Key Highlights

  • The ATO estimated a 17.4% net small business income tax gap for 2022–23.
  • Individuals not in business recorded a 6.2% net gap.
  • The small business net gap totalled $27.2 billion.
  • Third-party income reporting helps explain differences in tax compliance.

Small businesses and wage earners pay income tax under the same law and rate scale. Yet ATO estimates for 2022–23 show a net income tax gap of 17.4% for small business, against 6.2% for individuals not in business. That is nearly three times as large. With the 31 October 2026 deadline approaching for self-lodgers and tax agents warning the ATO is becoming "particularly unforgiving" towards small business, the figures show where the Tax Office believes money is going missing.

What the tax gap measures

The tax gap is the ATO's estimate of the difference between the tax that would be paid if everyone complied fully with the law and the tax actually collected. It is expressed both in dollars and as a share of the tax that should have been paid.

The ATO publishes two versions. The gross gap is the shortfall before the ATO's compliance activity. The net gap is what remains after amended assessments and other compliance results are counted.

According to the ATO's annual tax gap findings, last updated on 3 November 2025, the 2022–23 figures for income tax were:

Small business: a gross gap of $28.1 billion (18.0%) and a net gap of $27.2 billion (17.4%).

Individuals not in business: a gross gap of $14.1 billion (7.0%) and a net gap of $12.5 billion (6.2%).

The difference between the gross and net figures is revealing. ATO compliance work reduced the small business gap by about $0.9 billion, from $28.1 billion to $27.2 billion. For individuals not in business, the reduction was about $1.6 billion, from $14.1 billion to $12.5 billion. In other words, even after the ATO's audits and amendments, almost all of the small business shortfall remained uncollected.

Large corporate groups had the smallest net gap of the three income tax segments, at 3.7%. Small business accounted for more than twice the dollar amount of the gap for individuals not in business, even though the ATO's figures imply that the total income tax expected from small business is smaller than the total expected from individuals not in business.

The ATO also estimates a net GST gap of $8.1 billion, or 9.1%, in 2022–23, and $8.7 billion, or 9.4%, in 2023–24.

Why wage earners are harder to miss

Researchers Hoy, Bachas, Jensen and Shaukat examined the issue in an article on the Austaxpolicy blog published on 1 October 2026. "Both groups pay income tax under the same law and the same rate scale," they write of Australia.

Their international evidence points to the same pattern. Among the top 10% of earners in 29 lower-income countries, employees pay about 16% of their income in consumption and income taxes, compared with about 10% for the self-employed. Their survey covered more than 17,000 respondents in six countries.