We use a 5-step bottom-up channel analysis approach to estimate the alcohol tax gap. We consider the different channels where non-compliance can occur and make an estimate for each of these.
Step 1: Calculate gap associated with large manufacturers
A small group of large manufacturers pay over 93% of the total alcohol duty collected each year. Given their contribution, 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 manufacturers
We estimate the gap for small manufacturers, sometimes referred to as micro-breweries and micro-distilleries, using risk analysis and operational intelligence. We apply the identified rates of non-compliance to our gap estimate each year.
Step 3: Estimate gap for large illicit activity
We estimate the amount of large illicit activity from operational data and internal expert judgment. Using operational data, we identify the minimum amount of tax lost through large illicit activity. We then use internal expert judgment to uplift this amount to account for large illicit activity that we assess is occurring but not detected.
Step 4: Estimate gap for small illicit activity
We estimate the duty evaded from 2 key sources of non-compliance in relation to small illicit activity:
- illicit home distillation
- undeclared imports from international passenger arrivals.
For illicit home distilling, we use sales data on stills to estimate how much alcohol is produced. We apply assumptions around the use of these stills over time.
For undeclared imports of alcohol (that are excess to international passenger concessions), we estimate a percentage of arrivals that did not declare their excess alcohol and the amount they carried. This allows us to calculate a volume imported and the customs duty evaded. Notably the fall in passenger numbers due to COVID restrictions resulted in a much lower figure in the 2019–20 year.
Step 5: Consolidate the estimate
The gross gap is the total of steps 1 to 4 above. It does not consider any amendments or detections. We estimate the:
- theoretical liability by adding together tax reported and unreported tax
- gross gap 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.
|
Step |
Description |
2015–16 |
2016–17 |
2017–18 |
2018–19 |
2019–20 |
|---|---|---|---|---|---|---|
|
1 |
Gap estimated for large producers |
27 |
28 |
30 |
24 |
14 |
|
2 |
Small producers |
33 |
32 |
34 |
36 |
37 |
|
3 |
Large illicit |
418 |
417 |
440 |
462 |
512 |
|
4 |
Small illicit |
68 |
72 |
77 |
80 |
65 |
|
5.1 |
Gross gap ($m) |
552 |
557 |
627 |
657 |
649 |
|
5.2 |
Gross gap (%) |
9.3 |
9.4 |
10.1 |
10.1 |
9.7 |
|
5.3 |
Legal clearances |
5,368 |
5,359 |
5,582 |
5,838 |
6,042 |
|
5.4 |
Total theoretical tax |
5,920 |
5,916 |
6,209 |
6,496 |
6,691 |
|
5.5 |
Seizures and compliance activities |
3 |
4 |
47 |
55 |
20 |
|
5.6 |
Net gap ($m) |
549 |
552 |
580 |
603 |
629 |
|
5.7 |
Net gap (%) |
9.3 |
9.3 |
9.3 |
9.3 |
9.4 |
Find out more about our overall methodology, data sources and analysis used for creating our tax gap estimates.
Limitations
Due to limitations with data, we rely on these assumptions:
- Given the nature of illicit activity, it is difficult to estimate the amount that it contributes to the gap. To overcome this, for
- large illicit activity – we rely on operational data and apply an uplift which is informed by expert judgment
- small illicit activity – we apply several assumptions based on research and other data.
- Customs duty paid on alcohol is collected by the Department of Home Affairs. While we can use customs data for parts of our estimate, there are still components of the estimate which relate to non-compliance with paying customs duty which we have limited data for. These limitations mean that we rely on assumptions when forming our estimate.
Accounting for the shadow economy
The large illicit and small illicit activity components of the gap are attributed to the shadow economy. This captures activity where the participants are deliberately avoiding their obligations to pay duty.
Table 3: Impacts of the shadow economy on the alcohol tax gap, 2015–16 to 2019–20
|
Element |
2015–16 |
2016–17 |
2017–18 |
2018–19 |
2019–20 |
|---|---|---|---|---|---|
|
Small illicit activity |
68 |
72 |
77 |
80 |
65 |
|
Large illicit activity |
418 |
417 |
440 |
462 |
512 |
|
Amendments for illicit activity |
|
|
44 |
46 |
|
|
Total impact of shadow economy |
486 |
489 |
561 |
588 |
577 |
Updates and revisions to previous estimates
Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:
- improvements in methodology
- revisions to data
- additional information becoming available.
Figure 2: Current and previous net tax gap estimates, 2015–16 to 2019–20
The data is presented in Table 4 below.
|
|
2015–16 |
2016–17 |
2017–18 |
2018–19 |
2019–20 |
|---|---|---|---|---|---|
|
2022 program (%) |
9.3 |
9.3 |
9.3 |
9.3 |
9.4 |
|
2021 program (%) |
9.0 |
9.1 |
9.1 |
9.0 |
n/a |
|
2020 program (%) |
9.5 |
9.6 |
9.6 |
n/a |
n/a |
Note: Demand notices have recently issued. Due to timing, the impact of this will be reflected in next year's publication and will likely change our estimates over several years.