 6 months 108.90 92.11 136.28
Between 6 and 12 months 119.40 112.50 176.97
Greater than 12 months 592.69 437.63 573.06
Total 916.08 728.68 1062.78

Source: Tax Office

Revenue type

2.65 Of the $8.343 billion in outstanding collectable debt, the Tax Office reports that $4.415 billion related to activity statement collectable debt while $3.187 billion related to income tax collectable debt.

2.66 Integrated instalment account debt includes the GST, Pay As You Go withholding and Pay AS You Go instalment amounts but excludes fringe benefits tax (FBT) and superannuation-related debts.

2.67 Table 2.10 shows the total collectable debt levels 4, 5 and 6 for businesses with annual turnovers of less than $10 million by revenue type as at 13 September 2004.

Table 2.10: Small business collectable debt levels 4, 5 and 6 by revenue type
Revenue type Debt Level 4
($m)
% of all
revenue types
Debt Level 5
($m)
% of all
revenue types
Debt Level 6
($m)
% of all
revenue types
Income tax 248.01 20.5 181.39 19.2 658.05 37.0
Integrated instalment account 916.08 75.5 728.68 77.0 1062.79 59.8
Superannuation surcharge 11.57 1.0 8.25 0.9 18.25 1.0
Superannuation Guarantee 37.06 3.0 27.32 2.9 38.63 2.2
Total 1212.72 100.0 945.64 100.0 1777.72 100.0

Source: Tax Office

Income tax collectable debt

2.68 As at 30 June 2004, $3.187 billion of collectable debt classified as income tax remained outstanding with a total of 531,739 cases. By value, this represents 38.2 per cent of the total collectable debt and, by cases, 43.4 per cent of all collectable debt cases.

2.69 As at 13 September 2004, the Tax Office reports that $1.087 billion of income tax collectable debt relating to debt level 4, 5 and 6 amounts was owed by businesses with an annual turnover of less than $10 million. This $1.087 billion is owed by 11,846 cases.

2.70 The Tax Office is not able to provide a break-up of the income tax collectable debt, for debt level 4, 5 and 6 amounts, into the value of primary tax, interest and penalty amounts or trends for those debts over the last 12 months. It provides the same reasons as for its inability to provide similar break-ups and trends for the total collectable debt amounts.

Integrated instalment account (or activity statement) collectable debt

2.71 As at 30 June 2004, $4.415 billion of integrated instalment account collectable debt remained outstanding with a total of 633,551 cases. By value, this represents 52.9 per cent of the total collectable debt and, by cases, 51.8 per cent of all collectable debt cases.

2.72 As at 13 September 2004, the Tax Office reports that $2.707 billion of activity statement collectable debt classified as debt level 4, 5 or 6 amounts was owed by businesses with an annual turnover of less than $10 million. This $2.207 billion is owed by 42,283 cases.

2.73 As for income tax collectable debt and the total collectable debt, the Tax Office is not able to provide a break-up of the activity statement collectable debt, for debt level 4, 5 and 6 amounts, into the value of primary tax, interest and penalty amounts or trends for those debts over the last 12 months.

2.74 By value, 91.1 per cent of all integrated instalment account (activity statement) collectable debt is within the micro-business and SME segments, with $3.255 billion and $768 million respectively out of a total of $4.415 billion in integrated instalment account collectable debt. These represent 48.22 per cent of all collectable debt.

2.75 Information provided by the Tax Office also indicates an upward trend for outstanding integrated instalment account debt within both the micro-business and SME segments for the July 2003 to June 2004 period.

2.76 By cases, 85.41 per cent of all integrated instalment account cases are within the micro-business and SME segments, with 582,276 cases and 19,276 cases respectively out of a total of 704,367 integrated instalment account cases. These represent 43.02 per cent of the total number of collectable debt cases.

Micro-business segment

Background

2.77 As at 30 June 2004, $5.724 billion of collectable debt remained outstanding within the micro-business segment.

2.78 Of that, $3.088 billion was classified as debt level 4 ($1.017 billion), debt level 5 ($0.704 billion) or debt level 6 ($1.367 billion) amounts. This represents 53.94 per cent of the micro-business segment collectable debt or 37.01 per cent of the total collectable debt.

