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  • GST gap

    Collecting GST contributes significantly to revenue for our states and territories. Approximately 2.7 million registered businesses operate in the GST system.

    The GST gap is the difference between the amount of GST payable under the law (theoretical GST liability) and the amount actually collected (actual GST revenue) in a financial year.

    GST non-compliance creates a GST gap. Non-compliance happens when people or businesses operate outside the tax and regulatory systems, or are part of the system but do not correctly lodge, report and pay their tax obligations.

    Non-compliance covers a wide range of behaviours, including:

    • incorrectly registering or not registering for the GST system when required under the law
    • not lodging their business activity statement (BAS), or lodging their BAS late
    • not reporting or understating supplies subject to GST
    • over claiming of GST refunds
    • not paying GST obligations resulting in a GST debt.

    Measuring the GST gap

    We use the top-down approach to estimate the GST gap on an accrual basis. The top-down approach compares total accrual GST liabilities for a year with theoretical GST liabilities for that year, calculated using external economic data.

    The methodology is based on the approach recommended by the International Monetary Fund (IMF), and used globally for estimating value added tax (VAT) and GST gaps.

    The reliability of the GST gap estimate is assessed as medium.

    Trends and latest findings

    Australia’s GST gap compares favourably with similar international tax jurisdictions. Over a five-year period, it is in line with the best performing European Union (EU) member countries and compares well with the United Kingdom estimate.

    After reaching a low in 2013–14 at 7.1%, the GST net gap (including non-pursuable debt) has trended slightly upward. The net GST gap estimate for 2016–17 is $5.3 billion (or 7.9%).

    The main contributors to growth in the theoretical GST liability estimate had been transactions in new dwellings and profitable land sales. These are consistent with the national housing boom that has taken place over the past few years.

    There can be a significant lag between dwelling construction activity and eventual GST liabilities reported to us. As such, the relatively slow growth in GST collections over the past few years could potentially herald a catch-up period in future years.

    Our compliance activities have also identified instances of phoenix and off-market activity within this sector that has also contributed to the gap; this will be addressed by the new ‘GST at settlement’ measure.

    Figure 1: Amount reported and net gap – GST, 2012–17

    This graph shows the GST gap from 2011–12 to 2016–17. The GST gap over the last six years was: 2011–12 $3.5b; 2012–13 $3.0b; 2013–14 $4.0b; 2014–15 $4.4b; 2015–16 $5.5b; and 2016–17 $5.3b.
Note: GST gap data remains one year in arrears due to the timing of the National Accounts data releases. The data for the reporting period 2017–18 relates to gap estimates in 2016–17.

    Data sources: ABS, Treasury and ATO data.

    Managing the GST gap

    A range of taxpayer behaviours can affect the gap. These include:

    • non-reporting of GST
    • under-reporting of GST
    • over-claiming of refunds.

    Examples include:

    • incorrectly classifying transactions in accounting systems
    • creating false tax invoices
    • incorrectly claiming private expenses
    • participation in the black economy.

    In 2016–17, we continued our efforts to minimise the tax gap and maximise voluntary compliance by delivering a balanced and targeted compliance program focused on preventative early engagement and assurance activities.

    We monitor compliance through the use of third-party data holdings, analytics and risk mitigation activities. Our focus is on activities designed to prevent compliance issues before they arise. This has resulted in a significant investment shift to assurance and early engagement activities. Our aim is to reduce mistakes and foster voluntary compliance by supporting those that want to do the right thing.

    We will continue to work toward reducing the gap by making it easy to comply and hard not to. We are further streamlining, automating and integrating indirect tax obligations to reduce the cost of compliance and increase assurance.

    GST voluntary compliance ratio

    The voluntary compliance ratio (VCR) complements the GST gap by measuring the proportion of taxpayers that are fully compliant with all four pillars of compliance – registration, lodgment, reporting and payment. To be fully compliant, the taxpayer must:

    • be correctly registered
    • lodge by the due date
    • report the correct amount of GST
    • pay the correct amount on time.

    Important indicators of the health of – and community confidence in – the GST system are:

    • the proportion of taxpayers voluntarily complying with their obligations, and
    • the value of GST remitted voluntarily.

