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

    We continue to develop indicators to measure the performance and operation of the tax and superannuation system.

    2017–18 marks the first time we have reported tax assured as a measure of performance.

    Tax assured is an estimate of the proportion of tax reported that we are highly confident is correct. This measure is based on the concept of justified trust.

    Justified trust is a matter of judgment. In determining whether justified trust is achieved, we assess whether objective evidence exists that would lead a reasonable person to conclude the correct amount of tax has been reported.

    Generally, we use two approaches to gathering and assessing evidence to assure tax. Firstly, we use data from third-parties to match against information provided by taxpayers. Our second approach is based on one-to-one engagements with taxpayers where we can directly verify the information they report to us.

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    Why we measure tax assured

    Our tax assured measure provides insight into how well the tax and superannuation systems are performing. It measures both the impact our activities and the effectiveness of our system controls on improving taxpayer engagement with the system.

    By establishing a baseline for this measure for 2015–16, we can track movements in the proportion of tax reported we consider assured. Over time, changes in this measure will help us assess how our engagement strategies and system controls are working. By better understanding how we influence taxpayer behaviour, we can develop more effective strategies and system controls which will ultimately improve levels of willing participation.

    Identifying the proportion of tax reported we cannot assure also helps us focus on areas with potential for improving system or administrative design.

    Tax assured will be best viewed as a trend as we publish future year estimates. The measure should also be considered in conjunction with our broader suite of measures including tax gaps, audit yield and wider revenue effects.

    Methodologies

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

    For indirect tax, we examine the total throughput i.e. tax paid and credits claimed.

    We use two approaches to estimate tax assured:

    1. Data-matching – these estimates are based on analytic approaches using third-party data 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 to assure tax 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. One-to-one engagements – these estimates are generally based on direct taxpayer engagement where we can verify primary sources of information including financial statements, contracts, market analysis, etc. The types of engagements we use to assure tax typically include annual compliance arrangements, advance pricing arrangements, reviews and audits.

    Tax assured is a lag measure based on accrual accounting principles. 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. Due to this lag effect, our first estimate is based on the 2015–16 financial year.

    The proportion of tax assured is expected to increase year by year as we complete more of our larger and more complex client engagements.

    What the measures are telling us

    Our tax assured estimate for 2015–16 tells us that 45.5% of total tax reported has been assured as correct. This shows that we have high confidence over a large portion of tax reported. Using similar methodology, our tax assured estimate for 2014–15 is 44.9% of total tax reported.

    Tax assured estimates for 2015–16

    For individuals not in business, we have effective controls to assure income as correctly reported. We have evidence that over $91 billion or 75% of income tax reported by individuals not in business is correct. This estimate is based on our third-party data-matching programs that verify amounts reported in individuals’ tax returns against PAYG withholding information provided by employers and interest and dividend information provided by financial institutions and public companies. We do not have the same ability to assure information relating to deductions and some offsets.

    For individuals in business, we have confidence that over $16 billion or 32% of the income tax they report is correct. Again, this assurance is gained through our third-party data-matching programs for PAYG withholding, dividends and interest. We do not have the same level of third-party data to assure business income and deductions for individuals in business.

    For large businesses, our tailored engagement programs are effective in assuring tax is correctly reported. Under our Justified Trust programs with the top 100 and top 1,000 public and multinational businesses, we have positively evidenced that over $19 billion in income tax (or 50% of the income tax they report) is correct (over and above our application of sophisticated risk-based analytics to the remainder).

    We are confident that over 30% of transaction-based taxes are being correctly reported. The majority of this estimate is based on the ongoing relationships we have with our large excise clients. For 2015–16, these engagements have assured that $17 billion or 78% in excise payments have been correctly reported.

    Our client engagement activities give us confidence $6.5 billion or 12% of GST is being correctly reported.The large volume of payers and transactions as well as our limited ability to data-match means we cannot assure a large percentage of GST reported with evidence to the level of justified trust. However, the application of industry benchmarks and risk algorithms provides us a sufficient level of confidence over much of the GST reported.

    Limitations

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

    We require justified trust that the tax reported is correct. Justified trust relies on interpretation and judgment of available and appropriate evidence. This judgment can have varying degrees of confidence which may be higher for some parts of the tax base than others. Often we do not have the evidence to substantiate justified trust to the required level. For this reason, our estimate of tax assured is conservative.

    It is important to emphasise that components of the tax base we cannot report as being assured are not necessary incorrect or non-compliant. Our broader risk management frameworks provide us with a level of confidence over much of the tax reported that we do not formally consider assured for reporting purposes. Our confidence is supported through our administration of systems and tools including:

    • the Tax Payments Reporting System
    • industry benchmarks
    • real-time analytics
    • risk algorithms.

    Tax assured is reported as a proportion of the tax base which for practical purposes is the amount of tax reported. The tax base does not include the tax not reported. We are progressively estimating the amount of tax not reported through our tax gap program. When we have a comprehensive tax gap, we can then report tax assured as a proportion of the total theoretical liability – that is, how much we estimate we would collect if every taxpayer was fully compliant.

    As the quantity and quality of data we collect improves, we expect the amount of revenue we estimate to be assured will increase.

      Last modified: 26 Oct 2018QC 57137