2.79 Within debt level 6, as at 13 September 2004, there were 97 cases where a micro-business had a collectable debt greater than $1 million, totalling $251.07 million. There were also 4932 cases with a collectable debt between $100,000 and $499,999, totalling $855.82 million, and 170 cases with a collectable debt between $500,000 and $999,999, totalling $114.73 million.

2.80 As at 30 June 2004, the number of cases relating to the debt level 4, 5 and 6 amounts totalled 45,211, which represented 5.52 per cent of the micro-segment cases and 3.69 per cent of the total collectable debt cases.

By revenue type

2.81 Income tax debts and integrated instalment account debts comprise 91.22 per cent of the collectable debt within the micro-business segment and represent 94.99 per cent of the micro-business segment cases.

2.82 Within the micro-business segment, 56.86 per cent of the collectable debt ($3.255 billion) was characterised by the Tax Office as integrated instalment account debt. This amount also represents 39.01 per cent of the total collectable debt.

2.83 By cases, 62.39 per cent of cases within the micro-business segment (582,276 cases) were classified by the Tax Office as integrated instalment account cases. These represent 41.64 per cent of the total number of collectable debt cases.

2.84 Integrated instalment account debt includes GST and Pay As You Go withholding amounts. Tax Office longitudinal analysis of additional debt cases for February 2004 indicates that for the micro-business segment, 72.04 per cent of additional integrated instalment account debt comprised of Pay As You Go withholding while 22.17 per cent related to GST.

2.85 Table 2.11 shows the micro-business segment collectable debt levels 4, 5 and 6 by revenue type as at 13 September 2004.

Table 2.11: Micro-business collectable debt levels 4, 5 and 6 by revenue type
Revenue type Debt Level 4
($m)
% of all
revenue types
Debt Level 5
($m)
% of all
revenue types
Debt Level 6
($m)
% of all
revenue types
Income tax 235.02 20.7 167.28 20.8 563.84 46.2
Integrated instalment account 854.62 75.4 611.60 75.8 629.58 51.5
Superannuation surcharge 10.73 1.0 6.7 0.8 9.84 0.8
Superannuation Guarantee 32.90 2.9 21.01 2.6 18.36 1.5
Total 1133.27 100 806.59 100 1221.62 100

Source: Tax Office

2.86 Within the micro-business segment, 64.4 per cent of the total integrated instalment account debt ($2.095 billion) related to debt level 4, 5 and 6 amounts. Of that amount, approximately 74.3 per cent of the debt level 4, 5 and 6 cases related to integrated instalment account debt. Overall, these debt level 4, 5 and 6 cases represent 6.4 per cent of all integrated instalment account debt cases (37,265 cases out of 582,276).

2.87 Information provided by the Tax Office indicates an upward trend for outstanding integrated instalment account debt within the micro-segment for the July 2003 to June 2004 period. In particular, debt level 4, 5 and 6 activity statement collectable debt within the micro-segment all showed an upward trend for the July 2003 to June 2004 period.

2.88 The Tax Office states that it has identified additional debt as an area of concern, with a need to identify strategies to manage additional debt cases. In its latest longitudinal analysis study, it estimates an average of 39.5 per cent of cases will be finalised with 60.5 per cent of additional debt cases becoming bad or doubtful.

2.89 The Tax Office's Longitudinal Study - New and Additional Debt 2003-04 indicates that 775,885 additional debt cases, which totalled $15.4 billion, were referred for collection. Of this total, 606,268 cases related to micro-business, with a value of $8.8 billion.

2.90 The Tax Office's longitudinal study estimates that an average of 41.5 per cent of additional debt cases within the micro-business segment were finalised within 12 months. The Tax Office's study observed that this was the lowest finalisation rate of additional debt cases across all segments.

2.91 With respect to new debt cases, the Tax Office's longitudinal study estimates that 76.1 per cent of new debt cases within the micro-business segment finalised within 12 months. The Tax Office's study observed that this was the lowest finalisation rate of new debt cases across all segments.

Small to medium enterprise (SME) segment

Background

2.92 As at 30 June 2004, $1.141 billion of collectable debt remained outstanding within the SME segment.

2.93 Of that, $1.075 billion related to debt level 4 ($83 million), debt level 5 ($136 million) and debt level 6 ($856 million) amounts. This represents 94.22 per cent of the SME segment debt or 12.88 per cent of the total collectable debt.

