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  • Methodology

    The large super funds income tax gap estimate is derived through applying a bottom-up micro-analytical approach that incorporates tax assured data and projects future amendments.

    The five steps to our approach are explained below and are followed by a summary of the overall estimate.

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    Step 1: Calculate amendments

    The results of amendments, both ATO and client-initiated, are used to estimate the tax gap for the entire population. We use:

    • the actual result of compliance activities, including the amendments from completed audits and reviews
    • taxpayer voluntary disclosures
    • expected future compliance outcomes for material amounts in dispute
    • projected future amendments.

    We project future amendments to account for the delay between a tax return being lodged, and any final amendments that may be made. As complex tax cases may take a number of years to resolve, the amendments may not be received until several years after the tax return has been lodged.

    To account for these future amendments, we use data on the value and timing of past amendments to project amendments we are likely to receive in the future. As we revise the gap in future years, we will use refreshed amendment information to update our amendment results and to improve future projections.

    We then aggregate the amendments, including projected amendments, for the population to determine the total amendment result.

    Step 2: Integrate tax assured data

    We use our tax assured data in our estimation. This allows us to more accurately calculate unreported tax and derive a figure for non-detection.

    More information about our approach is in Tax assured: gaining confidence the right amount of tax is reported.

    Step 3: Calculate unreported tax

    Unreported tax is the additional tax we estimate may be raised if we were to undertake compliance activities on the entire population of large super funds. To estimate this, we calculate adjustment factors based on actual and projected future amendments.

    These factors are then discounted to account for selection bias. This reflects that our compliance activities are biased towards areas of higher risk than the risk level in the general population.

    The factors are then applied to each large super fund in the population to estimate the total amount of unreported tax. The factors may also be discounted where the tax paid by the large super fund has been assured, reflecting our higher confidence in those amounts of tax paid.

    Step 4: Estimate non-detection

    We uplift the estimates preceding this step to account for non-compliance that is not detected through our compliance activities. We do this by applying uplift factors to the tax amounts based on the level of tax assurance.

    Given the confidence we have in tax amounts assured through our data matching, we apply a lower non-detection factor to those amounts compared to amounts we have not assured.

    Find out more in Ensuring complete estimates: Non-detection.

    Step 5: Estimate theoretical liability, gross and net gap

    We add total amendments (Step 1), unreported tax (Step 3) and non-detection (Step 4) to determine the gross gap.

    We then add the amount of tax voluntarily reported and paid to calculate the theoretical liability.

    We then subtract total amendments from the gross gap to determine the net gap.

    Summary of the estimation process

    Table 2 provides a summary of each step of the estimate for each year. It shows the calculation for each of the steps described from 2013–14 to 2018–19. Steps 1 to Step 5d are in dollar values, and Steps 5e and 5f are in percentage values.

    Table 2: Estimate summary – large super funds income tax gap

    Step

    Description

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    2018–19

    1a

    Amendments ($m)

    22

    63

    52

    98

    56

    27

    1b

    Projected amendments ($m)

    -4

    -8

    -1

    5

    20

    31

    1c

    Total amendments ($m)

    17

    55

    51

    104

    76

    57

    2

    Tax assured ($m)

    0

    0

    0

    91

    131

    171

    3

    Unreported tax ($m)

    22

    42

    55

    65

    40

    30

    4

    Non-detection ($m)

    142

    148

    161

    186

    119

    83

    5a

    Gross tax gap ($m)

    182

    245

    268

    355

    236

    171

    5b

    Tax voluntarily reported and paid ($m)

    6,674

    7,171

    8,530

    11,004

    11,916

    8,316

    5c

    Theoretical liability ($m)

    6,855

    7,416

    8,798

    11,359

    12,151

    8,487

    5d

    Net tax gap ($m)

    164

    190

    217

    251

    160

    113

    5e

    Gross tax gap (%)

    2.6

    3.3

    3.0

    3.1

    1.9

    2.0

    5f

    Net tax gap (%)

    2.4

    2.6

    2.5

    2.2

    1.3

    1.3

    Limitations

    The following caveats and limitations apply when interpreting the large super funds income tax gap estimate:

    • The estimate doesn't reflect the difference between reasonably arguable positions presented by the ATO and taxpayers where tax law is open to interpretation.
    • There is no independent data source that can provide a credible or reliable macroeconomic-based estimate (unlike for indirect taxes).
    • Due to the diverse nature of the market and the complexity of large super funds, it would be impractical to apply a statistical approach based on auditing a random sample of funds with a large enough sample to provide a reliable indication of the tax gap.
    • Super funds rely on third-party data to complete tax return data. Failure in corporate governance may result in funds understating their tax position. This could also be hiding a larger gross gap than we currently estimated.
    • We recently clarified our position relating to unit trust distributions for gains from non-taxable Australian property of a foreign trust
      • we published guidance TD 2020/7 on how to correctly apply the capital losses offset provision as discussed in ATO action to reduce the gap
      • we have included an allowance for this issue in the tax gap estimate in years up to the release of our guidance.
       

    Updates and revisions to previous estimates

    Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:

    • improvements in methodology
    • revisions to data
    • additional information becoming available.

    The current estimate results align reasonably well with the previous release of the estimate, with results differing more in the later years. This is expected, as later years of estimates include projected components (2013–14 to 2018–19 in this release).

    Figure 2 displays the net gap from our current model compared to the previous estimate.

    Figure 2: Current and previous net gap estimates for large super funds, 2010–11 to 2018–19

    Figure 2: Current and previous net gap estimates for large super funds, 2010–11 to 2018–19
Figure 2 displays our previous and current net gap estimates, as outlined in  Table 3.

    The data is set out as a percentage in Table 3.

    Table 3: Current and previous net gap estimates for large super funds (percentage), 2010–11 to 2018–19

    Year

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    2018–19

    2018 program

    1.7%

    2.6%

    1.4%

    1.7%

    2.2%

    1.5%

    n/a

    n/a

    n/a

    2019 program

    n/a

    2.1%

    1.3%

    2.5%

    2.0%

    1.6%

    1.6%

    n/a

    n/a

    2020 program

    n/a

    n/a

    2.1%

    2.7%

    2.3%

    2.3%

    2.2%

    1.2%

    n/a

    2021 program

    n/a

    n/a

    n/a

    2.4%

    2.6%

    2.5%

    2.2%

    1.3%

    1.3%

    Revisions to these results will be published in future years as further information becomes available. New information generally relates to later years. By including this, we can reduce the uncertainty in the estimates for these years and improve the reliability and credibility of our estimates. However, given the higher level of uncertainty with later year gap estimates, caution should be taken in extrapolating these results.

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      Last modified: 19 Oct 2021QC 56335