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  • Fuel tax credits gap 2015-16

    This information is for historical purposes only.

    The fuel tax credits gap is the difference between the estimated value of fuel tax credits business are entitled to claim according to the law and the value of fuel tax credits actually claimed by businesses for a financial year.

    Fuel tax credits provide businesses with a credit for the excise or customs duty included in the price of fuel they use in the ordinary course of operating their business.

    The intention is to remove or reduce the cost of fuel tax on taxable fuels used in business operations.

    Differing rates of credits apply depending on the type and use of the fuel. To make a claim, a taxpayer must be carrying on a business and be registered for GST at the time they acquire, manufacture or import taxable fuel.

    Challenges for taxpayers exist due to complexities resulting from the frequency of rate changes and the complication arising from the need to apportion fuel use for different business activities and types of vehicles. Further challenges to the system may arise regarding uses of fuel being on public roads or off public roads, which affects the rate at which claims can be made.

    The fuel tax credit gap arises from taxpayers not claiming their correct credits. However, as the fuel tax credits system is voluntary, there is potential for over-compliance by taxpayers. That is, eligible taxpayers might under-claim or not make a claim which results in a negative gap.

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    Measuring the gap

    We calculate the fuel tax credit gap estimate using a bottom-up approach from two types of programs.

    The first program was undertaken in 2007–08, utilising a random audit program to estimate revenue leakage for fuel tax credits that were claimed in 2006–07. This work was referred to as the fuel tax credit benchmarking study and provided an estimate of the fuel tax credit gap for that year, which has then been used for estimating the gaps up to 2013–14.

    Under the second program, we used a random enquiry program (REP) to review the 2014–15 claims of 271 randomly selected fuel tax credit taxpayers. The data from this second program is used to estimate the 2014–15 gap onwards.

    The fuel tax credit gap reflects only the compliance gap and does not include the impact of tax concessions or other legislated benefits. This means it does not measure the policy gap.

    We have not made allowance for the impact of the black economy as fuel tax credits requires the taxpayer to participate and engage with the tax systems to claim their entitlements, rather than operating outside the taxation system. Fraud and evasion was not observed during the REP.

    The reliability of this estimate is assessed as medium.

    Trends and latest findings

    The fuel tax credits net gap estimate for 2015–16 is a small, negative gap of -$19 million (−0.3%). As the estimated amount of fuel tax credits under-claimed exceeded the estimated amount of fuel tax credits over-claimed, it resulted in a negative net gap. This indicates that some taxpayers who are entitled to fuel tax credits have not claimed their full entitlement. This may be either due to conservativism or being unaware of rate increases. This result follows on from the 2014–15 result, where the net gap was −$28 million or −0.5%.

    This has been supported by qualitative evidence gained from ATO contact with tax payers. This found that the biannual changes to fuel tax credits rates, apportionment of fuel and calculation errors resulted in taxpayers making additional claims for fuel tax credits for which they were previously unaware.

    Previous gap estimates for 2010–11 to 2013–14, based on results from a benchmarking study undertaken into 2006–07 claims, did not indicate the presence of overall under-claiming.

    Differences in the level of the gross and net gaps between the 2013–14 and 2014–15 years reflect changes in the tax gap estimation methodology rather than an actual change in those specific years.

    The following table shows the fuel tax credits claims, compliance, and gross and net fuel tax credits gap estimates for the period 2010–11 to 2015–16.

    Fuel tax credits gap ($ millions) 2010–11 to 2015–16(a)(b)

    Gap

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Tax reported

    5,177

    5,644

    5,428

    5,726

    6,026

    6,089

    Gross gap

    67

    77

    77

    71

    -7

    -7

    Adjustments

    39

    36

    39

    32

    20

    12

    Net gap

    28

    41

    38

    39

    −28

    −19

    Gross gap (%)

    1.3%

    1.3%

    1.4%

    1.2%

    −0.1%

    −0.1%

    Net gap (%)

    0.5%

    0.7%

    0.7%

    0.7%

    −0.5%

    −0.3%

    (a) Estimates for 2010–11 to 2013–14 based on results from benchmarking study undertaken on 2006–07 claims. 2014–15 estimates onwards based on results from a REP on 2014–15 claims.
    (b) Changes from previously published estimates are due to revisions to Australian Bureau of Statistics data, updated ATO data and a modified approach to determining liabilities reported but not paid.


