Alcohol tax gap 2018-19

This information is for historical purposes only. If you require previously published content for past estimates, please email taxgap@ato.gov.au.

This estimate for the alcohol tax gap relates to the 2018-19 financial year.

On this page

• Trends and latest findings
• ATO action to reduce the gap
• Methodology
• Reliability

This gap forms a part of our overall tax performance program.

The alcohol tax gap includes excise and customs duties. It does not include wine equalisation tax, as we publish a separate Wine equalisation tax gap.

For the purposes of estimating this gap, we look at all entities who are required to pay these amounts. This can incorporate a wide range of entities whose obligations arise in one of two ways, from either:

• delivering excisable alcohol products into the Australian domestic market for home consumption (domestic production)
• importing excise equivalent goods into Australia.

We also examine entities who are not meeting their obligations, such as through unlicensed or under-reported manufacture. It is these entities that create the gap.

The domestic population is identified through excise returns and claims, while the importing population is identified through customs data.

For 2018–19, we estimate a net alcohol tax gap of 9%, or $582 million. Viewed from the reverse this means that just over 90%, or nearly $5.9 billion, of the total theoretical tax payable was paid in 2018–19.

See more about:

• the concept of tax gaps, including why and how we measure them and a summary of the latest available tax gap data in Australian tax gaps – overview
• our research methodology, data sources and analysis used for our tax gap estimates in Principles and approaches to measuring gaps
• the tax on beer, spirits and other excisable beverages in Alcohol excise

Trends and latest findings

The alcohol net tax gap trend has remained steady between 2015–16 and 2018–19 at 9% with very little variation year-on-year.

Figure 1 displays the same information as a percentage.

Figure 1: Net tax gap (percentage) – alcohol tax gap, 2015–16 to 2018–19

Our analysis demonstrates that the key driver of the alcohol tax gap is illicit activity.

There are a number of known illicit alcohol activities and arrangements that have been identified as prevalent in this population. Broadly speaking, these can be categorised into the following behaviours:

• unauthorised manufacture and unpaid excise duty
• authorised manufacture with underreported/unpaid excise duty
• product diversion
• cross-border transactions (smuggling or export diversion)
• deliberate fraud or evasion.

For a detailed description of these illegal activities, see What attracts our attention – illicit alcohol.

ATO action to reduce the gap

We have increased our activities to reduce the alcohol tax gap. We are implementing strategies around the improved identification, prevention and correction of non-compliance, particularly focusing on illicit alcohol activity.

Our activities include but are not limited to:

• web guidance on the types of activities involving excisable alcohol that attract our attention, including the consequences of non-compliance and where to go to for help – see What attracts our attention – illicit alcohol
• Taxpayer Alert TA 2021/1 – Retail sale of illicit alcohol, which specifically focuses on arrangements where alcohol retailers are knowingly or recklessly purchasing illicit alcohol for the purposes of resale, including the consequences for entities engaging in these arrangements
• proactively engaging with key stakeholders in the alcohol industry at all points of the alcohol supply chain about their obligations in relation to the purchase and sale of excisable alcohol on which duty has not been properly paid
• monitoring and analysing information we receive on entities that may not be compliant with their obligations, particularly where non-compliance is deliberate, and taking compliance action where required
• issuing demands in relation to unpaid duty, including to individuals
• working closely with other government agencies, including the Australian Border Force, to enable a cross agency approach to addressing the illegal manufacture, importation and sale of alcohol in Australia
• escalating serious breaches of the excise laws for criminal prosecution.

Methodology

The alcohol tax gap is derived through applying a bottom-up channel analysis approach. Here we consider the different channels where potential non-compliance can occur and make an estimate for each of these.

