What is the ‘tax gap’? And how does the ATO measure it?

Every year, the ATO measures its revenue and compares that total against the amount of revenue it should have made were every taxpayer fully compliant. As you may expect, very often the two numbers are different. And it is this discrepancy that has become known as 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 helps in its 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?
The difference between GST collected and GST expected, for example (that is, the GST tax gap) would be an illustrative taxation area to look at with regard to tax gaps evidenced in ATO data.

The expected revenue would of course assume that every eligible business would be collecting the required 10% GST on every single purchase made over a financial year. That revenue would be balanced out by every eligible business then claiming the relevant credits.

But errors made by taxpayers such as non-registrations, not charging GST on items that should carry it, as well as oversights made on claiming credits and many more possible mistakes, would naturally have an effect on the net outcome of GST revenue collection.

For 2018-19, the ATO estimates the GST net gap to be 8.1% or $5.8 billion. In other words, it estimates that businesses paid over 91% of the total theoretical GST revenue payable in 2018-19.

The overall gap: A first
The ATO’s latest “set-in-concrete” data, which is for 2017-18 (it takes a while to finalise, but the GST gap estimation is helped by ongoing activity statements) shows that the overall tax gap is estimated to be $31.2 billion, which is 6.9% of the total amount of tax it would collect if everyone was fully compliant with tax law. This means that the ATO received 93% of tax revenue. These figures feature in the latest Commissioner of Taxation annual report (see page 62).

Important to note is that this could be the very first time the ATO has revealed an overall tax gap — its general approach is to publish gaps by sector of income or transaction type. The latest of these follows.

Transaction-based tax gaps:

Income-based tax gaps:

Administered program gaps:

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