     

    The graph below shows the trend in revenue reported and the net gap over the same period.

    Amount reported and net gap – fuel tax credits 2010–11 to 2015–16(a)

    Graph: This graph provides a visual representation of the trend of the fuel tax credits reported and the net fuel tax credits gap in dollar terms. This information is provided in the table listed earlier in this document.

    (a) Estimates for 2010–11 to 2013–14 based on results from benchmarking study undertaken on 2006–07 claims. 2014–15 estimates onwards based on results from a REP on 2014–15 claims.


     

    Fuel tax credits gross and net gap percentages 2010–11 to 2015–16

    Graph: This graph provides a visual representation of the trend of the gross fuel tax credits gap and net fuel tax credits gap as a percentage. This information is provided in the table listed earlier in this document.


     

    We have estimated that $23 million was over-claimed and through our compliance actions we have recouped $12 million. We have estimated that to obtain full compliance we would need to recoup another $11 million, which would cost around $30 million. Therefore the fuel tax credit scheme is estimated to be $19 million under-claimed.

    ATO action to reduce the gap

    Approximately 87% of claimants are small businesses that may not have systems or specific resources to manage claims.

    The introduction of bi-annual indexation in November 2014 resulted in an increase in the frequency of rate changes. In addition, annual changes to the road user charge also results in changes to some fuel tax credit rates. This results in multiple fuel tax credit rate changes throughout the year and can result in claimants using incorrect rates.

    Opportunistic or aggressive claiming behaviour does occur, but is limited.

    Challenges for taxpayers arise from:

    • the frequency of rate changes
    • complications with needing to apportion fuel use for different business activities and types of vehicles
    • apportionment issues arising over whether fuel is used on public roads or off public roads. This affects the rate at which claims can be made.

    By actively managing the key compliance risks that drive the gap we seek to sustainably manage that gap. Underpinning all our strategies is the knowledge that supporting high levels of voluntary compliance is the best way to achieving a sustained reduction in the gap.

    To support clients to get it right the first time, compliance efforts have focused on providing contemporary online services and information, including:

    Targeted compliance activity is also undertaken to address aggressive claiming or deliberate non-compliance. We also monitor outlays and compare against other relevant data.

    These strategies are effective in limiting inappropriate or excessive claiming.

    Although for 2015–16 the fuel tax credit gap is negative, it should be noted that it is only 0.1% of total claims, suggesting a very high level of overall compliance.

    Methodology

    To be eligible for a fuel tax credit, a taxpayer must be registered for GST at the time it acquires, manufactures or imports taxable fuel for use in carrying on a business.

    The fuel tax credit gap is the difference between the estimated value of fuel tax credits businesses are entitled to claim according to the law and the value of fuel tax credits actually claimed by businesses for a financial year.

    Here we outline the methodology we have selected to estimate the fuel tax credits gap. We detail our assumptions, limitations, data sources and reliability rating as assessed by our independent expert panel.

    Selecting the methodology

    Following consultation with our independent expert panel, we selected a bottom-up statistical methodology.

    For the 2014–15 estimates onwards, we use data derived from the ATO REP undertaken in 2015–16. This program randomly selected taxpayers who claimed fuel tax credit on the business activity statements and conducted a review of their reporting to detect issues and identify non-compliance. The sample is then split into two strata of FTC claims above and below $10,000, and by broad industry group.

    Under the REP, we assume that:

    • the sample is representative of the population
    • the incidence and magnitude of non-compliance found in the random sample is representative of the population
    • the final changes to liabilities as a result of compliance activities are correct at law and not subject to further change.

    For prior years, we use the results obtained from the statistically-based random audit program of 2006–07 fuel tax credits which was undertaken in 2007–08.

    We selected the most appropriate approach methodology given the nature of the market, the design of the tax, available resources and the data available.

