The performance of the tax system
Understanding the tax gap allows us to understand the overall performance of the tax system. Viewing the performance of the tax system with the economic environment at the time, enables us to better understand what may have influenced performance.
We have measured the tax gap across all the key revenue products and administered payments for the 2018–19 financial year.
A part of the reason for the growth in the tax base was the strength of the Australian economy. 2018–19 was the 28th consecutive year of annual economic growth, although momentum slowed in the latter half of the year. Expansionary monetary policy settings, the roll-out of major public infrastructure projects and solid growth in resource exports continued to support the economy whilst promoting a favourable business environment.
Strong growth in commodity prices coupled with record high export volumes spurred a significant uplift in company tax collections as profits in the mining, energy and water segments surged. The continued success of our funded taskforces targeting corporate tax avoidance through the Multinational Anti-Avoidance Law (MAAL) and Diverted Profits Tax (DPT) have served to further boost company tax collections. Meanwhile, stronger enforcement through our enhanced strategies to tackle the shadow economy saw substantial collections raised through the Shadow Economy program.
Total individual tax collections rose further in 2018-19, partly driven by higher dividend income in line with elevated levels of corporate profitability. Tax Time 2018 was streamlined with the implementation of Single Touch Payroll (STP) and improvements to myTax, including our nudge messaging, which resulted in a decrease in deductions claimed by individuals. Meanwhile, higher capital gains tax (CGT) receipts contributed to a larger proportion of total income tax collections, reflecting increasing gains on superannuation assets.
Goods and services tax (GST) collections grew modestly in 2018-19 as household discretionary spending and dwelling investment growth moderated. This was largely attributed to subdued growth in household disposable income, despite strong labour market conditions, as declining residential property prices weighed on household wealth.
There are nine income tax gaps and six transactional tax gaps that together give us complete coverage of the tax and superannuation systems. For the 15 published tax gaps, we see $428 billion in overall tax paid for 2018–19 and a tax gap estimate of $33.5 billion. This gives us an overall estimate of published gaps of 7.3%. This indicates that for 2018–19, we received 92.7% of the tax that should have been reported, 91% was received voluntarily and as a result of sustained improvements in compliance (wider revenue effects) and 1.7% was the result of compliance amendments and voluntary disclosures. (see Figure 1).
Figure 1: Tax performance for published tax gaps in 2018–19
When we review each tax gap individually, it reveals that for 13 out of the 15 tax gaps have gap estimates less than 10%. This means that we are collecting more than 90% of the tax that we would expect to collect for majority of the gaps.
While we continue to strive to sustainably reduce the net tax gap, we recognise that in some cases, ATO compliance action continues to be important in ensuring high levels of tax performance. We can see this when we compare the gross tax performance (voluntary performance) to the net tax performance (after compliance intervention). Across all income tax markets, the large corporate groups tax gap is most impacted by ATO initiated compliance action where the performance in this market improves from 91.7% before ATO action to 95.7% after.
For our transactional, taxes, the ATO compliance action has the biggest impact for tobacco duty, where the performance improves from 88.5% pre-ATO engagement to 93.7% post. More detail about the drivers for each tax gap and what we are doing about it is explained in the more detailed web content for each tax gap.
Figures 2 and 3 below show a breakdown of the tax performance ratios for the 15 tax gaps. It shows the tax performance before any ATO initiated action (gross performance) and after the result of ATO initiated action (net performance). Figure 2 includes both indirect taxes and excises. Figure 3 includes all income-based taxes.
Figure 2: Tax performance for transaction-based tax gaps in 2018–19
Figure 3: Tax performance for income-based tax gaps in 2018–19
Comparing tax gap estimates at a particular point in time can be problematic when you consider each tax gap is an estimate with a different reliability rating. For this reason, we recommend viewing tax gap estimates over time. We suggest a focus on the longer-term trends rather than the year-on-year changes because estimates are revised each year, but longer terms trends tend to signal a sustained change in the levels of compliance.
We see an example of that this year, where the overall net tax gap has increased to 7.3%. The main reason for this is due to an increase in the small business income tax gap which has increased from 11.7% in 2017-18 to 12.7% in 2018-19, consistent with the levels reported for 2015-16 and 2016-17. We note that the small business estimate is subject to revision as the estimate this year was affected by a hold on compliance activities as a result of the COVID-19 pandemic.
Overall, despite the increase in the net tax gap this year, the four-year trend is still showing an overall decrease in the overall tax gap.
Figure 4: Tax gap trend from 2015–16 to 2018–19
Other key measures
The health of the tax system is supported by other key measures. One such measure is tax assured. This is a measure of how confident we are that the tax reported is correct.
Based on concepts of justified trust and verifying taxpayer reported data with third party data, we are highly confident that 45.5% of the total tax reported in 2018–19 is correct. For the remaining 54%, we use our risk management approaches to give us confidence that the right amount of tax is being paid, and where it isn't, we take measures to address that.
Through data matching via the PAYG withholding system, we know that 92% of all salary and wages reported by individuals are correct. One-on-one engagement with large businesses gives us assurance the $27 billion of income taxes they report is correct.
Another measure of the performance of the tax system is the measure of the impact of our activities on the performance of the tax system, which we call total revenue effects. This year, we reported $6.8 billion in audit yield as we sought to address issues that contribute to the tax gap. Some of that $6.8 billion relates to issues in the 2018-19 year.
One of our goals is to improve taxpayer behaviour and to see that sustained into the future. We measure this sustained improvement in compliance and define it as the wider revenue effects. In 2020–21 we reported $3.5 billion in wider revenue effects. This represents additional revenue resulting from improved compliance from taxpayers treated through our interventions in previous years. We estimate that $1.9 billion of wider revenue effects relates to improved compliance in 2018-19.
Taken together, these measures tell us that the tax system is operating well, but not perfectly. Tax gaps do exist, but we are seeing:
- high levels of voluntary compliance
- positive changes in taxpayer behaviour
- tax collected via audits when taxpayers are not paying the right amount of tax.
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