    Measuring the voluntary compliance ratio

    The GST voluntary compliance ratio is measured at two levels:

    1. taxpayer level – the number of taxpayers who completely meet all their obligations for the financial year
    2. GST-value level – the amount of GST, by value, that is voluntarily provided to us in accordance with the law.

    Voluntary compliance ratio trends and latest findings

    The VCR is built on the assumption of strict administrative compliance with obligations, especially around lodgment.

    The analysis identified that 45% of taxpayers voluntarily comply with our strict VCR test. This does take into account minor unintentional late payments or lodgments.

    The level of voluntary compliance at the taxpayer level increases to 83% by adjusting for:

    • taxpayers who have no total business income in the year – that is, a nil BAS
    • taxpayers who are considered non-compliant for having only
      • one BAS lodged late
      • one late payment.
       

    At the GST-value level, the amount of revenue received voluntarily (that is, paid on time and without enforcement action) has been maintained over the last six years. In 2016–17, this was equivalent to 83% of theoretical GST revenue.

    Figure 2: GST voluntary compliance ratio (a)

    This graph shows the results for the voluntary compliance ratio by revenue value from 2008–09 to 2016–17. Results for GST value: 2008–09 77%; 2009–10 80%; 2010–11 81%; 2011–12 82%; 2012–13 81%; 2013–14 84%; 2014–15 82%; 2015–16 83%; and 2016–17 83%. Results for taxpayers: 2008–09 48%; 2009–10 49%; 2010–11 48%; 2011–12 47%; 2012–13 48%; 2013–14 49%; 2014–15 45%; 2015–16 44%; and 2016–17 45%.

    (a) Previously published figures updated with latest GST gap data.
    Data source: ATO data

    GST voluntary compliance program

    The GST voluntary compliance program commenced on 1 July 2010 as a four-year program of work. The program was extended in the 2012 Federal budget for a further two years. In the 2016 Budget, with the support of the states and territories, the ATO received additional funding extending the GST voluntary compliance program for a further three years to 2018–19.

    The program’s objectives included:

    • the detection and reduction of inflated or fabricated GST refund claims
    • investigation of systemic or deliberate under reporting of GST
    • more direct contact between the ATO and non-lodgers
    • more direct contact between the ATO and taxpayers with a GST debt
    • prosecution of the more flagrant non-compliers and related benefits flowing from publicity as well as providing support for those trying to do the right thing.

    The program was extremely effective, with revenue commitments exceeded in each year of the three years. In 2017–18, compliance and lodgment enforcement activities exceeded our commitments by over $541 million, and $192 million was collected through debt collection activities.

    The success of the program can be attributed to higher than planned revenue results on focused areas – lodgment and debt. Over the course of the program, we gained a better understanding of lodgment performance. This enabled us to improve our strategies for maximising lodgment compliance. In turn, this has improved case coverage and strike rates, resulting in higher than planned revenue results.

    Return on investment

    The return on investment is calculated as the total cash collections divided by the cost of administering the program. When compared to the normal business activities of the ATO, the program’s return on investment is high. This is because the results for the program include compliance results as well as lodgment and debt collection results.

    In 2017–18, the direct and indirect costs to administer the program were $88.3 million, and revenue was $1,105.5 million – giving a return on investment of 12.52. If lodgment and debt are excluded, the business as usual activities have a similar or higher return on investment than the program based on the Schedule B estimate.

    Research phase 8

    As part of our efforts to gain insights from the community, under the GST Voluntary Compliance Program we commissioned Kantar Public (formerly TNS Social Research) to conduct a seven-year program of research to understand the attributes and behaviours that drive compliance (or non-compliance) with GST obligations.

    The results reveal a continuing sense of optimism and confidence within the business landscape. This is reinforced by the fact that businesses are passing on their GST responsibilities to intermediaries. Businesses state that concerns about cash flow are the most common reason for paying GST late. However, most businesses have not paid their GST late for the past two years.

    Businesses reported using a range of ATO-provided supports to manage their GST obligations, including online tools, training sessions, and written information. More than half (57%) said they had used the ATO website, while 49% had visited the ATO Business Portal.

    Businesses continue to demonstrate a lack of knowledge around the severity of penalties, and 71% reported that businesses trying to evade GST are likely to get caught. Tax agents reported significantly increased concern among their clients about the penalties for GST non-compliance (64%, up from 38% in 2017).

      Last modified: 18 Mar 2019QC 58283