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6 The factors that indicate whether a legal entity is ‘in business’ or not are complex and have been the subject of court and tribunal decisions. Basically, the manner in which a legal entity takes part in an activity is the main indicator. To be ‘in business’ the activity must be something other than a hobby, i.e. run like a business with the intention and prospect of profit. (For details see article ‘Am I in Business’ on ATO web site <http://www.ato.gov.au>).
7 The ATO results are based on business taxation returns lodged for the financial year ended 30 June.
Types of organisations
8 The data examined in this publication cover individuals declaring business income and three types of organisations - companies, partnerships and trusts.
9 A company is a business or organisation incorporated under the Corporations Act 2001. By incorporating (becoming a corporation), a legal entity is created which is a separate body from the owners. A company is capable of performing the same legal action as an individual including holding property and having the capacity to sue and be sued.
10 A partnership involves the relationship that exists between individual persons carrying on a business together with the intention of making a profit. A partnership is not a legal entity separate from the partners. The partners are therefore separately and jointly legally responsible for the actions, debts and obligations of the partnership (though this relates only to the business of the partnership, not to matters outside it). The actions of an individual partner bind all the partners unless it is a limited liability partnership.
11 A trust is formed when a third party, on behalf of the owners, administers money and/or other assets. The money and/or assets are held in a trust fund and may be invested by the trustee who is accountable to, and in a fiduciary relationship with, the beneficiary(ies).
12 The industry classification in use is the 1993 edition of the Australian and New Zealand Standard Industrial Classification (ANZSIC) (cat. no. 1292.0). The ANZSIC code is one of the data items supplied by the ATO. The income tax return requires that the main business activity be described and coded.
13 In the vast majority of cases, it is the tax agent rather than the taxpayer who completes the form. The accuracy of the industry data is reliant on the knowledge and accuracy of individuals who may not have a full understanding of the ANZSIC. While there are inaccuracies in the ANZSIC coding of some income tax returns, the ABS and the ATO are working together to ensure higher quality data in future.
14 In addition to the ANZSIC industry codes, the ATO assign their own industry codes to certain records on the business income file which fall outside the industry classification. These codes include non-resident companies, film and video tape royalties derived by non-residents and businesses with an unknown industry. As a result, there is no industry code attached to these records. The ABS has assigned them an unspecified industry code. These make up approximately 4% of records on the company files and less than 2% on the partnerships.
15 The ATO assigned industry codes used in these experimental estimates have not been checked for consistency with industry codes sourced from the ABS Business Register in the small number of cases where comparison is possible. Some differences between the industry codes used in these experimental estimates and the other ABS economic survey estimates should be expected.
16 Regardless of the number of a business’ locations, the ATO collects the main business address only. Data from businesses that have more than one location are coded to the main business location. The ABS uses the postcode reported as the regional indicator. This should not be a significant problem for small business as we have defined it.
17 Inaccuracies in the reporting of a business' postcode can occur through coding errors, the provision of an illegal postcode or through the non-reporting of a postcode. These reporting problems occurred on less than 1% of records and further analysis by the ABS has found that in 95% of cases where illegal or incorrect postcodes were detected, changing to a correct postcode would not have resulted in a change in SD. As a result of these investigations the data have been aggregated to SD level to minimise the impact of incorrect reporting on the estimates.
18 A concordance between Australia Post postcodes and the Australian Standard Geographical Classification 2001 Statistical Divisions was compiled on a geographic 'best-fit' basis.
19 This publication includes the data items: Number of businesses, Total income, Total expenses, Wages and salaries, Superannuation expenses, Bad debts, Lease expenses, Rent expenses and Cost of sales. In addition, the data items Assets and Liabilities are included in the suite of standard tables available - for more detail refer to the Appendix of this publication.
20 For the full listing of data items available refer to Appendix 2 in the previous edition of Information Paper: Use of Business Income Tax Data for Regional Small Business Statistics - Experimental Estimates, Selected Regions, Australia 1995-96 to 1997-98 (cat. no. 5675.0).
