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  • Measuring the gap

    We use a top-down approach to estimate the GST gap on an accruals basis. The top-down approach compares:

    • total accrual GST liabilities for a year, with
    • theoretical GST liabilities for that year, calculated using external economic data.

    In calculating the GST gap estimate, we first estimate the amount of consumer spending subject to GST in the economy (that is, the GST base). We primarily use household final consumption expenditure (HFCE) and gross fixed capital formation (GFCF) in dwellings data released by the Australian Bureau of Statistics (ABS) as part of the annual Australian National Accounts.

    The ABS data incorporates a factor for the black economy. We remove expenditures that are subject to GST concessions or exemptions. From the estimated GST base, we then derive the total theoretical GST liability amount by multiplying it by one-eleventh (given a GST rate of 10%).

    The methodology is based on the approach recommended by the International Monetary Fund (IMF), and used globally for estimating value added tax (VAT) and GST gaps.

    The reliability of the GST gap estimate is assessed as medium.

    Trends and latest findings

    Australia’s GST gap compares favourably with similar international tax jurisdictions. Over a five-year time frame, it is in line with the best performing European Union (EU) member countries, and compares well with the United Kingdom estimate.

    After reaching a recent trough in 2012–13 at 5.7%, the GST net gap (including non-pursuable debt) has trended slightly upward. In 2015–16 the total value of the theoretical GST liability increased to 7.3%.

    The rising gap reflects stronger growth of the theoretical GST liability estimate relative to actual GST collections. The main contributors to growth in the theoretical GST liability estimate had been transactions in new dwellings (as indicated by GFCF in dwellings) and profitable land sales. These are consistent with the national housing boom that has taken place over the past few years.

    However, there can be a significant lag between dwelling construction activity and eventual GST liabilities reported to the ATO. Developers tend to claim GST credits on their expenditure throughout the construction phase, while the realisation of GST liabilities only occurs upon sales of the new dwellings (completion or sales can sometimes takes years from commencement). As such, the relative softer growth in GST collections over the past few years could potentially herald a catch-up period in future years.

    Our compliance activities have also identified instances of phoenix and off-market activity within this sector that also contribute to the gap.

    Another component of the theoretical GST liability that is associated with the property sector is the consumers' share of ownership transfer costs. Its contribution to growth in the theoretical liability has also increased on average in recent years. More work is required to precisely isolate the stamp duty component – which is not subject to GST – from the ownership transfer cost data.

    The following table shows the tax reported, adjustments, and gross and net GST gap estimates in Australia for the period 2009–10 to 2015–16.

    It should be noted that there are margins of error due to limitations in the methodology we use. Therefore, caution needs to be taken when looking at an individual year's results.

    GST gap ($ millions) 2009–10 to 2015–16(a)(b)(c)

    Gap

    2009–10

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Tax reported

    45,369

    46,580

    47,633

    49,361

    52,342

    54,757

    57,627

    Gross gap

    3,305

    4,737

    5,208

    5,150

    5,621

    5,895

    6,998

    Adjustments

    1,146

    1,216

    1,664

    2,198

    2,272

    1,990

    2,489

    Net gap

    2,159

    3,520

    3,544

    2,952

    3,349

    3,905

    4,508

    Gross gap (%)

    7.0%

    9.6%

    10.3%

    9.9%

    10.2%

    10.1%

    11.3%

    Net gap (%)

    4.6%

    7.1%

    7.0%

    5.7%

    6.1%

    6.7%

    7.3%

    (a) Amounts and percentages may not reconcile due to rounding.
    (b) Changes from previously published estimates are due to revisions to ABS data, updated ATO data and a modified approach to determining GST liabilities reported but not paid.
    (c) Amounts rounded to the nearest $1 million.

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

    Amount reported and net gap – GST, 2009–10 to 2015–16

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

    Data sources: ABS, Treasury and ATO data.

    ATO action to reduce the gap

    A range of taxpayer behaviours can affect the gap. These include non-reporting of GST, under-reporting of GST, and over-claiming of refunds. Examples include incorrect classification of transactions in accounting systems, creation of false tax invoices, incorrect claiming of private expenses and non-reporting of sales liable for GST.

