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  • Methodology

    The large super funds income tax gap is the difference between tax paid by large super funds and the amount they should have paid, assuming full compliance with the law as it stood in the relevant financial year. Therefore, new or recent law changes are not reflected in gap estimates.

    The methodology we used to estimate the large super funds tax gap is outlined below.

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    Selecting the methodology

    On the basis of expert opinion, we selected a model-based bottom-up approach to determine the value of under-reported income tax from large super funds to estimate the income tax gap. We chose this method given the nature of the market, the design of the tax, and the lack of suitable external data to produce a top-down estimate.

    Applying the methodology

    The large super funds income tax gap is established on an accrual-based concept. As such, late payments don't contribute to the gap. We use actual amendment records, which restricts our analysis to financial years prior to 2013–14. This reflects that it can take time to resolve large complex cases before an amended assessment is issued.

    Accordingly, we have projected the average gap for future years to estimate through to 2016–17. In future, as we revise this analysis, we will use updated amendment information, and incorporate the outcomes of our revised approaches to client engagement.

    We followed six steps in applying the methodology to estimate the gap. The steps are summarised in Figure 3 and then described in detail.

    Figure 3: Steps to estimate the large super funds income tax gap

    Figure 3. This image is a pictorial representation of the six calculation steps outlined in the text following this image. This image provides the names of the steps only.

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    Step 1: Calculate the tax payable

    The total tax payable for the financial year is the sum of tax payable for all large super funds as stated in the original return lodged for the year.

    Step 2: Calculate the compliance results

    In Step 2, we include all net positive amendments, whether they are initiated by the client or Commissioner of Taxation, to determine the total compliance result.

    For 2011–12 to 2013–14, we use actual compliance outcomes recorded from processed income tax return amendments and recently finalised or pending compliance cases.

    For 2014–15 to 2016–17, we project results based on the average income tax return amendments for the prior three years as a percentage of the original tax payable for those years. This estimate considered the actual amendments for 2016–17 instead of the projected value as the actual amendments were higher than the projected value.

    Step 3: Extrapolate the compliance results to the super fund population

    Step 3 involves extrapolating a proportion of the compliance results from those funds with amendments, to those funds without amendments. That is, we allow for the fact that higher risk funds are selected for audit.

    This involves two components where we determine each fund's share of total assets in accumulation phase (only assets in accumulation phase are taxed) in each year. We then extrapolate the compliance results across the population.

    For 2014–15 to 2016–17 we project the assets we would expect to relate to funds with amendments, by taking the average assets of funds with amendments in 2011–12 to 2013–14.

    Step 4: Apply estimate for non-detection

    In Step 4, we uplift the gap estimate to account for a non-detection component. We use expert judgment and evaluate a range of factors.

    The lower tax rate for super funds and regulatory oversight by APRA indicate a relatively low non-detection rate.

    Our compliance areas have identified other factors that serve to justify a larger non-detection factor. These include the interaction of structural and information complexity for these funds, and the potential historical understatement of net capital gains.

    Step 5: Determine the gross and net tax gap

    In Step 5, we combine the results from Steps 1 to Step 4 to obtain the gross and net tax gaps.

    Step 6: Determine the theoretical liability and gap percentages

    The theoretical liability is determined by adding Steps 1 through to Step 5. The percentage gaps are determined by dividing the gap estimate by the theoretical tax liability.

    Summary of estimation process

    Table 2 shows the calculation for each of the steps described from 2010–11 to 2016–17. Steps 1 through to Step 6.1 are in dollar values, and Steps 6.2 to 6.3 are in percentage values.

