Large corporate groups income 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 large corporate groups income 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 part of our overall tax performance program.

A large corporate group is defined as a corporate group with gross income of over $250 million in a given financial year. In 2018–19, large corporate groups:

• reported $2.1 trillion in gross income
• generated $213 billion in taxable income
• paid around $59 billion in income tax.

For 2018–19 we estimate a gross gap of 8.3% or $5.1 billion, which is the gap prior to considering the impact of engagement from the ATO. We estimate a net gap of 4.3% or $2.6 billion which reflects the final amount uncollected after impacts of our compliance action. In other words, this means that large corporate groups paid over 95% of the theoretical total amount of income tax payable by them in 2018–19.

For more information on how we calculate this estimate including both gross and net gap along with the overall trend of the past seven years of estimates, refer to Table 1.

See more about:

• the factors and behaviours that contribute to the large corporate groups income tax gap and the strategies we have to manage them in Tax and Corporate Australia
• the concept of tax gaps, including why and how we measure them and a summary of the latest data available to estimate the tax gap 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.

Trends and latest findings

While the headline income tax gap for large corporate groups has increased in 2018-19, over the longer term, the gross and net income tax gap have both trended downwards.

The gap estimate for 2018–19 is 4.3%. This increase in 2018-19 is explained by a decrease in the number of large corporate groups that had their 2018-19 tax year assured and a corresponding increase in the tax base. Having lower assurance increases our estimate of both the unreported tax and the tax not detected in our compliance activities. This is a feature of the micro-simulation approach used to estimate the large corporate groups tax gap.

Income tax returns for large corporate groups are adjusted on average by around $2.2 billion each year, excluding interest and penalties. Large corporate groups pay more 91% of the taxes they should voluntarily, and more than 95% after taking into account these amendments.

The lower value of gap estimates from 2013–14 coincides with a suite of legislative reforms and operational changes. We discuss some of these measures in Tax and Corporate Australia, including:

• enhancements made to the general anti-avoidance rule and transfer pricing provisions
• the adoption of transparency measures
• the expansion of our justified trust program.

The tax gap can be viewed in net and gross terms to show the impact of amendments on the gap.

Table 1 shows the tax paid, adjustments, and net and gross income tax gap estimates for the period 2013–14 to 2018–19.

Figure 1 displays the trend in the gross and net income tax gap over the same period.

Figure 1: Gross and net income tax gap (percentage) – large corporate groups, 2013–14 to 2018–19

ATO action to reduce the gap

We understand that the tax compliance of large corporate groups influences the confidence other taxpayers have in the fairness and integrity of the tax system. Therefore, addressing the large corporate groups income tax gap also improves willing participation by other taxpayers.

We seek to sustainably reduce the tax gap by actively managing the key compliance risks that drive it. We know the best way to achieve a sustained reduction in the gap is to support high levels of voluntary compliance, and this underpins all our strategies.

The most significant compliance risks and how we are treating them are discussed in Tax and Corporate Australia. A key strategy is to provide public advice and guidance to ensure large corporate groups understand our view and areas of concern. This allows them to make more informed compliance choices.

Our capacity and capability have been bolstered with additional funding for the Tax Avoidance Taskforce. This funding has allowed us to expand our justified trust program to the largest 1,000 public and multinational groups. This is giving us greater insight into the compliance risks in the large corporate groups population. It also allows us to provide assurance over a significant portion of the tax they pay.

We provide advice to government, via the Department of the Treasury, about potential opportunities for statutory law reform to improve the tax system. We do this when the law is difficult to apply, for both taxpayers and us, and clarification can help to decrease compliance costs. We also suggest where the law can be strengthened to allow us to more effectively deal with compliance risks.

See also:

• We are an active and capable administrator
• Tax Avoidance Taskforce
• Justified trust

Methodology

The large corporate groups income tax gap is derived through applying a model-based bottom-up approach.

There are five steps in applying the model-based bottom-up methodology to estimate the large corporate groups income tax gap. These steps are expanded upon below followed by a summary of the overall estimate:

• Step 1: Calculate amendments
• Step 2: Integrate tax assured data
• Step 3: Calculate unreported tax
• Step 4: Estimate non-detection
• Step 5: Estimate theoretical liability – gross gap and net gap
• Estimate summary
• Limitations
• Updates and revisions to previous estimates

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 time delay between a tax return being lodged, and any final amendments that will 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 was 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.

