The financial year of 2020–21 is the most recent income year with all tax gap estimates produced.
2020–21 overall tax gap
The overall tax gap for 2020–21 is $37.5 billion against our estimate of the total amount that we would collect if everyone was fully compliant, $495.6 billion, representing a net tax gap estimate of 7.0%.
Figure 6 shows the overall tax gap. The largest contributors (in dollar value) to the overall tax gap remain the same as last year.
Figure 6: Estimated total tax gap for 2020–21
Personal income tax gap
The personal income tax gap consolidates all the income tax gaps relating to individual tax returns.
It includes the income tax gaps for:
- High wealth individuals
- Individuals not in business
- Individuals in small business
- Individuals in medium business.
Overall, the trend in the personal income tax gap percentage estimates is steady over the 6 years from 2015–16 to 2020–21, with the main contributor being individuals not-in-business.
Figure 7: Personal income tax gap trend
Corporate income tax gap
The corporate income tax gap consolidates all the income tax gaps relating to corporate tax returns.
It includes the income tax gaps for:
- high wealth income tax gap
- large corporate groups income tax gap
- small business income tax gap
- medium business income tax gap.
The overall corporate income tax gap estimate has trended downwards over the 6-year period between 2015–16 and 2020–21, which suggests an overall improvement in the performance of the corporate income tax system over the period. In 2020–21, corporate income tax performance deteriorated slightly as the gap estimate rose to 5.7% from 5.3% in 2019-20, largely driven by the increase in the large corporate groups gap to 4.2% in 2020-21 from 3.6% in the previous year.
Figure 8: Corporate income tax gap trend
Income-based tax gaps:
- High wealth income tax gap
- Large corporate groups income tax gap
- Medium business income tax gap
- Small business income tax gap
Goods and services tax gap
Unlike most other gaps, we have data available to reliably estimate the GST tax gap for 2021–22.
Since 2015–16, the GST gap has fallen from 8.3% of theoretical GST in 2015–16 to 2.7% in 2020-21, before increasing to 3.6% in 2021–22. The difference between gross and net GST gaps each year reflects the impact of compliance activities and averaged around 4.1% over the 6 years to 2020–21. The difference between gross and net gap increased to 7.6% for 2021–22. This widening in 2021–22 reflected substantially higher compliance liabilities raised through Operation Protego to address fraudulent GST refunds.
Figure 9: Goods and services tax gap trend
Excise and other taxes gap
The last 9 tax gaps incorporate excise taxes and several smaller transactional and income-based taxes. While overall we are seeing an increase in the tax gap related to excise and other gaps, the increase in 2020–21 is largely being driven by the rise in the tobacco duty gap. Significant amounts of illicit tobacco continue to reach the market from overseas. In 2020–21, illicit tobacco supply is estimated to have contributed about $1.9 billion to the overall gap amount.
Figure 10: Excise and other taxes gap trend
Shadow economy findings
For tax gap purposes, we focus on the tax effect of unreported or dishonest economic activity deliberately concealed to avoid payment of taxes or compliance with regulations (or both). Internationally, these activities are more broadly referred to as the shadow economy.
In the past, there have been various estimates of the economic impact and the size of shadow economy in Australia by organisations such as the Black Economy TaskforceExternal Link and the Australian Bureau of Statistics (ABS). Our estimates of the tax effect of the shadow economy are not directly derived from those estimates, but largely based on our internal tax gap analysis. You can download the Shining light on the shadow economy reportExternal Link from the OECD.
Our latest estimates for the tax effect of shadow economy are for the 2020–21 tax year. In aggregate, it is around $16.3 billion across the income-based and transaction-based taxes (administered programs are not included), or 35.1% of the total gross tax gap amount in the system. Since our publication last year, there have been significant revisions in the historical shadow economy estimates for the small business and individuals tax gaps due to an increase in deliberate non-compliance identified in the small business random enquiry program results and changes to how we derive the tax effect of undeclared income (hidden wages), respectively.
Revision impact |
Shadow economy estimation |
Tax effect 2015–16 |
Tax effect 2016–17 |
Tax effect 2017–18 |
Tax effect 2018–19 |
Tax effect 2019–20 |
Tax effect 2020–21 |
---|---|---|---|---|---|---|---|
Small business ($m) |
Estimated using sample |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
Prior year publication |
n/a |
6,685 |
6,425 |
6,694 |
7,235 |
7,951 |
n/a |
Current year publication |
n/a |
6,735 |
6,493 |
6,721 |
9,013 |
9,438 |
10,372 |
Difference |
n/a |
50 |
68 |
27 |
1,778 |
1,487 |
n/a |
Individuals not in business ($m) |
Estimated using sample |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
Prior year publication |
n/a |
1,874 |
2,033 |
2,160 |
2,187 |
2,182 |
n/a |
Current year publication |
n/a |
2,490 |
2,669 |
2,844 |
3,002 |
3,098 |
3,088 |
Difference |
n/a |
616 |
636 |
684 |
815 |
916 |
n/a |
Overall, the total shadow economy amounts as a proportion of the sum of theoretical tax liabilities of those affected gaps have been on a rising trend over the 6 years to 2020-21, ranging between 3.5% and 4.3% (see Table 6d below). This largely reflects the growing size of contributions in dollar terms from the small business gap, followed by the tobacco gap.
Our analysis shows the following:
- Amongst the transaction-based gaps, the growing trend, both in dollar value and percentage, over time is largely driven by the increases in tobacco duty. The tax gap for tobacco duty is all included within the shadow economy as it represents importation or domestic growth of illicit tobacco. As a share of the sum of theoretical tax liabilities, shadow economy amounts for transaction-based gaps have increased from 1.7% in 2015–16 to 3.0% in 2020–21. See Table 6a below.
