PAYG withholding 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 pay as you go (PAYG) withholding 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.

Under the Taxation Administration Act 1953, employers have an obligation to collect tax from payments made to employees and remit that tax to us. Employers must register with us under the PAYG withholding scheme to do this.

PAYG withholding provides an effective way for most people to meet their annual income tax obligations. The withholding system also ensures we collect a more stable, secure source of revenue throughout the year, which supports a range of community services.

Key facts on PAYG withholding for the 2018–19 financial year include:

• we had around 856,000 employers in Australia
• employers paid $204 billion PAYG withholding to us
• employers paid about 97% of PAYG withholding voluntarily, without intervention from us.

For 2018–19 we estimate a net PAYG withholding gap of 1.6% or $3.4 billion. In other words, we estimate that around 98% of the total theoretical PAYG withholding payable was paid in 2018–19.

Note: the Fringe Benefits Tax (FBT) system might be considered a component of the broader PAYGW / income tax on salary and wages regime. When PAYGW and FBT are viewed together, the integrated gap was approximately 2.1% in 2018-19. That is, employers are voluntarily paying nearly 98% of the taxes related to their employee's remuneration.

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
• detailed information about PAYG withholding.

Trends and latest findings

There is generally a high level of voluntary compliance in the PAYG withholding system. We estimate that employers are paying about 97% of the PAYG withholding they are required to, without intervention from us. In 2018–19 the net gap was $3.4 billion, or 1.6% of the total theoretical value.

Overall, we observe that the PAYG withholding net gap estimates have been gradually trending downwards. Some of the estimates have been significantly revised from those of prior years as a result of external data changes. Given the margins of error due to limitations in the methodology, caution needs to be taken when looking at individual-year results. We note that weak wage growth, as indicated by Australian Bureau of Statistics (ABS) data, flows through to the gap measurement.

Measurement differences between the PAYG withholding data and the ABS Compensation of Employees data continue to drive revisions in the gap estimates. We monitor this constantly and engage with the ABS to understand the drivers of those differences. Some potential causes include ongoing suppressed wage growth reflected in the National Accounts, reductions in small employers in the market, and shifts from more traditional employment to other working arrangements.

Australia’s PAYG withholding gap is slightly higher than similar estimates made by the United Kingdom's pay as you earn (PAYE) gap of 1.0% for 2018–19. The UK has also seen a considerable decline in their PAYE gap over recent years.

Table 1: PAYG withholding gap, 2013–14 to 2018–19

Figure 1: PAYG withholding gross and net gap percentages, 2012–13 to 2018–19

Note: The estimates for the later years (2017–18 and 2018–19) are subject to revision due to updated ABS data.

ATO action to reduce the gap

A range of taxpayer behaviours can affect the gap. These can arise through employers failing to report or withhold PAYG withholding. The main events contributing to this risk include employers:

• failing to withhold or under-reporting PAYG withholding
• failing to report or pay withholding on time
• incorrectly treating employees as contractors.

These risk events are driven by a range of factors, including:

• businesses being impacted by unforeseen events, which puts pressure on their cash flow
• pressure from competitors who are deliberately underpaying staff or avoiding tax obligations to gain an advantage
• businesses struggling with the distinction between an employee and a contractor.

We focus our efforts in two main areas:

• prevention activities to help employers get things right and deal with genuine mistakes
• correction activities that deal with opportunistic or deliberate behaviour.

To help employers get it right and promote a level playing field, we:

• produce online assistance products that encourage voluntary compliance, including an employee/contractor decision tool to work out if a worker is an employee or contractor for tax and super purposes
• work with digital service providers and actively assist in the transition to Single Touch Payroll
• conduct information sessions, including seminars, webinars and visits to professional bodies, associations and industry groups.

Our targeted shadow economy activities focus on:

• protecting honest employers who comply with their obligations while addressing those employers that choose to wrongly classify employees as independent contractors
• engaging with employers who choose to use third parties (for example, labour hire firms or payroll service providers) where worker entitlements may be at risk
• more targeted enforcement actions directed towards those who choose to under report or avoid obligations altogether
• working in partnership with other government agencies, industry associations and intermediaries to promote tax and super compliance.

