What is Australia’s “tax gap”, and how is it measured?

Every year, the ATO measures its revenue and compares that total against the amount of revenue it expected to make. Often, the two numbers are different. The ATO has labelled that discrepancy the “tax gap”.

The ATO’s projected revenue total is based on the amount of tax “theoretically payable” in a given year, assuming every taxpayer complies fully. The actual amount of tax collected is always much less, and the ATO says this is mostly due to a host of innocuous factors like administration expenses and employer obligations. Sometimes, though, shonky practices increase the gap.

Tax gaps also help the ATO to locate its administrative revenue leaks, and work on fixing them. According to the regulator, all estimates have multiple goals, including:

  • measuring the types and levels of tax revenue losses from non-compliance, providing a view of the overall effectiveness of the tax system over time;
  • supporting efficiency in the allocation of resources; and
  • supporting perceptions of fairness and transparency in the tax administration’s efforts.

How is the tax gap actually created?
The ATO says tax gaps are made, at least in part, by “unintentional, careless or deliberate taxpayer actions that result in under-reporting of their tax obligations”. It says that as a result, it collects less revenue that would otherwise have been the case. But some taxpayers overpay – and the gap estimates “net off” overpayments and underpayments.

What are some recent gaps found?
In the 2014-15 financial year (the 2015-16 year isn’t fully accounted for yet), the ATO measured a series of tax areas and found sizeable gaps.

For example, it measured gaps for GST, luxury car tax and wine equalisation tax. In its measurements, it included a “voluntary compliance ratio” (VCR), which complements the gap number by measuring the proportion of taxpayers fully compliant with “all four pillars of compliance”, including:

  • being correctly registered,
  • reporting on time,
  • paying on time, and
  • reporting the correct amount.
Net gap $ Net gap % of revenue Gross gap % VCR (equivalent to % of theoretical revenue)
GST 2.7 billion 4.9 10.6 84
Luxury car tax (LCT)* 15 million 3.3 4.8 92
Wine equalisation tax (WET)* 35 million 3.3 3.9 N/A

*estimate, not taking into account LCT refunds or WET producer rebates

How reliable are the gap measurements?
The ATO says tax gap estimates are best viewed as a trend over time, taking into account a considerable error margin. The “absolute dollar gap,” for instance, “should only ever be seen as a guide”.

“Given this imprecision in measurement, the International Monetary Fund recognises that tax gap estimates generally should not be used mechanically as performance indicators,” it says.

The ATO also concedes tax gap measurements will never help it achieve full tax law compliance, which means it will be virtually impossible to close all gaps. Tax gap estimates are part of a host of assessment processes designed to encourage compliance and build confidence in the system.

Ultimately, the data is there for you to use.

 

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