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  • Measuring the gap

    We used a bottom-up approach to measure the small business income tax gap. We drew on the results of our random enquiry program, along with other research and data we have access to.

    Random enquiry programs review the whole tax return (all items). They are therefore considered best practice when producing estimates for large populations. They allow us to estimate the general compliance levels of the lodging population.

    In addition to the random enquiry program, we used separate approaches to estimate other parts of the gap, including:

    • a modelling approach – to estimate the incidence and tax impact of people outside the system
    • a top-down approach – to estimate the impact of unreported wages
    • operational data – to identify the amount of debt that we expect will never be repaid (non-pursuable debt).

    We engage an independent expert panel to advise on the methodology used in our gap estimates. Information regarding the panel, including its members, is in Australian tax gaps – overview.

    To provide further assurance we engaged Stephen Frost, former Deputy President of the Administrative Appeals Tribunal (AAT). Mr Frost confirmed the accuracy and quality of a sample of the audit results underpinning our small business income tax gap estimate.

    We have assessed the reliability of this estimate as medium.

    Random enquiry program

    To undertake our random enquiry program, we selected a random sample of small business taxpayers for profiling. The profiling stage makes use of all information provided to us by the taxpayer. It also includes third-party data we collect and data in the public domain.

    We reviewed the affairs of the selected taxpayers as well as any of their directly associated individuals and entities. Where we identified issues, we made contact with these taxpayers and progressed them to the audit stage.

    Once we gathered information from the random enquiry program, we estimated the gap. We did this by using the incidence rate of adjustments and average value of amendments resulting from non-compliance. Adjustments are the changes we make to items on a tax return to correct errors.

    This method provides insights into the value of non-compliance. It also shows us the proportion of the sample (and by extension the population) that is incorrectly reporting.

    The small business income tax gap reflects the compliance gap. That is, it is an estimate of the tax revenue which is not collected as a result of small businesses failing to comply with the law at the time. This is whether inadvertently or intentionally.

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      Last modified: 03 Oct 2019QC 59986