Australia does not have a single small-business sector but three distinct economies hidden behind the same label, according to new research that argues decades of policy have treated very different businesses as though they share the same needs.
The tenth report in The Balance Sheet research series audits the nation’s small-business landscape from registration to insolvency, examining who starts businesses, what they earn, how they are financed, how long they survive and what artificial intelligence could mean for their future. It concludes that the familiar description of small business as the backbone of the economy is “true of a minority of firms and misleading as a description of the whole”.
The report begins by challenging Australia’s headline business numbers. While there are 9.03 million ABNs recorded on the register, it says only 2.73 million businesses are actively trading and fewer than one million employ anyone. Nearly two-thirds of trading businesses have no employees, 57 per cent turn over less than $200,000 a year, and the sector experiences extraordinary churn, with 437,000 businesses starting and 371,000 exiting in a single year.
It argues the latest figures point to a structural shift rather than a temporary cycle. During 2024-25, non-employing businesses grew by 4.9 per cent, while businesses employing one to four people declined, those with five to 19 employees were unchanged and medium-sized firms also contracted. More than 32,000 businesses stopped employing staff altogether. As the report puts it, Australia “added non-employing businesses while its employing-business base stalled or contracted”.
The report also challenges assumptions about what business ownership delivers financially. Among roughly 1.7 million sole-trader taxpayers represented in Australian Taxation Office data, the median net business income was just $13,354 in 2023-24, compared with a median full-time wage approaching $90,500. Three-quarters of full-time self-employed owners earn less than the average full-time wage, while 43 per cent of micro and small companies reported no taxable profit.
It argues that for many operators, business ownership resembles demanding self-employment more than wealth creation. “Many owners do not own a valuable business; they own a demanding job,” the report says, while noting that many low-income sole traders also work part-time or earn wages from other employment.
Industry benchmarks published by the tax office help explain the gap between turnover and income. A coffee shop turning over more than $600,000 has about $11 remaining from every $100 of revenue before owner remuneration, debt servicing, tax obligations and any genuine profit are taken into account. A restaurant turning over more than $2 million has about $9 remaining.
The report also revisits the sector’s contribution to employment. Small businesses employ about 5.15 million people, or roughly two-fifths of Australia’s private workforce, rather than the oft-quoted two-thirds, which includes medium-sized businesses. It argues the country’s real employment engine is the roughly 300,000 firms employing five or more staff, while highlighting that 42 per cent of Australia’s apprentices train in small businesses.
Risk, rather than reward, emerges as one of the report’s strongest themes. Around half of all small-business lending is secured against the owner’s family home, unsecured credit accounts for less than 5 per cent of lending, and personal guarantees remain commonplace. When businesses fail, unsecured creditors recover between nothing and 11 cents in the dollar in 96 per cent of liquidations, while more than 3,500 personal insolvencies each year are linked to business activity, the highest proportion in more than a decade.
The Australian Taxation Office has also become the sector’s largest creditor. Small businesses owe $35.9 billion of Australia’s $54.2 billion in collectable tax debt, and the tax office is involved in more than nine out of ten completed small-business restructurings. Insolvencies reached a record 14,722 during 2024-25, although the failure rate remained below its peak in 2011-13. The report notes the latest figures suggest the cycle may be easing, with external administrations down 4.6 per cent during the first 11 months of 2025-26. It concludes that renewed tax collection has exposed existing financial weakness rather than created it, saying: “The ATO did not create the underlying weakness, but renewed collection activity has forced it into the open.”
Migrants account for 34 per cent of small-business owners despite making up 28 per cent of Australia’s population
Migration forms another major theme. Migrants account for 34 per cent of small-business owners despite making up 28 per cent of Australia’s population. While survey evidence suggests migrant owners are generally better educated and earn higher revenues than Australian-born owners, other research points to qualification recognition problems, labour-market barriers and a greater likelihood of entering business out of necessity. The report concludes that migrant entrepreneurship is “opportunity-shaped in its outcomes and constraint-shaped in its origins”.
Business survival remains challenging. Around three in four new businesses survive their first year, about half remain after three to four years and roughly one-third survive five years, according to the report’s estimates. Businesses employing staff from the outset perform markedly better than owner-only operations, while most closures occur through orderly wind-ups rather than insolvency.
On artificial intelligence, the report argues that conflicting adoption figures reveal how little is actually known. Official statistics put business AI use at 12 per cent, while industry surveys claim anything between 29 and 89 per cent. Rather than predicting widespread job losses, it concludes AI is more likely to lower the cost of operating alone, reinforcing the growth of non-employing businesses.
The report’s final conclusion is that Australia has three separate small-business economies. The first is a self-employment economy of roughly 1.7 million sole-trader taxpayers whose financial returns are often modest. The second is a local-service economy of about 900,000 employing businesses in trades, hospitality, retail and care, providing most of the jobs, apprenticeships and insolvencies while carrying substantial household risk. The third is a much smaller scalable-enterprise economy, comprising only a few tens of thousands of firms, that generates most exports, productivity growth and saleable business wealth.
It argues these groups increasingly face different economic realities but continue to be treated as one constituency. “These three economies have different problems,” the report concludes. “They are served by one ombudsman, one definition-riddled tax architecture and one political rhetoric. Policy that treats them as a single constituency will keep subsidising the label while missing all three.”
In keeping with the series, the paper rates the confidence of every major finding, presents the strongest evidence for and against the sector’s reputation, distinguishes between tax paid and GST collected on behalf of government, and identifies several major gaps in Australia’s business statistics, including the absence of official data tracking household income among business owners, the number of families who lose their homes following business failure, and how many firms successfully grow from one size category to the next.
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