On average, the top 20 amendments account for 78% of the total value of amendments across all large corporate groups.

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.

For large corporate groups we assure tax by collecting evidence directly from taxpayers.

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 corporate groups.

To estimate unreported tax, 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.

We then apply these factors to each entity in the population to estimate the total amount of unreported tax. The factors may be discounted where the tax paid by the entity has been assured, reflecting our higher confidence in those amounts of tax paid.

Step 4: Estimate non-detection

We uplift the estimates from the preceding steps 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 justified trust program, 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 gap and net gap

We add total amendments (Step 1c), 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 in order to calculate the theoretical liability. We then subtract total amendments from the gross gap to determine the net gap.

Estimate summary

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 through to Step 5d are in dollar values, and Steps 5e and 5f are in percentage values.

Limitations

Estimating the tax gap for large corporate groups is difficult and involves inherent uncertainty. Tax issues and tax laws are complex and contestable. Further, the estimates do not account for differences where there are alternative views on the appropriate interpretation of the tax law. In such circumstances, differences can exist between reasonably arguable positions presented by the ATO and by taxpayers.

Non-detection is also challenging to estimate. We use tax assured data to improve estimates of non-detection where possible.

The current methodology only provides an aggregated estimate of the large corporate groups tax gap. While this may allow generalised comparisons with other taxes, it does not measure relative risk between corporate groups or particular issues within this market.

The gap estimate is a lagging measure, as compliance results take several years to flow through. This is due to the complexity of the tax issues in this population and the elapsed time associated with finalising our compliance activities.

Find out more about:

• our assumptions
• how we account for non-detection in the gap.

Assumptions

The assumptions used to construct this estimate are informed by actual data and expert opinion. The key assumptions are listed as follows.

For those large corporate groups that we don't audit or review, we assume that: 

• a certain degree of non-compliance with tax law occurs
• the degree of non-compliance in these groups is less than those we do audit or review due to our risk detection approaches.

For those large corporate groups that we do audit or review, we assume that: 

• adjustments to their tax liabilities are representative of the value of non-compliance with tax law
• we don't detect all instances of non-compliance
• adjustments to their tax liabilities from completed audits and reviews are correct with the law at the time of estimation.

For projected estimates, we assume that: 

• past outcomes of audits, reviews, settlements and objections are reasonable representations of future outcomes
• our tax assurance activities will continue to improve the accuracy our tax gap estimates as more tax assured data becomes available.

Accounting for non-detection in the gap

Not all errors are detected through audit and assurance activity. We account for this by applying a non-detection uplift to the unreported tax estimate.

We apply different non-detection uplift rates depending on the level of assurance we have over the tax reported in each tax return. Where we have reviewed a tax return and have a high level of confidence in the amounts reported, we apply a lower non-detection uplift rate. We apply a higher non-detection uplift rate for tax returns that we have not reviewed.

For the 2018–19 year, we estimated the impact of non-detected errors to be $1.3 billion.

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.

Figure 2 displays the gross gap and net gap from our current model compared to our previous estimates and shows a downward trend.

Figure 2: Current and previous large corporate groups income tax gap estimates, 2009–10 to 2018–19

There have been no major changes made to the methodology since the last release of estimates in 2020. As such, the overall size and trend of the gap is similar to previous estimates.

As standard practice, the estimates have been revised using updated data. The updated data provides additional information on the amount of tax assured, as well as the actual amount of amendments which reduces the reliance on earlier projections.

The data used in Figure 2 is presented in Table 3 below.

Table 3: Current and previous large corporate groups net tax gap estimates (percentage), 2009–10 to 2018–19

We will publish revisions to these results in future years as information becomes available.

New information generally relates to later years and by including this we can reduce the uncertainty in the estimates and improve their reliability and credibility.

Given the higher level of uncertainty with later year gap estimates, caution should be taken in extrapolating these results.

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 high (with a score of 22). Our gap estimates remain sensitive to assumptions made, particularly regarding non-detection and the imputed result of compliance activities not undertaken.

While the estimates are sensitive to these assumptions, our confidence in the underlying data and population coverage informing the estimates is high. In particular, our integration of tax assured data has significantly improved the accuracy of our estimate.

Figure 3: Reliability rating scale from very low to very high – large corporate groups income tax gap