Small 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 small 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 purpose of this analysis, we define small super funds as those with no more than six members. The small super fund lodged population for 2018–19 consists of approximately:

• 513,000 self-managed super funds (SMSFs)
• 1,800 small Australian Prudential Regulation Authority (APRA) regulated funds.

For 2018–19, we estimate a net gap of 2.8% or $43 million. In other words, we estimate that small super funds paid around 97% of the total theoretical tax payable in 2018–19.

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 latest estimate of the net tax gap for small super funds is $43 million, or 2.8% in 2018-19. The estimate is essentially unchanged from the 2017-18 estimate and over the five years, we would say the gap has slightly increased.

The gap is mostly the result of errors in reporting:

• contributions
• net capital gains
• trust distributions
• exempt current pension income.

The non-lodging population contributes to the gap with the percentage of total funds not lodging a SMSF annual return continuing to increase each year.

Table 1 shows the dollar values at the various elements involved in calculating the gap for 2014–15 to 2018–19. The gross and net gaps are also shown as percentages.

Figure 1 shows the gross gap and net gap as a percentage over the same period.

Figure 1: Gross and net tax gap percentage – small super funds, 2014–15 to 2018–19

ATO action to reduce the gap

The concessionary tax environment for small super funds means that the tax consequence of non-compliance, due to errors or deliberate acts, is less than in other populations.

However, we still focus on ensuring super funds pay the right amount of tax. To achieve this, we have adopted a multi-faceted approach which includes:

• providing tools and resources to assist funds to meet their obligations
• mitigating risk with a rigorous and systematic approach to identifying and responding to regulatory risk
• actively engaging with and seeking feedback from stakeholders in the small super fund environment.

Super fund life cycle

Our approach to managing the small super fund tax gap recognises key activities that occur during the three inherent phases of a fund's life cycle:

1. establishment phase – initial setup and investment activities
2. accumulation phase – wealth building activities
3. retirement phase – starting an income stream during retirement.

We undertake targeted communication and education strategies to ensure trustees, advisers and industry professionals are aware of their obligations and understand our compliance stance during each of these phases.

We use a number of strategies to identify both potential and actual non-compliance. The first line of defence is our secure front-door process where each new application is assessed. This is to ensure individuals establish their small super fund for the sole purpose of providing them with retirement benefits.

We check that only individuals with a genuine intent of establishing and maintaining a compliant super fund enter the system. In this way, we seek to prevent the tax gap arising from illegal early release and promoter activity.

During the life of the fund, we make use of intelligence gathered from the annual audit process undertaken by SMSF approved auditors. Where non-compliance is reported, we apply tailored correctional action according to the severity of the issue.

We also have specific strategies looking at compliance risks of high value funds, non-lodging funds and those looking to inappropriately access the concessionally taxed environment through profit-shifting arrangements.

The risk strategies we adopt to minimise the tax gap are reviewed and validated twice a year to reflect the changing nature of compliance risk. Our areas of focus include:

• reviewing and validating the competency of the work completed by some of our highest volume approved auditors
• reviewing our highest value funds to ensure that inappropriate wealth accumulation strategies haven't been used to inflate investment returns within the concessional taxed environment
• prosecuting promoters of illegal early release schemes who target vulnerable trustees
• taking action to ensure that trustees of funds who haven't lodged their annual return bring their lodgments up to date, or to cancel their registration and cease operating as a small super fund
• applying differentiated treatment to encourage self-correction of identified non-compliance including where the non-compliance was notified through the early engagement voluntary discloser service. Treatments include:  
  • enforceable undertakings
  • direction to educate
  • direction to rectify
  • administrative penalties
  • notice of non-compliance
  • disqualification of individuals
  • civil or criminal prosecution. 
   

Table 2 shows the population of self-managed super funds that lodge, compared to those that are registered, over the period 2012–13 to 2018–19.

This data is displayed in Figure 2. It shows a trend in an increasing number of registered funds not lodging an annual return. Work is underway to understand the drivers to this trend and assess if retirement savings have been illegally withdrawn prior to funds being abandoned

Figure 2: Population of self-managed super funds that are lodged and registered, 2013–14 to 2018–19

Methodology

The small super funds income tax gap estimate is derived through applying a bottom-up illustrative method.

There are three steps in applying the bottom-up methodology to estimate this gap. These steps are expanded on below, followed by a summary of the overall estimate:

• Step 1: Estimate unreported tax
• Step 2: Estimate non-detection
• Step 3: Calculate the gross gap and net gap
• Summary of the estimation process
• Limitations
• Updates and revisions to previous estimates

Step 1: Estimate unreported tax

Unreported tax consists of the additional tax expected to be raised if we undertook compliance activity on the portion of the tax base not covered. It arises from incorrectly reported tax returns and has two components:

• unreported tax from the lodged population
• unreported tax from the non-lodged population.

Factors are applied over the base to estimate the amount of expected amendments if compliance activity had been undertaken for the whole tax base and funds that are registered but have not yet lodged.

A projection method was used to estimate the net and gross gaps for the 2017–18 year. The projection method bases the estimate on maintaining a broadly consistent gross gap percentage, by using the average of the 2016–17 and 2015–16 gross gaps in order to capture the recent trend.

Step 2: Estimate non-detection

We take the estimated unreported tax from Step 3 and uplift it to account for amounts that are not detected.

Step 3: Calculate the gross gap and net gap

In this step, we combine the amounts for amendments, unreported tax, and non-detection determined above, with non-pursuable debt, to obtain the gross and net tax gaps. The net gap is equal to the gross gap less amendments.

We then add the gross gap to the tax voluntarily paid amount to estimate the theoretical tax liability. The gap percentages are calculated by dividing the gap estimate by the theoretical tax liability.

Summary of the estimation process

Table 3 provides the results at each step of the estimation process for each year from 2014–15 to 2017–18.

Limitations

Estimating the tax gap for small super funds is difficult, with inherent uncertainty. Tax issues and the tax law are complex and contestable. Further, our estimates do not account for differences where there are alternative views on the interpretation of tax law. In these circumstances, differences can exist between reasonably arguable positions presented by the ATO and taxpayers. Further to this, non-detection estimates are extremely challenging to measure.

The current methodology provides an aggregated estimate of the small super funds tax gap. This may allow generalised comparisons with other taxes.

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

The assumptions used to construct our estimate are informed by actual data and expert opinion. The insights from the aged random enquiry program are less relevant in the current period and require extensive review.

The following caveats and limitations apply when interpreting this tax gap estimate:

• For funds that we don't audit or review, we assume  
  • 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-based approaches to engagement
   
• For funds that we do audit or review, we assume  
  • 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 at law, at the time of estimation. 
   

Accounting for non-detection in the gap

We account for non-detection by applying an uplift factor to the amendments amount. The uplift factor is based on international rates. The impact of non-detection on the small super funds income tax gap is $28 million in 2017–18.

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 3 below displays the gross gap and net gap from our current model, compared to the previous estimate for the 2014–15 financial year. The revised 2014–15 estimate differs from the original published version, primarily because of revised non-pursuable debt data. The dataset used in the original estimate included amounts which have since been classified as not belonging to small super funds non-pursuable debt.

Figure 3: Current and previous small super funds net tax gap estimates, 2014–15 to 2018–19

This data is set out in Table 4 as a percentage.

Table 4: Current and previous small super funds net tax gap estimates (percentage), 2014–15 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 14).

Our gap estimate remains highly sensitive to the changes in lodgment trends and the results of our compliance activities.

Figure 4: Reliability rating scale from very low to very high – small super funds income tax gap