    In 2015–16, to minimise the tax gap and maximise voluntary compliance, we adopted a balanced and targeted compliance program. This is based on transparency, risk and behaviour. Where taxpayers were not willing to comply, we applied appropriate remedial approaches available to us under the law.

    We will continue to monitor compliance through the use of third-party data holdings, analytics and risk mitigation activities. Our focus is on activities designed to prevent compliance issues before they arise. This has resulted in a significant investment shift to assurance and early engagement activities, with a view to fostering voluntary compliance, reducing mistakes and an increased focus on those not doing the right thing.

    For instance, we have engaged one-on-one with the largest construction groups on their income tax and GST obligations. We work with those same clients to influence positive behaviours with their sub-contractors across their tax obligations, including payment of tax debts. To prevent potential compliance issues, major new construction developments are identified in real time, and early engagement is offered to resolve any tax issues.

    Additionally there are ongoing changes occurring in the legislation that will have an impact on our future efforts to reduce the gap, such as:

    • The recent MAAL legislation has encouraged taxpayers to review their international pricing arrangements and amounts to better reflect the value creation within Australia, including on the application of GST to their new arrangements.
    • Changes to the GST legislation for the treatment on purchases of new residences or new subdivisions look to remove the incidence of developers not submitting the GST to us.
    • A risk surrounding the sale and purchase of precious metals was addressed through a legislative change that mitigated a loss of revenue that had been occurring through those transactions.

    Voluntary compliance ratio

    The voluntary compliance ratio (VCR) complements the GST gap by measuring the proportion of taxpayers fully compliant with all four pillars of compliance (registration, lodgment, reporting and payment). To be fully compliant, the taxpayer must do all the following:

    • be correctly registered
    • lodge by the required due date
    • report the correct amount of GST
    • pay the amount on time.

    The proportion of taxpayers voluntarily complying with their obligations and the value of GST remitted voluntarily are important indicators of the health of, and community confidence in, the GST system.

    Measuring the VCR

    For the purposes of calculating the VCR, a taxpayer that fails to comply with any of the four pillars of compliance is deemed to be non-compliant. It is a fail-one, fail-all test. For example, Taxpayer A is correctly registered for GST, lodges their BAS on time, correctly reports their liabilities but fails to pay by the due date. This taxpayer will not be considered to be voluntarily complying with all of their tax obligations and is excluded from the VCR.

    The GST voluntary compliance ratio is measured at two levels:

    • taxpayer level – the number of taxpayers who completely meet all their obligations for the financial year
    • GST-value level – the amount of GST, by value, that is voluntarily provided to us in accordance with the law.

    VCR trends and latest findings

    The VCR is built on the assumption of strict administrative compliance with obligations, especially as it relates to lodgment. The analysis identified that 44% of taxpayers voluntarily comply with our strict VCR test. This does not give any consideration to minor unintentional late payments or lodgments.

    The level of voluntary compliance at the taxpayer level increases to 83% by adjusting for:

    • taxpayers who have no total business income in the year (that is, a nil BAS)
    • taxpayers who are only considered non-compliant for having    
      • one BAS lodged late, and/or
      • one late payment.
       

    In making these adjustments, we recognise there is a significant proportion of taxpayers who aim to do the right thing but are late with either a single lodgment or payment.

    At the GST-value level, the amount of revenue received voluntarily (that is, paid on time and without enforcement action) has progressively improved over the last six years. In 2015–16, this was equivalent to 83% of theoretical GST revenue.

    GST voluntary compliance ratio, 2009–10 to 2015–16(a)

    Graph: This graph is a visual representation of the voluntary compliance ratio percentage from 2009-10 to 2015-16 by taxpayers and GST value. The trend is relatively stable around 80 percent for GST value, and around 50 percent for taxpayers.

    (a) Previously published figures updated with latest GST gap data.
    Data source: ATO data.

