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  • Tax assured: gaining confidence the right amount of tax is reported

    Tax assured is an indicator that helps us demonstrate our confidence in the tax and superannuation systems. It is an estimate of the proportion of tax reported that we are highly confident is correct.

    At 30 June 2020 we estimated 47.6% of total tax reported for the 2017–18 tax year can be assured as being correct. During 2019–20 we also assured an additional 2.7% for the 2016–17 tax year, bringing the total tax assured estimate for that year to 48.3%.

    Tax assured is based on the concept of justified trust. We achieve justified trust and consider tax to be assured when we have evidence that reporting of taxable income, deductions and offsets is complete and accurate.

    We collect data to assure tax from a range of sources. Where possible we collect data from third parties to match against information provided by taxpayers. We also collect data directly from taxpayers to verify the information they report to us.

    In practice, we cannot gather third-party data or other information to compare against all tax returns. As such our tax assured estimates will always be lower than the real amount of tax that is correctly reported.

    Where we cannot gather information to assure tax, we rely on our broader risk management approaches to provide us with confidence over the rest of the total tax reported.

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    What tax assured tells us

    We are highly confident that 47.6% of total tax reported for the 2017–18 tax year was reported correctly, as was 48.3% of the total tax reported for 2016–17.

    The tax assured measure gives us confidence that the tax system is working well overall. They also demonstrate strengths of particular parts of the tax system and help us monitor the system for potential threats.

    Two-thirds of the tax that we assure is done through the collection and matching of third-party data against tax reported by individual taxpayers (we call these system controls).

    One area where controls operate effectively is the PAYG withholding system. It ensures taxpayers report the salary and wage income they earn. These controls provide evidence that 93% of all salary and wages were reported correctly and confidence to assure $120 billion in income tax reported by individuals in the 2017–18 year as correct.

    Around a third of the tax that we assure is done through direct taxpayer engagement with our larger clients. These include multinational and large corporations which have more complex tax affairs. We engage with our larger clients on a one-to-one basis to verify the amount of tax reported. Our approaches include:

    • engagement with the top 100 and top 1,000 public and multinational businesses under our justified trust program – this gives us assurance that $26 billion in income tax is correctly reported in the 2017–18 year
    • the assurance of 76% of excise and 98% of petroleum resource rent tax (PRRT) through our ongoing relationships with these taxpayers.

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    Methods

    For income taxes, we seek assurance over the inputs that determine a taxpayer's liability, such as income, deductions and offsets.

    For transaction taxes, we examine the total throughput, including tax paid and credits claimed.

    We use two approaches to estimate the tax assured:

    1. Data-matching with third-party sources to verify what is being reported by taxpayers is correct. It is not necessary for us to engage directly with taxpayers to collect this information. The types of third-party data we use typically include   
      • salary and wages information received from employers through the PAYG withholding system
      • interest and dividend data from financial institutions and public companies
      • pensions and allowances from government departments.
       
    2. Direct engagements with taxpayers where we verify primary sources of information such as financial statements, contracts, a review of tax governance and other analysis of the taxpayer's business. Most of these engagements are carried out with large and multinational businesses under our justified trust program.

    In most cases, we can only assure tax reported by taxpayers once they have lodged and we have completed our data-matching and taxpayer engagements.

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    Limitations

    There are some technical limitations involved in determining whether tax is assured.

    Our tax assured estimates rely on interpretation, judgment and the strength of evidence that we can practically collect. While we will be more confident in some judgments than others, all tax assured estimates must meet the same essential criteria.

    It is important to note that we cannot collect information to compare with all tax returns. As such our tax assured estimates will always be lower than the real amount of tax that is correctly reported.

    We also rely on our broader risk management approaches to provide confidence over the rest of the total tax reported. These approaches include real-time analytics, benchmarking and sophisticated risk detection algorithms. These are supported by administrative systems and tools including the taxable payments reporting system.

    Tax assured is reported as a proportion of the tax base. For practical purposes the tax base is considered to be the total amount of tax reported. The tax base therefore does not include tax that is not reported. We are progressively estimating the amount of tax not reported through our tax gap program.

    In future we may be able to report tax assured as a proportion of the total theoretical tax base – that is, how much tax we estimate would be reported if every taxpayer was fully compliant with tax law.

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      Last modified: 19 Oct 2020QC 57137