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  • Definitions

    The defined terms following are used specifically in relation to the small business income tax gap. Further definitions in relation to our broader tax gap program are available from Principles and approaches to measuring gaps.

    Black economy

    The black economy includes the 'cash economy' or 'non-observed economy'. The OECD refers to the 'economic underground'.

    The black economy involves economic activity not declared. This may be a result of attempts to avoid tax obligations.

    National Accounts data makes a small allowance for expenditure associated with the 'underground economy'. This includes cash economy transactions, transactions relating to other avoidance measures, and understating income in Australian Bureau of Statistics (ABS) surveys.

    Bottom-up approach

    A bottom-up approach involves a detailed examination of data sources. For example, tax returns, audit results, risk registers or third-party data-matching information. We then extrapolate the results to establish the extent of non-compliance across the whole population. From this we estimate the tax gap.

    This approach generally involves applying statistical techniques. These estimate the incidence of adjustment and the average value of non-compliance. A bottom-up approach is typically used for direct taxes, such as income tax.

    Individuals in business

    Individuals in business are commonly referred to as sole traders. Our definition includes individuals running a business and those with business connections. This can be through a company, partnership or trust.

    Non-detection

    Some errors are not identified in bottom-up methodologies. To fully estimate the gap, we increase the amounts that we do identify to account for the amounts we don’t. We refer to this increase as an 'uplift factor'. Non-detection is inherently difficult to estimate. We will revise the uplift factors applied as our methodologies improve.

    People outside the system

    We estimate a tax impact for people outside the system, meaning they do not lodge a tax return. This includes people who are registered in the tax and super system but fail to lodge a tax return. It also includes those who have not registered.

    Stratified sampling

    A type of statistical sampling method in which a population is divided into small sub-groups known as strata. The members within each strata will have shared characteristics that will be unique to that strata.

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      Last modified: 03 Oct 2019QC 59986