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  • Methodology

    The small super funds income tax gap estimate is derived through applying a bottom-up illustrative method.

    There are three steps in applying the bottom-up methodology to estimate this gap. These steps are expanded on below, followed by a summary of the overall estimate.

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    Step 1: Estimate unreported tax

    Unreported tax consists of the additional tax expected to be raised if we undertook compliance activity on the portion of the tax base not covered. It arises from incorrectly reported tax returns and has two components:

    • unreported tax from the lodged population
    • unreported tax from the non-lodged population.

    Factors are applied over the base to estimate the amount of expected amendments if compliance activity had been undertaken for the whole tax base and funds that are registered but have not yet lodged.

    A projection method was used to estimate the net and gross gaps for the 2017–18 year. The projection method bases the estimate on maintaining a broadly consistent gross gap percentage, by using the average of the 2016–17 and 2015–16 gross gaps in order to capture the recent trend.

    Step 2: Estimate non-detection

    We take the estimated unreported tax from Step 3 and uplift it to account for amounts that are not detected.

    Step 3: Calculate the gross gap and net gap

    In this step, we combine the amounts for amendments, unreported tax, and non-detection determined above, with non-pursuable debt, to obtain the gross and net tax gaps. The net gap is equal to the gross gap less amendments.

    We then add the gross gap to the tax voluntarily paid amount to estimate the theoretical tax liability. The gap percentages are calculated by dividing the gap estimate by the theoretical tax liability.

    Summary of the estimation process

    Table 3 provides the results at each step of the estimation process for each year from 2014–15 to 2017–18.

    Table 3: Applying the methodology – small super funds income tax gap

    Step

    Description

    2014–15

    2015–16

    2016–17

    2017–18

    1.1

    Lodged population

    519,977

    530,389

    538,718

    526,460

    1.2

    Registered population

    541,965

    562,217

    578,616

    580,719

    1.3

    Tax paid voluntarily ($m)

    1,475

    1,316

    1,414

    1,636

    2.1

    Amendments ($m)

    12

    12

    18

    12

    2.2

    Tax paid ($m)

    1,487

    1,328

    1,433

    1,647

    3.1

    Unreported tax: lodged ($m)

    5

    5

    8

    8

    3.2

    Unreported tax: not lodged ($m)

    <1

    <1

    1

    2

    4

    Non-detection ($m)

    16

    15

    24

    28

    5.1

    Non-pursuable debt ($m)

    3

    3

    3

    3

    5.2

    Gross gap ($m)

    36

    36

    54

    53

    5.3

    Net gap ($m)

    24

    24

    36

    41

    6.1

    Theoretical liability ($m)

    1,512

    1,351

    1,468

    1,689

    6.2

    Gross gap (%)

    2.4

    2.6

    3.7

    3.2

    6.3

    Net gap (%)

    1.6

    1.8

    2.4

    2.5

    Limitations

    Estimating the tax gap for small super funds is difficult, with inherent uncertainty. Tax issues and the tax law are complex and contestable. Further, our estimates do not account for differences where there are alternative views on the interpretation of tax law. In these circumstances, differences can exist between reasonably arguable positions presented by the ATO and taxpayers. Further to this, non-detection estimates are extremely challenging to measure.

    The current methodology provides an aggregated estimate of the small super funds tax gap. This may allow generalised comparisons with other taxes.

    The gap estimate is a lagging measure, as compliance results take several years to flow through. This is due to the complexity of the market and the elapsed time associated with finalising our compliance activities.

    The assumptions used to construct our estimate are informed by actual data and expert opinion. The insights from the aged random enquiry program are less relevant in the current period and require extensive review.

    The following caveats and limitations apply when interpreting this tax gap estimate:

    • For funds that we don't audit or review, we assume
      • a certain degree of non-compliance with tax law occurs
      • the degree of non-compliance in these groups is less than those we do audit or review due to our risk-based approaches to engagement.
       
    • For funds that we do audit or review, we assume
      • adjustments to their tax liabilities are representative of the value of non-compliance with tax law
      • we don't detect all instances of non-compliance
      • adjustments to their tax liabilities from completed audits and reviews are correct at law, at the time of estimation.
       

    Accounting for non-detection in the gap

    We account for non-detection by applying an uplift factor to the amendments amount. The uplift factor is based on international rates. The impact of non-detection on the small super funds income tax gap is $28 million in 2017–18.

    Updates and revisions to previous estimates

    Figure 3 below displays the gross gap and net gap from our current model, compared to the previous estimate for the 2014–15 financial year. The revised 2014–15 estimate differs from the original published version, primarily because of revised non-pursuable debt data. The dataset used in the original estimate included amounts which have since been classified as not belonging to small super funds non-pursuable debt.

    Figure 3: Current and previous small super funds net tax gap estimates, 2014–15 to 2017–18

    Figure 3: Graph showing the net gap estimates from previously published years as outlined in Table 4.

    This data is set out in Table 4 as a percentage.

    Table 4: Current and previous small super funds net tax gap estimates (percentage), 2014–15 to 2017–18

    Year published

    2014–15

    2015–16

    2016–17

    2017–18

    2018

    3.2%

    n/a

    n/a

    n/a

    2019

    1.1%

    1.5%

    2.0%

    n/a

    2020

    1.6%

    1.8%

    2.4%

    2.5%

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      Last modified: 19 Oct 2020QC 56336