Methodology

The PAYG withholding gap estimate is derived through applying a top-down method. We use five steps in applying this method to estimate the gap. These steps are expanded on below followed by a summary of the overall estimate:

• Step 1: Estimate salary and wages subject to withholding
• Step 2: Calculate the theoretical PAYG withholding amount
• Step 3: Calculate PAYG withholding received by the ATO
• Step 4: Calculate the PAYG withholding net gap and gross gap
• Summary of the estimation process
• Limitations

Step 1: Estimate salary and wages subject to withholding

To calculate the PAYG withholding gap, we start with external data on Compensation of Employees – salary and wages published by the Australian Bureau of Statistics (ABS) in its quarterly and annual Australian National Accounts. We adjust the data in the following way:

• We apply an uplift factor of 1.2% to account for the shadow economy. In arriving at this uplift factor, we considered comparable international uplifts and conducted an analysis of the large amount of data from our interactions with employers and our compliance activities that focus on the shadow economy.
• We subtract benefits and payments not subject to withholding. This includes payments in kind (fringe benefits) tax, salary sacrifice into super, employee share schemes, and defence exempt income.
• The resulting amount is assumed to represent salary and wages subject to withholding.

Step 2: Calculate the theoretical PAYG withholding amount

In this step, we multiply the amount calculated in Step 1 by the average rate of withholding to calculate the withholding amount that should be reported and remitted to us.

The average rate of tax withheld is calculated from tax return data for each year. This is the amount of tax withheld, from salary and wage income and other items such as lump sum payments made by employers to their employees and allowances over the total salary-and-wages-type income.

This provides us with the theoretical PAYG withholding amount that should be reported and remitted. For 2017–18 and 2018–19, we had to make a provision to the theoretical liability amount to be consistent with a gross gap of 3.3%, the same as that of 2016–17.

Step 3: Calculate PAYG withholding received by the ATO

In Step 3, total PAYG withholding received is calculated from our internal data. It is calculated on an accrual basis. Non-resident dividends, interest and royalty withholding tax amounts are excluded.

We subtract other non-salary amounts subject to withholding. These include personal services income for sole traders, tax withheld where an Australian business number (ABN) is not quoted, voluntary agreements, benefits and pensions. We are then left with PAYG withholding received minus excluded amounts.

Step 4: Calculate the PAYG withholding net gap and gross gap

In Step 4, we subtract PAYG withholding received (calculated in Step 3) from the theoretical PAYG withholding amount (calculated in Step 2). We then add non-pursuable debt amounts (PAYG withholding liabilities which have been written-off after being deemed as irrecoverable at law or not economical to pursue) to determine the net gap.

Finally, we add compliance outcomes and taxpayer self-adjustments to the PAYG withholding net gap to determine the PAYG withholding gross gap.

For 2017–18 and 2018–19 we continue to see a divergence between our data and ABS data that results in a negative gap. For the purpose of this year's estimate we apply a projection pending a revision by ABS to their data.

Summary of the estimation process

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

Limitations

Our data for salary and wages from tax returns does not have the same definition as the salary and wages series produced by the ABS. While we make adjustments to improve consistency, there are some items in the ABS data series we cannot quantify. The main variances are:

• Individuals earning under the tax-free threshold are not required to lodge a tax return. While a significant number of these people do lodge tax returns, some wage and salary data will be missing. This will affect the average tax rate we apply.
• We do not have data on changes in provision for future entitlements, such as long service leave.
• While we have tax expenditure statement estimates for tax-exempt Australian Defence Force payments and allowances, this does not include the value of food, clothing and travel.
• We are uncertain about the number of individuals under voluntary withholding agreements or labour hire arrangements where they are classified as employees.

We use ABS National Accounts data to estimate theoretical salary and wages amounts. There are limitations with this approach, which means there will be margins of error with the data. The limitations include:

• sampling and non-sampling errors
• National Accounts data is often subject to revision, which can alter historical trend results. Material revisions to this data will result in changes to the estimated PAYG withholding gap
• non-measurement of the underground economy in relation to Compensation of Employees due to lack of sufficient data – we have added an uplift factor of 1.2% to account for this and ensure the gap is not underestimated
• as highlighted in the Black Economy Taskforce final report, it is likely the uplift for hidden wages understates the true nature of the economic impact on undisclosed wages –we will be reviewing this estimate in the future with an expectation of an upward revision.

Some of the key assumptions of the methodology are:

• When we remove identified income not subject to withholding from National Accounts data, the resulting amount represents salary and wages subject to withholding.
• The average rate of withholding we apply to this data is appropriate.

Updates and revisions to previous estimates

Each year we refresh our estimates in line with our 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 the previous estimates.

Figure 2: Current and previous PAYG withholding gap estimates, 2008–09 to 2018–19

The data is presented in Table 3 below.

Table 3: Current and previous PAYG withholding gap estimates (percentage), 2008–09 to 2018–19

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 for this estimate is low (with a score of 15).

This is low because there are some ongoing issues with the data inputs to the model. The data is subject to revision and has historically impacted the most recent years of published gap estimates. There is no official source for such estimates as highlighted by the final report of the Black Economy Taskforce.

We will continue to refine our work on the PAYG withholding gap in future releases.

Figure 3: Reliability rating scale from very low to very high – PAYG withholding gap