Show download pdf controls
  • Trends and latest findings

    Our current gap estimate for individuals not in business is based on findings from three years of our random enquiry program, allowing us to begin analysing trends. We see fairly consistent results across years, which is manifesting in a stable gap trend. Work to assure the random enquiry program for the 2016–17 year is in progress and this will inform the next tax gap estimate. We have also started the random enquiry program for the 2017–18 financial year.

    Internationally, tax gaps are difficult to compare. This is due to the large variations in legal and tax systems, market definitions, availability of data and the methodologies used to estimate gaps across tax jurisdictions.

    While the individuals not in business tax gap estimate is not directly comparable for these reasons, we used methodology that is used in similar tax regimes. The United Kingdom (UK) and United States of America (USA) also use random enquiry programs to estimate some income tax gaps. They are considered best practice when estimating from large and homogenous taxpayer populations.

    In our random enquiry program, we found adjustments were made in both tax agent and self-prepared returns, including:

    • incorrect claiming of deductions for work-related expenses and/or rental property expenses
    • careless administration or careless preparation of a return.

    Lack of connection to income earned or substantiation for expenses were also significant issues.

    In establishing the estimate, we also identified that unreported income from cash wages contributed around $1.4 billion to the gap in 2015–16. This activity is considered to be part of the black economy.

    While the amounts over-claimed and under-reported by individual taxpayers may be small, collectively across a large population the overall revenue impact is significant.

    Note that amounts reported in this estimate are rounded to the nearest $ million.

    Table 1 summarises the gap estimates for the three years of the random enquiry program. It shows the tax reported, adjustments, gross gaps and net gaps from 2013–14 to 2015–16.

    Table 1: Income tax gap – individuals not in business, 2013–14 to 2015–16

    Element

    2103–14

    2014–15

    2015–16

    Gross gap ($m)

    7,506

    8,550

    9,089

    Amendments ($m)

    754

    696

    645

    Net gap ($m)

    6,752

    7,854

    8,444

    Tax paid ($m)

    113,158

    117,935

    124,067

    Theoretical liability ($m)

    119,910

    125,789

    132,511

    Gross gap (%)

    6.3

    6.8

    6.9

    Net gap (%)

    5.6

    6.2

    6.4

    Notes:Data used for this estimate was extracted from ATO systems and was current as at 3 April 2019. See Data sources for more information.We have recalculated the 2013–14 and 2014–15 using the refined tax gap population definitions.

    Figure 1 shows the trend in tax paid and the net tax gap in dollar values.

    Figure 1: Amount paid and net gap – individuals not in business, 2013–14 to 2015–16

    Figure 1: This graph shows the amount of income tax paid and the net gap stated in Table 1 for the years 2013–14 to 2015–16.

    Figure 2 shows these trends as a percentage.

    Figure 2: Gross and net tax gap percentage – individuals not in business, 2013–14 to 2015–16

    Figure 2: This graph is a pictorial representation of the gross and net gap percentages stated in Table 1 for the years 2013–14 to 2015–16.

    Findings from the random enquiry program

    The random enquiry programs for 2013–14, 2014–15 and 2015–16 saw 1,403 reviews undertaken across a representative sample of the individuals not in business population. Of these cases, 1,132 involved manual reviews, while 271 were verified using third-party data.

    The sample was large enough to provide a suitable representation of the population. It is proportionally similar to, or greater than, other comparable countries' programs (for example, UK and USA).

    During the selection process the population was stratified across all income bands to ensure the overall population was appropriately represented. Taxpayers in the tax-free threshold and low through to very high incomes were represented as well as taxpayers with rental properties.

    We used a confidence interval to quantify the 'precision' of the estimate. This is discussed in detail in the Limitations section. We are confident that the true value of the net gap in 2015–16 lies between 5.7% to 7.1%, or $7.5 billion to $9.4 billion. The sample includes taxpayers who lodged through various channels. The proportion of agent-prepared returns in the random sample was representative of the total individuals not in business population.

    In the full sample of 1,403 cases the incidence of adjustment was 75%, with 80% of agent-prepared returns being adjusted. This compares with 61% of returns adjusted for people who prepared their own tax (self-preparers).

    On average we made three item adjustments per income tax return. The median increase to taxpayers' taxable income (income less deductions) was $1,307. While individually this amount may not be large, when tallied across the whole population, the effect is significant.

    There were 69 cases where we decreased tax payable. This includes 17 cases where we made adjustments solely in the taxpayer’s favour. There were four additional cases where we made adjustments solely in the taxpayer’s favour but with nil effect on tax payable.

    Across the random enquiry program, there were more adjustments to income items in the self-prepared returns. Adjustments to deduction items (including rental expenses, work-related expenses, gifts and donations and other deductions) were higher for agent-prepared returns.

    Table 2: Overview of the 2013–14 to 2015–16 random enquiry programs for individuals not in business

    Cases

    Sample
    (no.)

    Agent-prepared sample
    (no.)

    Agent-prepared sample
    (%)

    Self-prepared sample
    (no.)

    Self-prepared sample
    (%)

    Manually reviewed cases

    1,132

    839

    74

    293

    26

    Verified cases

    271

    153

    56

    118

    44

    Total finalised cases

    1,403

    992

    71

    411

    29

    Table 3: Comparison of the incidence of adjustment in all finalised cases for the 2013–14 to 2015–16 random enquiry programs for individuals not in business

    Cases

    Full sample
    (no.)