21 There are several factors affecting data quality. ATO data are sourced from an administrative by-product and reference back to the originating businesses is not possible because the ABS is not involved in the collection of the data. While accounting processes are subject to standards, there remains a great deal of flexibility available to businesses in the accounting policies and practices they adopt. Differences in accounting policy and practices across businesses and industries can lead to inconsistencies in the data. Inaccuracies in the data may occur because of imperfections in reporting by those who complete the income tax returns.
22 The ATO method for dealing with businesses that have not completed their tax returns also has an effect on the consistency of the estimates as a time series. The ATO either bring forward the previous year’s data or leave the data as zero if the business does not have an ATO history.
23 There is also the potential for ANZSIC and postcode miscoding. These issues have been covered in more detail in the Industry Classification and Regional Indicator paragraphs above.
24 The above limitations should be considered when interpreting the data.
25 To ensure consistency the ABS conducted a series of edit checks on certain data items. Overall, the business income tax files were of a high quality, however in some cases remedial action was required due to either input errors or the non-reporting of certain data items. In these cases, data were derived or imputed. For example, where wages and salaries were reported but there were no superannuation expenses, the ABS imputed the superannuation expenses by industry for those records.
26 The majority of edits were performed on the major income and expense data items therefore care needs to be taken when using items other than income and expenses as they may not have undergone editing.
Comparison with other data
27 The ABS has compiled business counts on a number of different bases for inclusion in a range of publications. These include:
28 Each publication provides a profile of business demographics from a different perspective. Differences in scope, coverage, timing and business definitions mean the estimates of businesses in these publications are not directly comparable. The ABS is working to ensure greater integration of business demographics information in the future.
29 The definition of a small business in Experimental Estimates, Regional Small Business Statistics is based on a combination of income and expenses. Businesses with total income or expenses between $10,000 and $5m are classified as small. Data in this publication are sourced from the ATO Business Income Tax file. The ATO Business Income Tax file includes all businesses who have traded at any point during the year. The statistical unit is the legal entity.
30 In Small Business in Australia, a small business is defined as one with fewer than 20 employees. Counts of small businesses in this publication are sourced from a combination of ABS household survey data and Survey of Employment and Earnings data, a collection which is based on the ABS Business Register. The ABS monthly labour force survey which is household-based, is used to produce estimates of the number of non-employing businesses. These are based on estimates of own account workers (i.e. persons working in their own business without employees) from the survey. The ABS Business Register includes employing businesses registered with the Australian Taxation Office at a point in time. The statistical unit is the management unit, which may include more than one legal entity.
31 Australian Industry provides counts of businesses by industry at national level. Estimates of the number of small businesses are not separately identified in this publication. Data in this publication are sourced from the ATO Business Income Tax File and the ABS Economic Activity Survey (EAS), a survey also based on the ABS Business Register. The ATO Business Income Tax File contains all businesses (legal entities) which traded at any point during the financial year. The statistical unit for the EAS is the management unit.
32 For more information, please refer to the Explanatory Notes in each publication.
Users may also like to refer to the following related ABS publications and products.
Small Business in Australia, cat. no. 1321.0
Small Business in Australia Data Report 1999-2000, cat. no. 1321.0.40.001
Information Paper: ABS Statistics and The New Tax System, 2000, cat. no. 1358.0
Information Paper: Expanded Use of Business Income Tax Data in ABS Economic Statistics - Experimental Estimates for Selected Industries, 1994-95 and 1995-96, cat. no. 5672.0
Experimental Estimates, Regional Wage and Salary Earner Statistics, Australia, 1995-96 to 1998-99, cat. no. 5673.0.
Information Paper: Use of Business Income Tax Data for Regional Small Business Statistics - Experimental Estimates, Selected Regions, Australia 1995-96 to 1997-98, cat. no. 5675.0
Australian Business Register, ANZSIC Industry Class by State, cat. no. 8138.0.55.001
Business Operations and Industry Performance, Australia, cat. no. 8140.0
Australian Industry, cat. no. 8155.0
Experimental Estimates, Australian Industry, A State Perspective 1999-2000, cat. no. 8156.0.
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