Wine equalisation 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 wine equalisation tax (WET) gap relates to the 2018-19 financial year.

On this page

• Trends and latest findings
• How we reduce the gap
• Methodology
• Reliability

This gap forms a part of our overall tax performance program.

WET is paid on wine and selected products (such as cider, perry, mead and sake) consumed in Australia, and applies either:

• at the last wholesale sale to a retailer
• to direct sales from wine producers to consumers.

The WET system includes a producer rebate scheme which entitles the producers of wine and selected products to a rebate of 29 per cent of taxable value of domestic sales up to $350,000 per financial year. This effectively makes the first $1.2 million of domestic wholesale sales are exempt from WET.

Some legislative changes took effect from 1 July 2018:

• the WET producer rebate cap was reduced from $500,000 to $350,000 for transactions in wine made from 1 July 2018
• circumstances when a WET credit can be claimed were reduced
• additional information must be reported when buying wine under quote.

For the 2018–19 year we estimate a net WET gap of 2.9% or $29 million. Therefore, approximately 97% of the total theoretical tax liability was paid 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
• the wine equalisation tax.

Trends and latest findings

Since 2011, the WET gap estimate has reduced to a relatively stable and lower level of 2.9% (or $29 million) for the 2018–19 year. From a tax perspective, this means that over 97% of the tax we expect to receive is received voluntarily.

Our updated estimate uses a statistical approach, referred to as extreme value theorem (EVT). This allows us to view the trend using a single method.

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

Figure 1 below displays the same information as a percentage.

Figure 1: Gross and net WET gap percentages from 2013–14 to 2018–19

The previous WET estimates used different methods. We have applied the current methodology across all years to remove the impacts of changing methods.

How we reduce the gap

Incorrect reporting and payment of WET is due to:

• simple errors or lack of awareness regarding WET obligations
• deliberate non-compliance – including  
  • claiming WET producer rebate when not entitled
  • claiming WET producer rebate on exported wine
  • incorrect quoting and inadequate quotation documentation
  • overvaluing wine for claiming the WET producer rebate
  • accounting for WET on wine for own use.
   

Our goal is to improve compliance and have the correct amount of WET reported. Our WET compliance strategies focus on:

• providing education, support and guidance that helps registrants correctly claim the producer rebate
• ensuring wine products are classified correctly
• cross-checking activity statement data to identify and act when there are insufficient goods and services tax (GST) sales to substantiate WET claims
• focussing on incorrect claiming of WET credits on wine exports.

Methodology

The WET gap comes from applying a statistical bottom-up approach, referred to as extreme value theorem.

We estimate the WET gap net of refundable and payable amounts to produce a whole of program view. This approach was adopted over three years ago and includes full historical revisions.

We use five steps to apply the bottom-up methodology to estimate the WET gap:

• Step 1: Identify extreme values
• Step 2: Establish linear regression trend and extrapolate to population
• Step 3: Apply estimate for non-detection
• Step 4: Apply estimate for non-pursuable debt
• Step 5: Consolidate the gap estimates
• Summary of the estimation process
• Limitations
• Updates and revisions to previous estimates

Step 1: Identify extreme values

Rank the amendments in descending order and identify the point where the cumulative sum of positive amendments is just equal to or less than the total negative amendments. The remaining positive amendments which are greater than this point are the extreme values.

Step 2: Establish linear regression trend and extrapolate to population

We transform the amendment data. This allows us to estimate the equation using a linear regression that describes the relationship between the value and rank of the amendments. We estimate the expected number of amendments in the population if every taxpayer was reviewed. We then extrapolate the outcomes from the regression to the WET population to estimate the amount of under-reporting.

Step 3: Apply estimate for non-detection

For the resulting gross gap in Step 2, we calculate an uplift based on the non-detection uplift factor.

Step 4: Apply estimate for non-pursuable debt

We add in an estimate for non-pursuable debt.

Step 5: Consolidate the gap estimates

We add the results of Step 2, Step 3 and Step 4 to arrive at the gross gap estimate. We then take the gross gap and deduct amendments to arrive at the net gap estimate. We lastly add the net gap to the tax paid amount to estimate the theoretical tax liability.

Summary of the estimation process

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

Limitations

The following limitations are associated with estimation of the WET gap:

• There is considerable delay after a financial year ends and the completion of our compliance activities relating to that year. This means that gap estimates may remain subject to revisions for a number of years.
• The extent of non-detection is unknown and is extremely challenging to measure. We use a figure based on expert opinion and operational data.
• The calculation of the impacts of the shadow economy on WET revenue is difficult to measure. For this estimate, we include a small amount within the non-detection estimation for shadow economy activity. This amount is in keeping with expert opinion that any shadow economy activity present is infrequent and irregular with a negligible impact on the WET gap.

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 many 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 estimate.

Figure 2: Current and previous WET tax gap estimates, 2010–11 to 2018–19

Notes: Estimates in gaps published for 2017–18 and previous years have payable figures only for 2010–11 to 2013–14.

The nature of issues investigated in compliance activities in 2012–13 resulted in higher amendments and therefore a higher gap estimate for that financial year.

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

Table 3: Current and previous net wine equalisation tax gap estimates (percentage), 2014–15 to 2019–20

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 medium (with a score of 16).

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