2.94 As at 30 June 2004, approximately 6,590 cases related to debt level 4, 5 and 6 amounts. This represented 28.77 per cent of the SME segment cases and 0.54 per cent of the total collectable debt cases.

By revenue type

2.95 As at 30 June 2004, income tax debts and integrated instalment account debts comprised 87.12 per cent of the collectable debt within the SME segment and represented 84.49 per cent of the SME segment cases.

2.96 Within the SME segment, 67.27 per cent of the collectable debt ($768 million) was characterised by the Tax Office as integrated instalment account debt. This amount also represents 9.21 per cent of the total collectable debt.

2.97 By cases, 65.72 per cent of cases within the SME segment (19,273 cases) were classified by the Tax Office as integrated instalment account cases. These represent 1.38 per cent of the total number of collectable debt cases.

2.98 Tax Office analysis of new debt cases for February 2004 indicates that for the SME segment, 67.33 per cent of new integrated instalment account debt comprised of Pay As You Go withholding while 31.64 per cent related to GST.

2.99 Within the SME segment, 79.65 per cent of the total integrated instalment account debt ($611.74 million) was classified as debt level 4, 5 or 6 amounts.

2.100 Table 2.12 shows the SME segment collectable debt levels 4, 5 and 6 by revenue type as at 13 September 2004.

Table 2.12: SME segment collectable debt levels 4, 5 and 6 by revenue type
Revenue type Debt Level 4
($m)
% of all
revenue types
Debt Level 5
($m)
% of all
revenue types
Debt Level 6
($m)
% of all
revenue types
Income tax 13.00 16.4 14.12 10.2 94.21 17.0
Integrated instalment account 61.45 77.3 117.08 84.2 433.21 77.9
Superannuation surcharge 0.84 1.1 1.55 1.1 8.42 1.5
Superannuation Guarantee 4.16 5.2 6.30 4.5 20.26 3.6
Total 79.45 100.0 139.05 100.0 556.10 100.0

Source: Tax Office

2.101 Approximately 80.68 per cent of the debt level 4, 5 and 6 cases related to integrated instalment account debt. Overall, these cases represent 8.72 per cent of all SME segment integrated instalment account debt cases (1680 cases out of 19,276).

2.102 Information provided by the Tax Office indicates an upward trend for outstanding integrated instalment account debt within the SME segment for the July 2003 to June 2004 period. In particular, debt level 4, 5 and 6 activity statement collectable debt within the SME segment all showed an upward trend for the July 2003 to June 2004 period.

2.103 As previously discussed, the Tax Office has stated that it has identified additional debt as an area of concern with a need to identify strategies to manage additional debt cases.

2.104 The Tax Office's Longitudinal Study - New and Additional Debt 2003-04 indicates that 34,116 additional debt cases relating to SMEs, with a value of $3.2 billion, were referred for collection.

2.105 The Tax Office's longitudinal study estimates that an average of 59.6 per cent of additional debt cases within the SME segment were finalised within 12 months.

2.106 With respect to new debt cases, the Tax Office's longitudinal study estimates that 86.1 per cent of new debt cases within the SME segment finalised within 12 months.

Small business environment

2.107 During the course of the review, submissions drew attention to a number of factors that, in the opinion of the authors of the submissions, influence the small business sector's compliance with tax payment obligations. Generally, these factors can be said to be inherent to running a small business. Submissions indicate that these factors are more pronounced in businesses that have an outstanding tax debt. Submissions are of the view that these factors are:

  • difficulties with cash flow management;
  • limited access to finance;
  • dealing with big business;
  • competition with non-compliant businesses; and
  • the regulatory burden on small businesses.

Difficulties with cash flow management

Cash flow a major concern

2.108 Without sufficient cash flow a business is unable to meet debts when due and payable and may technically be trading while insolvent.

2.109 In submissions, small business representatives and tax practitioners commented that difficulty with cash flow was one of the primary factors affecting payment of tax liabilities. The February 2004 Sensis Business Index reports that, behind finding quality staff and lack of work/sales, cash flow is the third most important concern for small and medium businesses.8

Factors affecting cash flow

2.110 The factors which adversely affect a small business's cash flow range from those outside a business's control—such as, increasing unemployment, an economic downturn or collapse of a key supplier or client9—to those entirely within a business's control, such as business decisions and lack of sufficient financial competence.

