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  • Methodology

    The GST gap is derived through applying a top-down approach. We use four steps in applying the top-down methodology to estimate the GST gap. These are expanded on below followed by a summary of the overall estimate.

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    Step 1: Construct theoretical GST base using expenditure data

    Starting with household final consumption expenditure (HFCE) data subject to GST, we add estimates of expenditure for the following items:

    • new private dwellings investment expenditure (based on investment in new dwellings data)
    • consumers' share of ownership transfer costs
    • a proportion of land sales
    • net impact of international tourism.

    Step 2: Subtract GST concessions or exemptions

    We then remove specific expenditures included in HFCE. These are expenditures for which GST concessions or exemptions apply. These include:

    • expenditures that are exempt or concessionally taxed, such as food and education
    • input-taxed supplies, such as rent
    • certain financial supplies and reduced GST credits
    • concessions for entities with turnover less than $75,000 ($150,000 for not-for-profit entities).

    The residual amount is our estimate of total final consumption expenditure that is subject to GST.

    Step 3: Determine theoretical GST liability

    The total consumption expenditure value consists of the GST exclusive price and GST, which equals 10% of the price. We therefore isolate the total theoretical GST liability amount by dividing it by 11 (given the fixed GST rate of 10% incorporated in the data).

    Step 4: Consolidate the gap estimates

    We subtract the actual GST liabilities reported on an accrual basis, including our compliance activities, from the theoretical total GST liability to estimate the net gap.

    Non-pursuable debt increases the net gap. Therefore, we add this amount back to come up with the net gap with debt amount. This is the most accurate measure of tax gap for GST.

    The gross gap (including debt) is obtained by adding the liabilities raised from ATO compliance activities to the net gap figure.

    Some of the key assumptions of the methodology are as follows:

    • Final consumption expenditure represents all Australian consumption. No additional uplift for the shadow economy other than those incorporated into the Australian Bureau of Statistics (ABS) estimates has been applied. This is currently a 0.4% adjustment made to the HFCE estimate to account for under-reporting of sales.
    • There is no adjustment for inventory. Stock inventory levels are assumed to remain relatively constant.

    Summary of the estimation process

    Table 2 provides a summary of each step of the estimation process and the results for each year, from 2013–14 to 2018–19.

    Table 2: Summary of the GST gap estimation process

    Step

    Description

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    2018–19

    1 to 3

    Total theoretical tax liability ($m)

    55,899

    59,372

    62,611

    65,677

    68,608

    71,029

    4

    Less final GST reported ($m)

    52,791

    55,588

    58,134

    61,819

    64,298

    65,923

    4.1

    Equals final GST liabilities not reported

    3,108

    3,785

    4,478

    3,859

    4,310

    5,107

    4.2

    Add non-pursuable debt ($m)

    994

    669

    669

    669

    669

    669

    4.3

    Net gap with debt estimate ($m)

    4,103

    4,453

    5,146

    4,527

    4,978

    5,776

    4.4

    Add compliance outcomes and taxpayer adjustments ($m)

    2,496

    2,547

    2,255

    2,643

    2,467

    2,618

    4.5

    Equals gross gap with debt estimate ($m)

    6,599

    7,000

    7,401

    7,170

    7,445

    8,393

    4.6

    Gross gap (%)

    11.8

    11.8

    11.8

    10.9

    10.9

    11.8

    4.7

    Net gap (%)

    7.3

    7.5

    8.2

    6.9

    7.3

    8.1

    Limitations

    The GST gap is estimated primarily using ABS Australian National Accounts data. The reliability of the gap estimate therefore depends on the accuracy and completeness of that data. National Accounts data includes a margin of error and imposes some limitations on the estimate. Specific issues include:

    • Sampling and non-sampling errors may exist.
    • Underlying data is subject to revision, which can vary historical trend results and the estimated GST gap.
    • Timing differences can exist between the National Accounts and GST treatment for certain supplies.

    There is a time lag between the completion of a period and the publishing of Australian National Accounts data.

    In addition, concessions and exemptions are identified and estimated in the Treasury Tax Expenditures Statement. The statement estimates can have a wide range and are not exhaustive, with only major exemptions and exceptions identified.

    Accounting for shadow economy activity in a top-down model

    Due to the GST gap being calculated using the National accounts, accounting for shadow economy activity can only be estimated at a macro level. What this means is that we look to calculate the tax impact of the shadow economy based on the ABS stated level of 1.5%. Therefore, the shadow economy impact is 1.5% of the total theoretical liability. This translates into a tax impact of approximately $1.08 billion. This estimate is contained within the total theoretical liability calculation.

    Updates and revisions to previous estimates

    Periodically, information collated and analysed by the ABS is updated or revised. For the GST gap estimate, this means that changes to the underlying data will have an effect on the outcomes of our analysis. The ABS generally revise their annual benchmarks for the prior three years. However, they periodically revise the entire time series. The effects of these changes to our estimate are demonstrated at Figure 2.

    Figure 2: Effect of ABS and Australian National Accounts revisions and methodological changes on previous GST net gap estimates, 2009–10 to 2018–19

    Figure 2: Graph showing the net gap estimates from previously published years as outlined in Table 3.

    This data is set out in Table 3, shown as a percentage.

    Table 3: Effect of ABS and Australian National Accounts revisions and methodological changes on previous GST net gap estimates (percentage), 2009–10 to 2018–19

    Year published

    2009–10

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    2018–19

    2011

    4.9

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    2015

    4.5

    6.8

    7.7

    7.1

    6.5

    n/a

    n/a

    n/a

    n/a

    n/a

    2016

    4.5

    7.0

    7.0

    5.8

    6.1

    6.5

    n/a

    n/a

    n/a

    n/a

    2017

    4.6

    7.1

    7.0

    5.7

    6.1

    6.7

    7.3

    n/a

    n/a

    n/a

    2018

    n/a

    n/a

    8.1

    7.4

    7.1

    7.4

    8.7

    7.9

    n/a

    n/a

    2019

    n/a

    n/a

    n/a

    7.7

    7.3

    7.1

    8.2

    7.2

    7.3

    n/a

    2020

    n/a

    n/a

    n/a

    n/a

    7.3

    7.5

    8.2

    6.9

    7.3

    8.1

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      Last modified: 19 Oct 2020QC 57175