Show download pdf controls
  • Reliability assessment

    All gap estimates are assessed for reliability against 10 criteria. The reliability rating provides a transparent assessment of our gap estimates, drawing on the International Monetary Fund (IMF) and our expertise. We summarise this in a rating assessment for each gap estimate.

    In assessing reliability, we provide the expert panel with our initial views and working material. The expert panel assesses each submission and provides feedback for improvements. Once all feedback is addressed, the panel endorses a final rating.

    Reliability criteria

    The ten reliability criteria are considered of equal importance. We sort them into three groups, by evaluation stage, as follows:

    • Evaluation of the estimation framework  
      • Capture the appropriate tax base
      • Cover all potential taxpayers
      • Account for all potential forms of non-compliance
      • No overlap within or between any components of the framework
       
    • Evaluation of the methodology  
      • Evaluate the approach used against the assessment criteria for that methodology
      • The most appropriate method is used and results are validated against supporting information
      • Sensitivity to the underlying model, assumption and structure
      • Assessment of assumptions, judgment or expertise
       
    • Evaluation of the internal process and delivery  
      • Evaluate the quality of the management process
      • The analysis provides insights into the drivers of a gap estimate.
       

    Reliability ratings

    For each estimate, each reliability criterion is scored from 0 ('poor/missing') to 3 ('excellent'). The sum of these scores determines the reliability rating.

    The total reliability score ranges from 0 to 30 and is placed into one of five categories, as follows:

    • Very low (a score of 0 to 10) – The results are preliminary or interim in nature, often being a pilot estimate in its first years of production. The estimate may have a number of issues that compromise its reliability. It may have a large or unknown margin of error. The estimate is not confirmed by other independent analysis. The results provide very little information and could be misleading.
    • Low (a score of 11 to 15) – A large number of factors are not considered in the estimate. The estimate has a material margin of error. The estimate may be partially confirmed by other analyses. It should not be used to provide insight into population compliance. It may, however, provide direction for further research and analysis. Improvements, when made, may significantly alter the gap estimate.
    • Medium (a score of 16 to 20) – A number of factors are not considered which, if addressed, may change gap estimates to a limited or immaterial degree. The estimate has an acceptable margin of error. The estimate is derived from an appropriate calculation methodology. It is materially confirmed by other analyses, such as risk models and intelligence scans. With caution and contextualisation it can provide insight into population compliance.
    • High (a score of 21 to 25) – A small number of factors are not considered which, if addressed, may change the gap estimate to a very limited or immaterial degree. The estimate has a low margin of error. The estimate is derived from a highly appropriate calculation methodology. It is materially confirmed by other analyses such as risk models and intelligence scans. With caution and contextualisation, it can provide insight into population compliance.
    • Very high (a score of 26 to 30) – All factors are considered. The estimate has a very low margin of error. The estimate is derived from the most appropriate calculation methodology. It is confirmed by other analyses, such as risk models and intelligence scans. It can provide highly detailed insights into the levels of compliance across the population.

    Voluntary compliance ratio

    The voluntary compliance ratio (VCR) complements gap estimates. It measures the proportion of taxpayers fully compliant with their tax obligations. Under the four pillars of compliance, there are four key taxpayer obligations covered by the VCR:

    • registration – taxpayers/entities are correctly registered, as required
    • lodgment – the required returns are lodged by the due date
    • payment – tax liabilities are paid on time
    • reporting – the correct amount of tax liabilities are paid.

    The VCR estimate is a cumulative assessment of compliance. Failure against one of the pillars counts as non-compliance in a taxpayer’s total tax affairs.

    Non-compliant taxpayers are removed from the starting population at each pillar. This leaves a final compliant population, expressed as a percentage of the starting population. A taxpayer failing at any stage is considered non-compliant. They are not tested for compliance at a later stage.

    The VCR measures the proportion of a population that meets all four obligations. This is expressed as a percentage of the starting population. We measure the VCR for both the number of taxpayers (taxpayer level) and the dollar value.

    We calculate the VCR for GST – the step-by-step methodology we use is provided in Goods and services tax gap.

    VCR – taxpayer level

    To estimate the VCR at the taxpayer level, we determine the number of taxpayers that voluntarily comply with all obligations. We then divide this by the number of taxpayers required to be registered under the law.

    Figure 6: Calculation to estimate the VCR at taxpayer level

    To calculate VCR at the taxpayer count level, divide the number of voluntarily compliant taxpayers by the number value of required taxpayers in the system.

    We also calculate an ‘adjusted VCR’ at the taxpayer level, which is not as strict as the above test. In the adjusted VCR calculation, taxpayers are assumed to be compliant if they:

    • have no total business income in the year (that is, all business activity statements are nil)
    • only have one late lodgment of a business activity statement (BAS) and/or one late payment through the year.

    VCR – value level

    For the VCR at the value level, we sum the value of each compliant taxpayer’s tax as it moves through the four pillars of compliance. This amount is divided by the value of the tax expected under the law.

    Figure 7: Calculation to estimate the VCR at value level

    To calculate VCR at the tax value level, divide the value of tax voluntarily paid by taxpayers by the total value of theoretical tax.

    Return to:

      Last modified: 12 Mar 2020QC 53168