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  • Methodology

    The alcohol tax gap is derived through applying a bottom-up channel analysis approach. Here we consider the different channels where potential non-compliance can occur and make an estimate for each of these.

    The five steps to our approach are explained below and are followed by a summary of the overall estimate:

    Step 1: Calculate gap associated with large producers

    A small group of large producers consistently pay over 93% of alcohol duty each year. Given their contribution to alcohol duty, we work closely with these taxpayers to maximise voluntary compliance. We draw on our understanding of their business arrangements to inform the overall estimate.

    Step 2: Estimate gap for small producers

    This component looks at the risk relating to small producers, sometimes referred to as micro-breweries and micro-distilleries. We estimate the gap for small producers based on risk and intelligence work undertaken in November 2017. At that time, we looked at the correct licensing of new entities in both the micro-brewery and micro-distillery industries.

    From the risk reviews undertaken, we identified the level of non-compliance in the population at that time. We have applied the identified incidence rates to our other gap years.

    Step 3: Estimate the gap for large illicit activity

    We estimate the amount of large illicit activity from case data and internal expert judgment. We assess the data that we have from cases to identify the minimum amount of tax lost through large illicit activity. We then apply an uplift to this which is based on internal expert judgment. This accounts for additional large illicit activity which is expected to be occurring in the population.

    Step 4: Estimate gap for small illicit activity

    We have identified and estimated the duty evaded from two key sources of non-compliance in relation to small illicit activity, being:

    • illicit still home distillation
    • undeclared imports from international passenger arrivals.

    For illicit still home distilling, we make an estimate of how much alcohol is produced by using data on the sales of stills. We apply assumptions around the use of these stills over time.

    We also estimate for undeclared imports of alcohol, in excess of the passenger concession, from international passenger arrivals. We estimated a percentage of arrivals that did not declare excess alcohol and the amount they carried. This allowed us to calculate a volume imported and thereby the customs duty evaded.

    Step 5: Consolidate the estimate

    The gross gap is the total of the four previous steps and does not consider any amendments or detections. We estimate the:

    • theoretical liability by adding together tax reported and unreported tax
    • gross gap percentage by subtracting tax voluntarily reported and paid from the theoretical tax
    • net gap by subtracting amendments from the gross gap.

    Summary of the estimation process

    Table 2 provides a summary of each step of the estimation process and the results for each year.

    Table 2: Summary of estimation process

    Step

    Description

    2015–16

    2016–17

    2017–18

    2018–19

    1

    Gap estimated for large producers

    7

    11

    11

    3

    2

    Small producers

    33

    32

    34

    36

    3

    Large illicit

    418

    417

    440

    462

    4

    Small illicit

    68

    72

    77

    80

    5.1

    Gross gap ($m)

    532

    540

    608

    636

    5.2

    Gross gap (%)

    9.0

    9.2

    9.8

    9.8

    5.3

    Legal clearances

    5,374

    5,366

    5,629

    5,893

    5.4

    Total theoretical tax

    5,900

    5,899

    6,191

    6,475

    5.5

    Seizures and compliance activities

    3

    4

    47

    55

    5.6

    Net gap ($m)

    529

    536

    562

    582

    5.7

    Net gap (%)

    9.0

    9.1

    9.1

    9.0

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      Last modified: 19 Oct 2021QC 63955