    Methodology

    We use a top-down approach to estimate the GST gap which compares total GST liabilities for an income year with the theoretical total GST liabilities for that year.

    The GST gap is the difference between the amount of GST payable under the law (theoretical GST liability) and the amount actually collected by us (actual GST revenue) for a defined period, typically a financial year.

    The gap can arise from a number of taxpayer behaviours. These include, but are not limited to, the non-reporting of GST, under-reporting of GST and over-claiming of GST refunds.

    The gap estimate is made on the basis of the law as applicable for the relevant income year. New or recent law changes will not be reflected in gap estimates.

    Here we outline the methodology we have selected to estimate the net GST gap. We detail our assumption, limitations, data sources and reliability rating as assessed by our independent expert panel.

    Selecting the methodology

    Actual GST revenue is calculated on an accrual basis, matching revenue to the income year in which the liability occurred, rather than to the income year in which the revenue is received. The economic transaction method (ETM) is used; this is the revenue recognition basis applied for GST in the ATO financial statements.

    In selecting a methodology we researched and considered the full range of options available including ‘top town’ and ‘bottom up’ methods.

    We adopt a top-down methodology largely based on macroeconomic data from the ABS. This is considered the most suitable given the broad-based coverage of GST across goods and services and the high correlation between GST collections with consumer spending activity and other economic variables. We supplement the ABS data with a combination of ATO internal data and other government statistics.

    Applying the methodology

    The Australian GST system is a tax on final consumption expenditure on goods and services within the domestic economy. We apply the appropriate GST rate to the modified final consumption expenditure items which are taxable. This provides the theoretical tax liability, from which we subtract actual GST collections to obtain the tax gap estimates.

    We followed five steps in applying the top-down methodology to estimate the GST gap.

    Steps to estimate the GST gap

    The five steps to estimate the goods and services tax gap are: Step 1: Construct theoretical GST base using expenditure data Step 2: Subtract GST concessions and exemptions to calculate the total theoretical GST base Step 3: Determine theoretical GST liability by extracting the GST component from the theoretical GST base (which is 1/11) Step 4: Subtract GST reported and add non-pursuable debt from theoretical GST liability to determine the GST net gap Step 5: Add compliance outcomes to determine the GST gross gap

    Step 1: Construct theoretical GST base using expenditure data

    Starting with HFCE data subject to GST, we add estimates of expenditure for the following items:

    • new private dwellings investment expenditure (based on investment in new dwellings data)
    • consumers' share of ownership transfer costs
    • a proportion of land sales
    • net impact of international tourism.

    Step 2: Subtract GST concessions or exemptions

    We then remove specific expenditures included in HFCE. These are expenditures for which GST concessions or exemptions apply. These include:

    • expenditures that are exempt or concessionally taxed, such as food and education
    • input taxed supplies, such as rent
    • certain financial supplies and reduced input tax credits
    • concessions for entities with turnover less than $75,000 ($150,000 for not-for-profit entities).

    The residual amount is our estimate of total final consumption expenditure that is subject to GST.

    Step 3: Determine theoretical GST liability

    The total consumption expenditure value consists of the GST exclusive price and a GST equals to 10% of the price. We therefore isolate the total theoretical GST liability amount by multiplying it by one-eleventh (given the fixed GST rate of 10% incorporated in the data).

    Step 4: Calculate net gaps

    We subtract the actual GST liabilities reported on an accrual basis, including ATO compliance activities, from the theoretical total GST liability to estimate the net gap.

    Non-pursuable debt increases the net gap, Hence we add them back to the net gap estimate to come up with net gap with debt. This is the most accurate measure of tax gap for GST.

    Step 5: Calculate gross gaps

    The gross gap (including debt) is obtained by adding the liabilities raised from ATO compliance activities to the net gap figure.

    Some of the key assumptions of the methodology are as follows:

    • Final consumption expenditure represents all Australian consumption. No additional uplift for the black economy other than those incorporated into the ABS estimates has been applied. This is currently a 0.4% adjustment made to the HFCE estimate to account for under-reporting of sales.
    • No adjustment for inventory. Stock inventory levels are assumed to remain relatively constant.