2.111 Tax practitioners also comment that the nature of a business may affect the cash flow cycle. For example, certain industries may generate larger cash flows during periods of increased demand—such as the retail sector during the lead-up to Christmas.

Provision for and awareness of tax debt

2.112 A feature of the current taxation system is that there is a delay between the business activity that accrues a future tax liability and the liability to pay the tax. For income tax debts this delay may be up to 25 months where a business derives profit at start of the financial year and is on a tax agent's income tax return lodgment program. Therefore, a business needs to be aware of the taxation liabilities that its activities accrue and make provision for future tax debts.

2.113 Tax practitioners indicate that small businesses are normally undercapitalised from the commencement of the business and lack the planning of larger businesses which have management tools such as business plans and regular reporting. The consequence of this is that small businesses often lack sufficient cash flow and find it difficult to borrow the funds required to enable continued trading or expansion.

2.114 Tax practitioners observe that despite using the tax withheld or collected from employees and sales as working capital, small businesses find it difficult to make provision for future tax debts. Generally, tax practitioners observe that small businesses micro-manage on a cash flow basis and make provision to meet liabilities on a 30 to 60 day basis. Examples provided indicate that rather than determining their tax liability on a periodic basis and putting money aside for that liability, small businesses generally try to find the money for a tax debt when they become aware of their tax liability. This awareness may be either when the business's income tax return or business activity statement is prepared, or the Tax Office amends or adjusts the business's previously lodged forms or statements. The observed result is generally that the business needs to find a larger amount of money in a shorter period of time where it waits until its income tax return or business activity statement is prepared before making provision for the tax liability.

2.115 Tax practitioners also state that despite advice to do so, many of their small business clients do not have separate accounts for tax liabilities and do not have management systems in place to determine their tax liability on a periodic basis. There are commercial products available that assist small businesses to identify their taxation liabilities and make provision for them. However, a survey of 3000 small businesses by MYOB found that 80 per cent of those small businesses did not have a separate account for their tax liabilities and only 54 per cent of those businesses were aware of the amount needed to pay their tax liability when their business activity statement was to be lodged.10

2.116 Tax practitioners state that the need to have management systems in place is even more important where the taxpayer is required to remit tax on behalf of others. This would include Pay As You Go amounts withheld from employee wages and GST amounts collected from sales. Tax practitioners argue that these amounts are effectively being held on trust by the small business and that there is a greater need to ensure that a small business does make provision for the payment of these amounts to the Tax Office.

2.117 Tax practitioners put forward a number of possible ways to ensure that a small business makes provision for their tax liabilities. Some suggest that it should be a requirement when starting up a small business to have a separate account for their tax liabilities. Others suggest that government needs to provide incentives to small business taxpayers, especially during the start-up period, to encourage them to make provision for their tax liabilities. This could be similar to the approach adopted in New Zealand and briefly discussed later in this document. However, tax practitioners state that together with the measures suggested above there is a real need for greater assistance to be provided to small business in managing their cash flow and understanding their responsibilities in business.

2.118 Even if a small business makes provision for future tax liabilities, in difficult financial circumstances, it may not have enough available cash to pay all creditors and may need to choose whom they will pay first and whom they will pay later. Where small businesses are required to choose between paying the Tax Office or a supplier, small businesses indicated that they were more likely to pay a supplier. Where suppliers were not paid, they could immediately stop supply of goods and services necessary for the continuing operation of a business. However, the time lag between non-payment of a tax debt and recovery action would not immediately affect the continuing operation of a business.

Access to finance

2.119 Small businesses and tax practitioners also generally state that small businesses are undercapitalised, highly geared and may have business borrowings using private assets as collateral. Small businesses argue that they are generally unable to borrow more money to pay tax debts as they have borrowed up to their credit limit in running their business.

2.120 Representatives of small businesses also state that small businesses have little capital that financial institutions will lend against. For example, the business's goodwill, chattels and fixtures may have a particular book value but not have a realisable value in the event of foreclosure.

Dealing with big business

2.121 One tax practitioner commented that the real reason for small business debts was the onerous terms and conditions that big businesses impose on small businesses and the minimal profit margins small businesses obtain in dealing with big businesses. They stated that small businesses must deal with big businesses to survive and that the law does not allow small businesses to contract with big business with equal bargaining power.

