Large super funds 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 super funds 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 a part of our overall tax performance program.

For the purposes of our tax gap estimates, the large superpopulation is all super funds other than the SMSFs and Small APRA funds. Typically, large super funds have thousands or millions of members.

For 2018–19, we estimate the net income tax gap for large super funds to be 1.3% or $113 million. In other words, we estimate that large super funds paid around 99% of the total theoretical tax payable in 2018–19.

Small APRA funds, which are not included in this analysis, have fewer than five members and have similar characteristics to self-managed super funds (SMSFs). These funds are covered in our Small super funds income tax gap.

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.

Trends and latest findings

The large super funds tax gap has been relatively steady over the years estimated. A decline in large tax adjustments along with improved industry compliance with capital gains tax (CGT) provisions led to a reduction in the gap in 2017–18 that was maintained in 2018-19.

Over the years estimated, we have seen the following key drivers of tax adjustments:

• incorrect reporting of foreign income and overclaiming of the foreign income tax offset
• overclaiming of franking credits
• the incorrect use of the CGT discount and the capital losses offset provision for gains from non-taxable Australian property of a foreign trust. These are often contingent on market and taxpayer specific conditions.

The incorrect use of the CGT discount was the subject of Taxation Determination TD 2017/24. Industry wide compliance with the approach outlined in the determination has contributed to reducing the tax gap in this area.

Overall, the net income tax gap has ranged from 2.6% to 1.3% over the six years we have estimated.

Table 1 shows the tax reported, adjustments, gross and net gaps from 2013–14 to 2018–19.

Figure 1 displays a trend of the gross and net income tax gap percentages over the same period.

Figure 1: Gross and net income tax gap percentage – large super funds, 2013–14 to 2018–19

ATO action to reduce the gap

We work closely with large super funds to help them pay the right amount of tax. We do this through our justified trust program and providing guidance to help funds comply. Our engagement with funds and the investment industry more broadly, coupled with the significant prudential and regulatory supervision of this industry, results in the relatively low tax gap estimate for this group.

We gather intelligence through assurance reviews, industry consultation and our rulings program to identify emerging risks.

We focus on preventative action, including treatment strategies to address legal or systemic issues. We also work with industry to resolve unsettled interpretive matters to promote willing participation.

We help those that have proven they have paid the right amount of tax and take firmer action against those that do not comply with the law.

Our key strategies include:

• our top 100 and top 1,000 tax performance programs to assure that these funds are paying the correct amount of income tax through assurance reviews and the next actions program.
• engaging early with key industry participants, including custodians and administrative service providers
• continuing our focus on fund governance, including that funds have adequate controls over third-party data
• working with Treasury to support law design and settling areas of interpretative uncertainty
• identifying existing and emerging areas of uncertainty and consulting with industry to develop public advice and guidance to help large super comply, for example  
  • TA 2020/5 Structured arrangements that provide imputation benefits on shares acquired where economic exposure is offset through use of derivative instruments
  • TD 2020/7 Income tax: can capital gains be included under subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 in calculating the foreign income tax offset limit?
  • PCG 2018/2 Propagation arrangements adopted by registrable superannuation entities
  • TD 2017/24 Income tax: where an amount included in a beneficiary's assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) had its origins in a capital gain from non-taxable Australian property of a foreign trust, can the beneficiary offset capital losses or a carry-forward net capital loss ('capital loss offset') or access the CGT discount in relation to the amount?
   
• measuring the impact of our activities to give the community a better understanding of the tax and super system in operation.

Methodology

The large super funds income tax gap estimate is derived through applying a bottom-up micro-analytical approach that incorporates tax assured data and projects future amendments.

The five steps to our approach are explained below and are 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 and net gap
• Summary of the estimation process
• 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 delay between a tax return being lodged, and any final amendments that may 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 has been 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.

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.

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 super funds. To estimate this, 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.

The factors are then applied to each large super fund in the population to estimate the total amount of unreported tax. The factors may also be discounted where the tax paid by the large super fund has been assured, reflecting our higher confidence in those amounts of tax paid.

Step 4: Estimate non-detection

We uplift the estimates preceding this step 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 data matching, 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 and net gap

We add total amendments (Step 1), 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 to calculate the theoretical liability.

We then subtract total amendments from the gross gap to determine the net gap.

Summary of the estimation process

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

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 diverse 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.
• Super funds rely on third-party data to complete 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 we 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 TD 2020/7 on how to correctly apply the capital losses offset provision as discussed in ATO action to reduce the gap
  • we have included an allowance for this issue in the tax gap estimate in years up to the release of our guidance.
   

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.

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 2018–19 in this release).

Figure 2 displays the net gap from our current model compared to the previous estimate.

Figure 2: Current and previous net gap estimates for large super funds, 2010–11 to 2018–19

The data is set out as a percentage in Table 3.

Table 3: Current and previous net gap estimates for large super funds (percentage), 2010–11 to 2018–19

Revisions to these results will be published in future years as further information becomes available. New information generally relates to later years. By including this, we can reduce the uncertainty in the estimates for these years and improve the reliability and credibility of our estimates. However, 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 gap estimate is high (with a score of 22).

Our gap estimates remain sensitive to assumptions made, particularly to non-detection and the selection bias estimated within our compliance approach. While the estimates are sensitive to these assumptions, our confidence in the underlying data and population coverage informing the estimates is high.

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