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

• Step 1: Calculate gap associated with large producers
• Step 2: Estimate gap for small producers
• Step 3: Estimate the gap for large illicit activity
• Step 4: Estimate gap for small illicit activity
• Step 5: Consolidate the estimate
• Summary of the estimation process
• Limitations
• Updates and revisions to previous estimates

Step 1: Calculate gap associated with large producers

A small group of large producers consistently pay over 93% of alcohol duty each year. Given their contribution to alcohol duty, we work closely with these taxpayers to maximise voluntary compliance. We draw on our understanding of their business arrangements to inform the overall estimate.

Step 2: Estimate gap for small producers

This component looks at the risk relating to small producers, sometimes referred to as micro-breweries and micro-distilleries. We estimate the gap for small producers based on risk and intelligence work undertaken in November 2017. At that time, we looked at the correct licensing of new entities in both the micro-brewery and micro-distillery industries.

From the risk reviews undertaken, we identified the level of non-compliance in the population at that time. We have applied the identified incidence rates to our other gap years.

Step 3: Estimate the gap for large illicit activity

We estimate the amount of large illicit activity from case data and internal expert judgment. We assess the data that we have from cases to identify the minimum amount of tax lost through large illicit activity. We then apply an uplift to this which is based on internal expert judgment. This accounts for additional large illicit activity which is expected to be occurring in the population.

Step 4: Estimate gap for small illicit activity

We have identified and estimated the duty evaded from two key sources of non-compliance in relation to small illicit activity, being:

• illicit still home distillation
• undeclared imports from international passenger arrivals.

For illicit still home distilling, we make an estimate of how much alcohol is produced by using data on the sales of stills. We apply assumptions around the use of these stills over time.

We also estimate for undeclared imports of alcohol, in excess of the passenger concession, from international passenger arrivals. We estimated a percentage of arrivals that did not declare excess alcohol and the amount they carried. This allowed us to calculate a volume imported and thereby the customs duty evaded.

Step 5: Consolidate the estimate

The gross gap is the total of the four previous steps and does not consider any amendments or detections. We estimate the:

• theoretical liability by adding together tax reported and unreported tax
• gross gap percentage by subtracting tax voluntarily reported and paid from the theoretical tax
• net gap by subtracting amendments from the gross gap.

Summary of the estimation process

Table 2 provides a summary of each step of the estimation process and the results for each year.

Limitations

The limitations associated with estimation of the alcohol tax gap generally relate to limitations in access and availability of data. Therefore, we are required to make some assumptions as follows:

• Given the nature of illicit activity, it is inherently difficult to estimate the amount that it contributes to the gap. To overcome this, for  
  • large illicit activity – we rely on case data and apply an uplift which is informed by expert judgment
  • small illicit activity – we apply a number of assumptions based on research and some limited data.
   
• Customs duty paid on alcohol is collected by the Department of Home Affairs. While we are able to use customs data for parts of our estimate, there are still components of the estimate which relate to non-compliance with paying customs duty which we have limited data for. In place of data, we rely on assumptions when forming our estimate.

Accounting for the shadow economy

The large illicit and small illicit activity components of unreported tax are attributed to the shadow economy. This captures activity where the participants are deliberately avoiding their obligations to pay duty.

Table 3 shows the impact of the shadow economy on the gap.

Table 3: Impacts of the shadow economy on the alcohol tax gap, 2015–16 to 2018–19

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.

This gap was first published in 2020 and has been revised once on an annual basis. While there has been no change to the methodology, updates to the underlying data have resulted in minor changes to previously published estimates.

Current and previous net tax gap estimates, 2015–16 to 2018–19

The data is presented in Table 4 below.

For detail on our approach to revisions, see Principles and approaches.

Reliability

We seek feedback and advice about the methods we use to estimate the gap from our external and internal subject matter experts. Based on the advice and assessment, the reliability rating for this estimate is medium (with a score of 16).

We are looking to improve the reliability in the future by drawing on further data sources so that we can remove or improve upon assumptions that we currently use.

Figure 2: Reliability rating scale from very low to very high – alcohol tax gap