2.122 CPA Australia's 2002 survey of small businesses reports that a significant proportion of small businesses are not paid promptly by big business:

Forty per cent of small businesses say they wait more than 30 days for payment from large business customers.

CPAs say an average of 51 per cent of businesses are not paid promptly by big business and slow payment impacted either a great deal or a fair amount on 83 per cent of businesses.11

2.123 Small businesses may obtain finance to bridge the period between paying a tax liability and receiving payment from clients. This borrowing will incur interest and add to the business's running costs. For those operating in an accrued accounting system, they may face the further burden of being required to pay their business activity statement before being paid by their business debtors.

Competition with non-compliant businesses

2.124 The Tax Office has observed that in some industries competition with non-compliant businesses may in fact influence businesses not to comply themselves. For example, suppliers may move away from businesses that endeavour to improve compliance with their taxation obligations.

2.125 Also, representatives for small businesses stated that non-compliant businesses have reduced operating costs and therefore are able to undercut compliant businesses' prices.

Regulatory burden

2.126 Small businesses have to comply with a variety of ongoing government regulatory obligations. These may include:

  • Commonwealth requirements, such as industrial awards, corporate governance and taxes;
  • State government requirements, such as environmental protection, payroll tax and worker insurance; and
  • professional association obligations, such as professional indemnity insurance and continuing professional development.

2.127 Representatives for small businesses comment that the cumulative complexity of these different obligations creates a significant burden on small businesses. They state that this reduces the time and resources that small businesses could direct towards entrepreneurial activities. Third party surveys have concluded that compliance with taxation laws is one of the most costly regulatory burdens on small businesses.12 The Inspector-General has identified the cost of complying with taxation obligations as a potential separate issue for review.


1 CPA Australia, Small Business Survey Program: Perceptions of Risk, August 2002, p. 4.

2 Australian Bureau of Statistics, 8127.0 Characteristics of Small Business, Canberra, April 2004.

3 See Australian Bureau of Statistics, 5675.0 Experimental Estimates, Regional Small Business Statistics, Australia, Canberra, November 2002, http://www.abs.gov.au/Ausstats/abs@.nsf/0/c3067c5b705852aaca256e2d00774… ? Open viewed on 16 September 2004.

4 Australian Bureau of Statistics, 5675.0 Experimental Estimates, Regional Small Business Statistics, Explanatory Notes, Australia, Canberra, February 2004, http://www.abs.gov.au/Ausstats/abs@.nsf/Lookup/792214F6E8471B03C A256C6FF0077052A viewed on 8 October 2004.

5 The Tax Office has stated that collectable debt amounts provided to the Inspector-General, which have been used for the purposes of this analysis and discussion, are 'unadjusted' and will differ from overall debt on hand.

6 Note that this figure assumes that 85 per cent of businesses within the SME segment have an annual turnover of less than $10 million, as reported in the Tax Office's Compliance Program 2004-05, at p. 18.

7 Cases on hand are taken to represent the number of taxpayers including entities that have a collectable debt owed to the Tax Office.

8 Sensis, Sensis® Business Index—small and medium enterprises, February 2004, http://www.sensis.com.au/media/pdf/sensis_bizindex_feb2004.pdf viewed on 4 May 2004, p. 11.

9 See CPA Australia, Small Business Survey Program: Perceptions of Risk, August 2002, p. 5.

10 'Minnows struggling with cash', Sydney Morning Herald, 4 May 2004, p. 21.

11 CPA Australia, Small Business Survey Program: Perceptions of Risk, August 2002, pp. 5-6.

12 Small Business Deregulation Task Force, Time For Business Report of the Small Business Deregulation Task Force, November 1996; Senate Employment, Workplace Relations and Education Committee References Committee, Small business employment, February 2003; Chittenden, Kauser and Poutziouris, Regulatory Burdens of Small Business: A Literary Review, University of Manchester, 2002, p. 9; CPA, Small business survey program: Compliance burden, April 2003, p. 4; Senate Employment, Workplace Relations and Education Committee References Committee, Small business employment, February 2003, pp. 126-127 in quoting the WA Small Business Development Corporation; and OECD, Businesses' views on red tape—administrative and regulatory Burdens on small and medium enterprises, OECD, Paris, 2001, p. 21.