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

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

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 (the rate that was introduced with the tax in 2000) 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.

The ATO’s latest “set-in-concrete” data, which is for 2016-17 (it takes a while to finalise) show that the GST net gap — that is, the shortfall in revenue — is $5.3 billion. This equates to a gap of 7.9%.

Recent year GST gaps (sourced from the ATO) are shown in the table below.

GST gap ($ millions)
Gap 2011–12 2012–13 2013–14 2014–15 2015–16 2016-17
Tax paid 47,289 48,927 51,966 55,015 57,497 60,962
Gross gap 6,030 6,435 6,699 7,108 8,250 8,268
Amendments 1,866 2,515 2,702 2,688 2,751 3,004
Net gap 4,164 3,920 3,997 4,420 5,500 5,264
Gross gap (%) 11.7% 12.2% 12.0% 12.0% 13.1% 12.5%
Net gap (%) 8.1% 7.4% 7.1% 7.4% 8.7% 7.9%

Other areas of tax included in the overall tax gap for Australia include the following (the links take you to the ATO page that details the gap estimates):

  Fuel excise tax gap

  Fuel tax credits gap

  Goods and services tax gap

  Individuals not in business income tax gap

  Large corporate groups income tax gap

  Large super funds income tax gap

  PAYG withholding gap

  Small super funds income tax gap

  Superannuation guarantee gap

  Tobacco tax gap

  Wine equalisation tax gap.

There is also a page of summary findings, which you can view here.

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.

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