    Applying the methodology

    This approach first determines the value of non-compliance for the sample. We then apply this percentage to the total claims of the fuel tax credits population. We do this through five main steps as follows:

    Steps to estimate the fuel tax credits gap

    The five steps to estimate the fuel tax credits gap are:  Step 1: Estimate the percentage of fuel tax credit amounts incorrectly claimed (that is, weighted estimate) Step 2: Multiply weighted estimate of amounts incorrectly claimed by total fuel tax credits claimed Step 3: Determine theoretical fuel tax credits liability by adding estimated incorrect claims to total fuel tax credits claims Step 4: Add non-pursuable debt to calculate the fuel tax credits gross gap Step 5: Subtract compliance outcomes to determine the fuel tax credits net gap.

    Step 1: Determine the estimated percentage of amounts of FTC incorrectly claimed for each year

    After a REP sample has been identified, the taxpayers in the sample are split into two strata – those with FTC claims above and below $10,000, respectively. Within each stratum, the sample was further divided into two sub-groups: those who have over-claimed and under-claimed.

    We then derive the amount of over-claims and under-claims within each stratum as a percentage of the original FTC liability in the respective sub-groups. A net percentage estimate of incorrectly claimed FTC for the stratum is calculated by taking the difference between the over-claim and under-claim percentage estimates.

    The two net percentage estimates for the strata are subsequently combined to yield an overall percentage estimate for the entire REP sample weighted by the populations across the strata.

    Step 2: Calculate the total amount of originally incorrectly claimed FTC

    This step involves the extrapolation of the sample estimate to the wider base of reported FTC liability to determine the total amount of incorrectly claimed FTC. This is achieved by multiplying weighted percentage estimate of incorrectly claimed FTC calculated in Step 1 by the total amount of FTC liability reported to the ATO.

    Step 3: Determine the amount of theoretical FTC

    We add the amount of originally incorrectly claimed FTC calculated in Step 2 to the total amount of claims reported to the ATO. This provides us with the theoretical FTC amount that should be reported and remitted to the organisation.

    Step 4: Calculate the FTC gross gap

    The amount of originally incorrectly claimed FTC represents a shortfall in the original FTC revenue that should have been reported and remitted to the ATO, hence forms part of the FTC gross gap.

    To determine the overall gross gap, however, we have to add non-pursuable debt (reported FTC liabilities which have been written off after being deemed irrecoverable at law or not economical to pursue) to the estimated amount of incorrectly claimed FTC.

    Step 5: Calculate the FTC net gap

    Nonetheless, the gross gap amount calculated in Step 4 does not represent the final amount of FTC revenue loss, as some additional revenue will be recouped by the ATO through its compliance activities. The outstanding FTC gap post-ATO compliance activities is known as the net gap.

    To calculate the net gap, we use updated internal compliance data to determine the reduction in over-claims and taxpayer self-reported adjustments as a result of ATO interventions. We then subtract these compliance outcomes and taxpayer self-adjustments from the gross gap amount to derive the net gap.

    This table outlines the five-step calculations used to estimate the fuel tax credits gap from 2010–11 to 2015–16

    This table outlines the five-step calculations used to estimate the fuel tax credits gap from 2010–11 to 2015–16
    Summary of estimation process ($ millions) (a)(b)

    Step

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Step 1

    Estimate the percentage of incorrect claims in the sample (A)

    1.2%

    1.2%

    1.2%

    1.2%

    −0.13%

    −0.12%

    Step 2

    Multiply by total value of claims (B)

    5,177

    5,644

    5,428

    5,726

    6,026

    6,089

    Equals estimated amounts originally incorrectly claimed (C)

    62

    68

    65

    69

    −8

    −7

    Step 3

    Add (B) and (C) to get theoretical value of claims (D) (c)

    5,239

    5,712

    5,493

    5,795

    6,018

    6,082

    Step 4

    Add non-pursuable debt (E) to (C)

    4.7

    9.4

    12.0

    1.9

    0.8

    0.3

    Equals gross gap (F)

    67

    77

    77

    71

    −7

    −7

    Step 5

    Minus compliance outcomes and taxpayer self-adjustments (G)

    39

    36

    39

    32

    20

    12

    Equals net gap (H)

    28

    41

    38

    39

    −28

    −19

    Notes:
    (a) Claims made incorrectly and not paid back are amounts that are written off as irrecoverable at law or not economical to pursue.
    (b) Estimates for 2010–11 to 2013–14 based on results from benchmarking study undertaken on 2006–07 claims. 2014–15 estimates onwards based on results from a REP on 2014–15 claims.
    (c) Original claims plus estimated amounts originally incorrectly claimed.

