Tax gap methodology
The GST gap is derived by comparing net theoretical GST liability with actual accrual GST revenue for any given period. It provides an estimate of the GST shortfall from non-compliance after our active compliance activities and taxpayer self-revisions have occurred.
Chart 2.3: Our top-down tax gap concept
The top-down tax gap methodology involves:
- obtaining data from the ABS on household final consumption expenditure in the economy from Australian System of National Accounts (ABS national accounts catalogue 5206.0)
- adding additional consumer spending that is subject to GST
- residential building construction - new dwellings investment, alterations and repairs and land purchases subject to GST
- consumer share of ownership and transfer costs subject to GST
- removing GST concessions - adjusting the data to derive household consumption expenditure that is subject to GST by removing concessionally-taxed items. Adjustments were made where the concession was likely to have a material impact on the GST gap, and could be readily measured. The adjustments include:
- removing exempt and concessionally-taxed expenditure (such as certain food, education, health, certain financial supplies)
- removing input-taxed expenditure (such as rent)
- removing revenue from taxpayers exempt from remitting GST - for example, relating to GST registration thresholds and low-value imports
- tourism adjustment (net impact) - consumption by non-residents on domestic goods and services is taxable but not included in household final consumption expenditure (HFCE), while consumption by residents on overseas goods and services does not contribute to GST but is included in HFCE.
- estimating the GST payable on that expenditure to derive the theoretical GST revenue
- subtracting actual GST accrual revenue from the theoretical GST revenue to derive the GST gap.
Bottom-up analysis is undertaken to validate the reasonableness of the GST gap estimate and to estimate lower and upper bounds of the GST gap. Bottom-up analysis involves:
- benchmarking GST revenue against economic data
- analysing and extrapolating active compliance results
- benchmarking GST revenue at the industry and segment level.
As with any statistical estimate, the level of GST gap is subject to a margin of error. It is not possible to produce a precise confidence interval for the GST gap estimates. In addition, the GST gap can be affected by:
- assumptions relating to GST concessions
- the non-observed economy uplift component in the ABS national accounts statistics.