Tax gap overview
The tax gap is the difference between the actual tax liability reported to us, or that we raise, and the tax liability that should be reported. That is to say, tax that would be reported assuming that all businesses and individuals fully complied with their tax-reporting obligations.
The tax gap is an estimate of the level of theoretical tax losses through non-reporting of tax by businesses through a failure to register or failure to lodge returns, net under-reporting of tax obligations or over-claiming of refunds.
The reason for such non-compliant behaviours may be unintentional (errors, misinterpretation of the law for complex transactions, lack of reasonable care), or intentional (tax avoidance, evasion, and fraudulent behaviours).
The absolute dollar gap represents more of a guide to the level of actual tax gap. Random and systematic errors arising from the assumptions used to derive the estimates may be present. The macro level of data involved in any measurement of the tax gap leads to estimation errors. Therefore the tax gap is best viewed as a trend over time.
The ATO will use measurement of the tax gap in conjunction with other monitoring indicators, to provide assurance that overall compliance levels have at least been maintained and significant shifts in compliance over the period of review have not occurred.
It should be noted that tax gap is only one of many indicators we use to measure the effectiveness of our range of activities to improve voluntary compliance.