    Limitations

    The gap estimates are derived from the randomly selected sample. Although it is assumed that the sample is representative of the population, there may be isolated instances of fuel tax credits non-compliance present outside the sample, which have not been captured in this analysis.

    The sample size for this REP is small. In general terms, the larger the sample the more reliable the results.

    The extent of non-detection is unknown and is extremely challenging to measure. The REP is subject to uncertainty around the impact of non-detection error.

    This estimate does not include the population that may be entitled to fuel tax credits, but have not registered and lodged a claim to receive fuel tax credits. This population also does not include a small number of taxpayers who claimed for fuel tax credits for domestic electricity generation.

    Definitions

    Top-down approaches

    Top-down approaches use externally-provided aggregated data sources to estimate the size of the tax base, from which we estimate theoretical tax liability. The difference between the theoretical tax liability and the amount we receive is the estimated tax gap. A top-down approach is typically used for indirect taxes.

    Bottom-up approaches

    Bottom-up approaches involve a detailed examination of data sources, such as 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 which we estimate the tax gap. This approach generally involves applying statistical techniques to estimate the incidence and value of non-compliance. A bottom-up approach is typically used for direct taxes.

    Random enquiry programs

    Random enquiry programs (bottom-up approach) are considered to be international best practice, resulting in a higher degree of credibility and improvements in confidence intervals. The REPs select claims for evaluation so that they all have the same likelihood of being chosen. The REPs are structured to minimise selection bias, maximise accuracy, account for non-detection error and account for the outcomes of compliance work conducted in parallel to the REP.

    Data sources

    Five ATO data sources are used to calculate the fuel tax credit tax gap estimate:

    • ATO excisable products and excise liabilities and fuel schemes statistics as published on data.gov.au (both numbers of taxpayers and value of claims including Industry statistics). See Australian Taxation Office Taxation Statistics 2014–15 Excise and Fuel Schemes Tables 1 and 4.
    • 2012–13 to 2015–16 Annual reports into administered expenses of both tax reported and net gaps.
    • ATO compliance data. Final results of fuel tax credit compliance cases of taxpayers claiming fuel tax credit for the 2010–11 to 2015–16 income years.
    • 2014–15 REP results, which are derived from the compliance checks on the random sample of taxpayers who claimed fuel tax credit.
    • ATO benchmarking study conducted on 2006–07 claims. This was used to calculate the estimates for 2010–11 to 2013–14.

    The ATO benchmarking study was undertaken in 2007–08 and provided diesel fuel benchmarking data that was used for estimating the gaps up to 2013–14.

    The 2014–15 REP reviewed the 2014–15 claims of 271 randomly selected fuel tax credit taxpayers. The data from this second program has been used to estimate the 2014–15 and current 2015–16 gap:

    • The program initially selected 500 claimants, split into two-tiered strata – claims above and below $10,000, and by broad industry group. Each taxpayer was reviewed and 271 were selected, based on risk, for a desk-based audit or review.
    • The largest taxpayers for fuel tax credits were excluded from the scope of the REP. We have assumed our relationship management program provides a level of assurance over the integrity of accounting systems in place to cover this population.

    See also:

    Reliability

    The estimate is based on a random sample of taxpayers, resulting in an unbiased estimate of the gap. While the sample size was relatively small, the broad results were confirmed by qualitative insights held by the ATO. This suggests the complexity and changes to the fuel tax credits system may result in a more conservative approach by taxpayers when claiming fuel tax credits.

    Therefore the reliability of the estimate is assessed as medium.

      Last modified: 26 Oct 2018QC 53162