    Table 2: Summary of estimation process – large super funds income tax gap

    Step

    Description

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    2016–17

    1

    Tax payable (at lodgment) ($m)

    7,682

    7,165

    6,686

    7,180

    8,514

    10,996

    2

    Compliance result ($m)

    112

    19

    39

    73

    41

    73

    3

    Extrapolate ($m)

    24

    9

    51

    23

    27

    47

    4

    Non-detection ($m)

    143

    89

    120

    123

    109

    135

    5.1

    Gross tax gap ($m)

    278

    116

    211

    220

    177

    255

    5.2

    Net tax gap ($m)

    166

    97

    172

    146

    136

    182

    6.1

    Theoretical liability ($m)

    7,960

    7,281

    6,896

    7,400

    8,691

    11,251

    6.2

    Gross tax gap (%)

    3.5

    1.6

    3.1

    3.0

    2.0

    2.3

    6.3

    Net tax gap (%)

    2.1

    1.3

    2.5

    2.0

    1.6

    1.6

    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 heterogeneous 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.
    • While our coverage of large super funds is significant, for the period used to calculate the gap, this was mostly done through pre-lodgment activities. We don't currently have comprehensive estimates of the impact of these activities. Compliance assurance is also done through industry-wide consultation and education campaigns. The impact of this is extremely difficult to measure.
    • Super funds rely on third-party data to complete income 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 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 on the correct application of the capital losses offset provision and the impact of understated capital gains due to an incorrect cost base and use of the CGT discount. These items were not reviewed in previous compliance activities and would not be included in amendment records. We have included an allowance for this issue in the tax gap estimate in years up to the release of the guidance.

    Updates and revisions to previous estimates

    Figure 4 displays the net gap from our current model compared to the previous estimate.

    Figure 4: Current and previous net gap estimates for large super funds, 2010–11 to 2016–17

    Figure 4. This graph provides a visual representation of the previous and current net gap estimates provided at Table 3.

    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 2015–16 in the last release).

    Table 3: Summary of published net gap percentages for large super funds

    Gap release year

    2010–11
    (%)

    2011–12
    (%)

    2012–13
    (%)

    2013–14
    (%)

    2014–15
    (%)

    2015–16
    (%)

    2016–17
    (%)

    2018

    1.7

    2.6

    1.4

    1.7

    2.2

    1.5

    na

    2019

    na

    2.1

    1.3

    2.5

    2.0

    1.6

    1.6

    Data sources

    The methodology draws on the operational data of the ATO. These include the results of audit, review and other related compliance activities, and demographic information extracted from income tax returns. This approach incorporates the:

    • value of adjustments – from compliance results
    • level of engagement – from number of cases
    • value of tax reviewed by the ATO – the average coverage per case.

    Reliability

    An independent expert panel has assessed our estimate of the large super funds income tax gap, as described in Principles and approaches to measuring gaps.

    Based on advice from the independent expert panel, the reliability rating for the large super funds income tax gap estimate is medium.

    Our gap estimates remain sensitive to assumptions made, particularly to non-detection and the imputed result of compliance activities not undertaken. While the estimates are sensitive to these assumptions, the underlying data and population coverage informing the estimates is high.

    We are looking to expand our data to improve future gap estimates. We are considering the following activities to facilitate this:

    • conducting a comprehensive quantitative assessment of risk for the large super funds population that is less reliant on historic compliance results
    • improving estimates for tax covered in the model with compliance activities linked with our tax assurance measures in addition to pre-lodgment cases
    • improving indicators of non-detection for large super funds.

    We are enhancing the way we record information on issues we detect and the tax effect of our compliance activities – both prior to and after tax return lodgment. This data will become increasingly comprehensive over time and will be integrated into our methodology.

    Figure 5: Reliability rating scale from very low to very high – large super funds income tax gap

    Figure 5. This image is a graphical representation of the reliability rating for the current large super funds income tax gap estimate. It graphically represents a rating of medium, which is a score between 16 and 20. The maximum score is 30.

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    Definitions

    Bottom-up approaches

    A bottom-up approach involves a detailed examination of data sources. These include tax returns, audit results, risk registers or third-party data-matching information. We then extrapolate the results to establish the extent of non-compliance across the whole population. From this we estimate the tax gap. A bottom-up approach is typically used for direct taxes.

    Voluntary disclosures

    A voluntary disclosure is where a taxpayer tells us about a false or misleading statement they've made to us or a change that increases their tax or reduces their credits, without prompting, persuasion or compulsion by the Commissioner.

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      Last modified: 17 Oct 2019QC 56335