- For income-based taxes, there has been an overall upward trend in shadow economy as a share of the sum of theoretical tax liability has over the past 6 years, fluctuating between 4.1% and 4.8%. Shadow economy behaviour manifests mostly in the small business income tax gap. See Table 6b below.
- For employer obligations of Superannuation Guarantee (SG) and PAYG withholding, hidden wages are the only source of shadow economy amounts. As the PAYG withholding gap and income tax gaps are estimated separately, missing income tax that should have been withheld by employers is captured in both gap estimates. To avoid double counting, we capture the tax effect of shadow economy only once across the PAYG withholding and income tax gaps. As a result, some of the tax impact of hidden wages estimated for the PAYG withholding gap is said to have been 'passed-through' to be reflected in income tax gaps (see Table 6c below). After accounting for the pass-through tax effects of hidden wages in PAYG withholding to the income tax gaps of small business and individuals not in business, the residual total shadow economy estimate for employer obligations is about $4.4 billion for 2020–21, representing around 1.5% of total theoretical contributions for SG and PAYGW gaps.
This year, there has been a change to the way the tax value of hidden wages has been calculated. The previous method assumed an effective tax rate equivalent to the expected average tax rate for the taxpayer deriving hidden wages. This has been changed so that the effective marginal tax rate is used. This increases the 2020–21 estimate of the tax effect of hidden wages in the Small Business gap by $0.3 billion or 0.2% of the theoretical tax and for the Individuals gap by $1 billion or 0.6% of theoretical tax.
We previously changed the way we estimate the shadow economy impact on the GST. Our method now fully aligns with the adjustments that the ABS makes to components of GDP which overlap with the GST tax base – mainly household final consumption expenditure (HFCE). The ABS has provided more detailed information in relation to these adjustments to selected components of HFCE, which enables a more targeted estimate of the shadow economy relevant to GST. Applying the adjustments made by the ABS, we estimate the shadow economy component of the GST gap to be around 0.5% of our estimate of the theoretical tax liability for GST.
Transaction-based program |
Shadow economy estimation |
Tax effect 2015–16 |
Tax effect 2016–17 |
Tax effect 2017–18 |
Tax effect 2018–19 |
Tax effect 2019–20 |
Tax effect 2020–21 |
---|---|---|---|---|---|---|---|
Alcohol excise ($m) |
Illicit channels only |
486 |
402 |
420 |
448 |
490 |
615 |
Tobacco excise ($m) |
All channels |
520 |
621 |
837 |
1,036 |
1,334 |
1,901 |
GST ($m) |
Based on ABS estimates |
357 |
367 |
385 |
400 |
364 |
342 |
Total transaction-based tax effect ($m) |
Total of above |
1363 |
1,389 |
1,643 |
1,885 |
2,189 |
2,858 |
Proportion of theoretical tax liability of transaction taxes above (%) |
Ratio |
1.7 |
1.7 |
1.9 |
2.1 |
2.5 |
3.0 |
Income-based program |
Shadow economy estimation |
Tax effect 2015–16 |
Tax effect 2016–17 |
Tax effect 2017–18 |
Tax effect 2018–19 |
Tax effect 2019–20 |
Tax effect 2020–21 |
---|---|---|---|---|---|---|---|
Small business ($m) |
Estimated using sample |
6,735 |
6,493 |
6,721 |
9,013 |
9,438 |
10,372 |
Individuals not in business ($m) |
Estimated using sample |
2,490 |
2,669 |
2,844 |
3,002 |
3,098 |
3,088 |
Total income-based tax effect ($m) |
Total of above |
9,225 |
9,162 |
9,565 |
12,015 |
12,536 |
13,460 |
Proportion of theoretical tax liability of income taxes above (%) |
Ratio |
4.1 |
3.9 |
3.8 |
4.7 |
4.7 |
4.8 |
Administered program |
Shadow economy estimation |
Tax effect 2015–16 |
Tax effect 2016–17 |
Tax effect 2017–18 |
Tax effect 2018–19 |
Tax effect 2019–20 |
Tax effect 2020–21 |
---|---|---|---|---|---|---|---|
Superannuation guarantee ($m) |
2.3% uplift to wages |
1,518 |
1,559 |
1,641 |
1,733 |
1,643 |
1,862 |
PAYG withholding* ($m) |
Based on the 2.3% uplift to wages |
2,213 |
2,237 |
2,299 |
2,388 |
2,449 |
2,548 |
Total administered programs ($m) |
Total of above |
3,731 |
3,796 |
3,940 |
4,121 |
4,091 |
4,409 |
Proportion of theoretical liability of employer obligations above (%) |
n/a |
1.6 |
1.6 |
1.5 |
1.5 |
1.4 |
1.5 |
Tax gap program |
Shadow economy estimation |
Tax effect 2015–16 |
Tax effect 2016–17 |
Tax effect 2017–18 |
Tax effect 2018–19 |
Tax effect 2019–20 |
Tax effect 2020–21 |
---|---|---|---|---|---|---|---|
Transaction-based ($m) |
Various |
1,363 |
1,389 |
1,643 |
1,885 |
2,189 |
2,858 |
Income-based ($m) |
Estimated using sample |
9,225 |
9,162 |
9,565 |
12,015 |
12,536 |
13,460 |
Total of transaction and income-based taxes ($) |
Total of above |
10,588 |
10,551 |
11,207 |
13,900 |
14,725 |
16,318 |
Total theoretical tax liabilities ($m) |
n/a |
305,158 |
315,212 |
336,964 |
348,231 |
355,470 |
375,749 |
Proportion of total theoretical tax liabilities % |
n/a |
3.5 |
3.3 |
3.3 |
4.0 |
4.1 |
4.3 |