    GST gross gap and net gap estimation

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

    This table displays the five-step GST gap estimates (in dollar values) from 2009–10 to 2015–16.
    Results at each step of GST gap estimation ($ millions)

    Step

    2009–10

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Step 1 to 3

    Total theoretical tax liability

    46,950

    49,582

    50,595

    51,850

    54,889

    58,387

    62,011

    Step 4

    Less final GST reported

    45,369

    46,580

    47,633

    49,361

    52,342

    54,757

    57,627

    Equals final GST liabilities not reported

    1,581

    3,002

    2,961

    2,489

    2,547

    3,630

    4,385

     Add non-pursuable debt

    578

    518

    583

    464

    802

    275

    124

    Step 5

    Net gap with debt estimate

    2,159

    3,520

    3,544

    2,952

    3,349

    3,905

    4,508

    Add compliance outcomes and taxpayer adjustments

    1,146

    1,216

    1,664

    2,198

    2,272

    1,990

    2,489

     Equals gross gap with debt estimate

    3,305

    4,737

    5,208

    5,150

    5,621

    5,895

    6,998

    Limitations

    The GST gap is estimated primarily using ABS National Accounts data. The reliability of the gap estimate therefore depends on the accuracy and completeness of that data. Australian National Accounts data includes a margin of error and imposes some limitations on the estimate. Specific issues are:

    • sampling and non-sampling errors may exist
    • underlying data are subject to revision which can vary historical trend results and the estimated GST gap
    • timing differences can exist between the National Accounts and GST treatment for certain supplies
    • there is a time lag between the completion of a period and the publishing of the National Accounts.

    In addition, concessions and exemptions are identified and estimated in the Treasury Tax Expenditures Statement. The statement estimates can have a wide range and are not exhaustive, with only major exemptions and exceptions identified.

    The GST gap estimate may not reflect the true level of under-compliance in the GST system as there is likely to be a degree of over-compliance. This may occur where taxpayers under-claim GST credits they are entitled to, or incorrectly classify supplies as subject to GST when they are actually GST-free. As a result, the real revenue gap using a top-down methodology may be understated.

    We have not produced a confidence interval for the estimate of the GST gap. Each of the assumptions used in the top-down model has its own errors, many of which are unquantifiable.

    Definitions

    Household final consumption expenditure (HFCE)

    Household final consumption expenditure consists of expenditure by resident households on goods and services, whether the expenditure is made within the domestic territory or by Australian residents abroad, and expenditure by non-profit institutions serving households (NPISH).

    Gross fixed capital formation (GFCF) on dwellings

    Gross fixed capital formation on dwellings consists of the value of acquisitions of new and existing (used) dwellings less the value of disposals of existing dwellings. It also includes the value of dwellings created by the conversion of existing non-dwelling buildings to dwellings, and the value of alterations and additions to existing dwellings.

    Ownership transfer costs

    Ownership transfer costs comprise the various fees which are incurred by either the buyer or seller of real estate, namely legal fees on transfer, real estate sales commissions, stamp duties on transfer and other government charges (for example, Water Board, Land Tax Office, etc). Costs associated with acquiring and disposing of assets may be described as costs of ownership transfer.

    Data sources

    We adopt a top-down methodology to estimate the GST gap using a combination of ATO external data, such as:

    • ABS National Accounts
    • ABS Household Expenditure Survey
    • Treasury Tax Expenditures Statement.

    See also:

    Reliability assessment

    The GST gap estimates are assessed to be of medium reliability. Data used to estimate the theoretical tax liability is largely based on external data sources and incorporates a factor for the black economy.

    The methodology is based on the approach recommended by the IMF and applied to value added tax (VAT) / GST gap estimation globally. We retain some concerns over the completeness of the tax base covered, and the estimates for concessional and exempt expenditure.

    Based on this, we will focus in the year ahead on better reflecting the impacts relating to transactions in new dwellings and profitable land sales into the theoretical liability.

      Last modified: 26 Oct 2018QC 53167