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  • Our broad approaches to gap estimation

    Our tax gap estimates are derived from a wide range of sources, including publicly-available information and ATO administrative data. Broadly, we apply either a top-down or bottom-up approach to estimating each gap. Where possible, we use a combined approach.

    Top-down approaches use externally-provided aggregated data sources to estimate the size of the tax base, from which we estimate theoretical tax liability. The difference between the theoretical tax liability and the amount we receive is the estimated tax gap. A top-down approach is typically used for indirect taxes.

    Bottom-up approaches involve a detailed examination of data sources, such as tax returns, audit results, risk registers or third-party data-matching information. We then extrapolate the results to determine the extent of non-compliance across the whole population, from which we estimate the tax gap. This approach generally involves applying statistical techniques to determine the incidence and value of non-compliance. A bottom-up approach is typically used for direct taxes.

    Ideally, a combined approach is used, as each methodology complements the other and improves the accuracy and utility of the estimates.

    The table below shows the type of methodological approach we currently use for each tax gap estimate.

    Methodological approach used, by tax gap

    Gap estimate

    Methodological approach

    Goods and services tax

    Top down

    Wine equalisation tax (WET) payable

    Top down

    Beer excise and duty

    Top down

    Petroleum and diesel excise and duty

    Top down

    Pay as you go (PAYG) withholding

    Top down

    Luxury car tax

    Bottom up

    Fuel tax credits

    Combined

    In future, we plan to also use illustrative approaches where limited operational data is available or the taxpayer group is not suitable for statistical estimation. These estimates are produced using assumptions based on operational intelligence and subject matter expertise. We will use illustrative approaches to estimate gaps for large company income tax, petroleum resource rent tax, and superannuation income tax for APRA-regulated funds.

      Last modified: 05 Nov 2015QC 47278