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  • The performance of the tax system

    Understanding the tax gap allows us to understand the overall performance of the tax system as a whole. With the release of the small business income tax gap in 2019 and the high wealth income tax gap in early 2020, we now have over 94% of the overall tax base with gap measures in place for the 2015–16 financial year, which is the latest year in which we have data across all the tax gaps released so far. Future ongoing annual releases will see us achieve full coverage of the tax base for 2015–16 and future years.

    For the 11 published tax gaps (7 income-based and 4 transaction-based) out of 15, we see $346 billion in overall tax paid for 2015–16 and a resulting tax gap estimate of $28 billion. This gives us an overall estimate of published gaps of 7.6% indicating that, for 2015–16, over 92% of tax we expect to receive is received, the bulk of which is voluntary (see Figure 1).

    Figure 1: Tax performance for published tax gaps in 2015–16

    Figure 1: This graph displays the tax performance and tax gap as a percentage of the total revenue that we should receive under the law. The amount of revenue we receive is 92% of expected revenue (tax performance). Therefore, the total tax gap is about 8%.

    For the 4 remaining (unpublished) tax gaps in the income-based and transaction-based gaps program, approximately $22 billion in overall tax was paid for the 2015–16 financial year. If the unpublished gaps are similar to the gaps we have published so far, the potential tax gap for them would be between $1.1 billion to $2.4 billion.

    This means the total tax gap estimate for 2015–16 would be somewhere between $30 billion and $31 billion. This indicates that, for the 2015–16 financial year, we expect to receive $398 billion to $399 billion, with the vast bulk ($368 billion) received voluntarily.

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    Why we measure the tax gap

    Estimating tax gaps forms part of our broader accountability and transparency as a leading administrator. Our approach is consistent with contemporary international best practice in tax administration.

    Australians all benefit from healthy tax and superannuation systems that support our society and economy. The community expects us to manage all aspects of the system, including advising on any tax gaps and what we are doing about them. As such, we measure and publish tax gaps where they are credible, reliable and meaningful, to inject our perspective into the community debate.

    Tax gap estimates also allow us to better understand levels of compliance and risk in the tax and superannuation systems. Insights gained from this work can guide us in determining priority risks and developing strategies (including administrative design, help and education, and audit), which aim to sustainably reduce the tax gap.

    Tax gaps internationally

    Other administrations also measure tax gaps, including:

    • Her Majesty’s Revenue and Customs (HMRC) – United Kingdom
    • Internal Revenue Service (IRS) – United States
    • Danish Customs and Tax Administration (SKAT) – Denmark
    • Canada Revenue Agency (CRA) – Canada.

    The European Commission (EU) uses external researchers to identify the value-added tax (VAT) gap in each of its 28 member countries. The International Monetary Fund (IMF) provides support to jurisdictions in estimating tax gaps.

    Our gap measurement methodologies draw on the experience of the above contemporary administrations. This ensures our estimates are best practice. We share our tax gap information with our counterparts in HMRC and the IRS. We also participate in international forums and communities of practice.

    Addressing the gap

    Our primary strategy is to make it as easy as possible for Australians to comply with their tax obligations. We approach this from many perspectives:

    • enhancing our digital services
    • improving our processes and technology, including our data-matching capability
    • providing advice to government, via the Treasury, where we see law reform options
    • working with partner agencies and stakeholders to improve the tax and superannuation systems
    • providing guidance and advice to clarify areas of uncertainty, including issuing taxpayer alerts if we see potential risks
    • dealing with non-compliance, including investigating aggressive tax planning.

    How to use the estimates

    The tax gap estimates should be viewed as trends over time, in conjunction with other performance measures. The dollar value is indicative rather than definitive.

    All estimates have a margin of error which may not be quantifiable. The estimates are subject to limitations and caveats that need to be considered when using them and drawing conclusions. These limitations are explained in Principles and approaches to measuring gaps.

    Care should be taken when results are aggregated. This is to avoid double-counting and to ensure alignment of reporting years. In principle, administered programs cannot be aggregated with other measures. Until we achieve full release of the tax gap program, the impact of different financial years for different tax gaps can influence the results. The differences between the definitions of gap populations and reporting definitions can also make these measures difficult to reconcile with other measures.

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      Last modified: 12 Mar 2020QC 53161