    Full sample
    (%)

    Agent-prepared sample
    (no.)

    Agent-prepared sample
    (%)

    Self-prepared sample
    (no.)

    Self-prepared sample
    (%)

    Cases with adjustments

    1,048

    75

    796

    80

    252

    61

    Cases with adjustments only in the taxpayer’s favour

    21

    1

    12

    1

    9

    2

    Note: The distribution of the value of the item adjustments show that 38% of adjustments are $150 or less and 23% are over $1,000.

    Table 4: Distribution of item adjustment rates and values in the 2013–14 to 2015–16 random enquiry programs (percentage) for individuals not in business

    Range of adjustments

    Self-prepared % of all adjustments

    Self-prepared % of values adjusted

    Agent-prepared % of all adjustments

    Agent-prepared % of values adjusted

    Total % of all adjustments

    Total % of values

    $0–$150

    9

    <1

    30

    1

    38

    2

    $151–$300

    4

    1

    12

    3

    16

    4

    $301–$500

    2

    1

    9

    4

    11

    5

    $501–$1,000

    3

    2

    9

    7

    12

    10

    More than $1,000

    5

    10

    18

    70

    23

    80

    Total

    23

    14

    77

    86

    100

    100

    Analysis indicated that adjustment rates were broadly similar across types of agent practices and agent locations, although rates for agents in small tiers were slightly higher.

    Based on the analysis and findings of the random enquiry program and insight from our overall engagement program, we can highlight particular themes that contribute to the gap.

    Figure 3 shows a breakdown of the individuals not in business tax gap by the different drivers.

    Figure 3: Net tax gap breakdown by driver for individuals not in business, 2015–16

    Figure 3: This image is a graph that breaks down the net tax gap by the drivers of the gap. The four drivers are work related expenses, rental, hidden income and other. Work related expenses represents 48%, rental 18%, hidden income 17% and other 17%.

    Find out about:

    Work-related expenses

    Work-related expenses are a key component of the individuals not in business income net tax gap. The work-related expenses net tax gap for individuals not in business was estimated to be $4 billion.

    Each case can have multiple adjustments across the return. Of the 4,222 adjustments made in identified cases, around 80% related to deduction items, with 50% (or 2,119) of adjustments made at work-related expense items. Of those work-related expenses adjustments, 77% (or 1,630) were made in agent-prepared returns.

    Common reasons for adjustments in the random enquiry program included:

    • claims for expenses that were actually paid for or reimbursed by the employer
    • claims that appeared legitimate, but could not be substantiated
    • mistakes and guesswork relating to apportioning work-related expenses
    • claims for ‘standard’ deductions where exceptions to substantiation provisions exist.

    Many taxpayers believed they did not have to explain their claim if a substantiation exception was applicable.

    Work-related expenses adjustments and reasons

    The following two pie charts display the number of adjustments to work-related expense items and the reasons for these adjustments.

    The highest rate of adjustments was for 'other expenses', in particular incorrect claims for home office, mobile phone and internet. Claims for clothing and car were also frequently adjusted.

    Figure 4: Number of adjustments to work-related expenses

    Figure 4 : This image provides a breakdown of the type of work–related expenses adjustments and number of times they occurred. The main adjustments and the number of those adjustments are: car expenses – 383, travel – 158, clothing – 670, self–education – 88 and other expenses – 820.

    Figure 5: Reasons for work-related expense adjustments

    Figure 5: This image provides a visual representation of the percentage breakdown of the reasons for why there were adjustments made for work-related expenses. The reasons and percentages in descending order are: substantiation 27%, nexus and substantiation 27%, overclaimed 15%, nexus 11%, no response 5% and other reasons combined 16%.

    Undeclared income

    Income that has been omitted, particularly cash wages and income from the sharing economy, also contributes to the tax gap for individuals not in business.

    Some people don't declare income and payments to avoid paying the right amount of tax or superannuation. For example, some businesses may pay their employees 'cash-in-hand’ and some taxpayers do not report all the cash income they earn in their tax return.

    We estimate the proportion of the tax gap for individuals not in business for 2015–16 attributable to unreported income was $1.4 billion.

    Identifying non-declared wages is difficult, even in a random enquiry program. To account for the impact of undeclared cash wages (an aspect of the black economy), we take a different approach.

    In separate top-down methods (the PAYG withholding gap and the superannuation guarantee gap) we have identified that an uplift factor of 1.2% needs to be applied to the national accounts wages to account for cash wages.

    We convert this amount to an income tax amount. We apportion the amount to the individuals not in business population based on the population proportion.

    Our approach to addressing the non-reporting of cash wages is incorporated in our black economy strategy.

    See also:

    Other findings and observations

    Observations from our broader compliance activities reinforce findings from our random enquiry program – further supporting our understanding of what is driving the gap.

    Deductions for rental property expenses are also a key contributor to the gap. The rental component of the individuals not in business net tax gap is estimated to be $1.5 billion.

    Our observations indicate that the most common reasons for adjustments to rental items on a tax return are a lack of, or incorrect, apportionment of expenses.

    This includes, for example, deduction claims where the property was only available to rent for part of the year. Or claims for interest expenses where a portion of the loan was used for private purposes. We also see mistakes relating to capital works and capital allowance deductions.

    Return to:

      Last modified: 17 Oct 2019QC 56246