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  • Methodology

    Income tax is payable by small super funds to the Australian Government based on their annual taxable income. Income tax for complying super funds is applied at a flat rate of 15% on taxable income. This is half that of the large company tax rate of 30%. Various exemptions and deductions mean that the taxable income for most funds is much lower than their gross or assessable income.

    The small super fund income tax gap estimate is the difference between tax paid by small super funds and the amount they should have paid. The gross gap is the amount prior to our active compliance activities and the net gap is the amount after compliance action.

    The gap estimate is made on the basis of the law as applicable for the relevant financial year. New or recent law changes will not be reflected in gap estimates.

    The methodology we have selected to estimate the theoretic net small super funds tax gap follows. We detail our assumptions, limitations, data sources and reliability rating as assessed by an independent expert panel.

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    Selecting the methodology

    The selection of methodology to produce an estimate depends heavily on the design of the tax system, the characteristics of the population, and the data available. In the case of income tax of small super funds, there are no aggregate macroeconomic measures suitable for estimating the value of a tax gap with sufficient reliability or accuracy. Therefore, the use of a top-down approach is not possible.

    In our previous approach to calculating the small super funds tax gap estimate, we used a random sampling method. However, due to a lack of recent sampling of the small super funds population, this method was not available to us for the current estimate.

    We examined bottom-up approaches based on extrapolating the results of ATO operational audits (that is, the amounts of non-compliance detected in audits of small super funds).

    Following consultation with our independent expert panel, we produced the estimate using a bottom-up model based approach to determine the value of under-reported income tax from small super funds. This draws together a detailed examination of data sources along with expert judgment and knowledge. It is used to provide a picture of the tax gap across the whole small super fund population.

    The bottom-up approach is considered most suitable given the nature of the market, the design of the tax, and the data available.

    Applying the methodology

    There are six steps in applying the bottom-up methodology to estimate the small super funds income tax gap. The steps are summarised in Figure 3 and then described in detail.

    Figure 3: Steps to estimate the small super funds income tax gap

    Figure 3: This image is a pictorial representation of the six calculation steps outlined in the text following this image. This image provides the names of the steps only.

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    Step 1: Determine tax paid voluntarily

    Income tax return data for all small super funds is obtained for the estimated years. The total tax paid for each year is the sum of tax payable for all funds from their original returns lodged for that year.

    Step 2: Calculate amendments

    The amendment for each fund is the final amount of tax payable for the year, minus the minimum amount of tax payable claimed by the taxpayer in the year (the minimum client-initiated amendment).

    Step 3: Estimate unreported tax

    Unreported tax consists of the additional tax expected to be raised if the ATO 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.

    Step 4: Estimate non-detection

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

    Step 5: 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.

    Step 6: Determine theoretical tax liability and calculate gap percentages

    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 2 provides the results at each step of the estimation process for each year from 2014–15 to 2016–16.

    Table 2: Applying the methodology – small super funds income tax gap

    Step

    Description

    2014–15

    2015–16

    2016–17

    1.1

    Lodged population

    517,155

    523,897

    517,570

    1.2

    Registered population

    542,325

    562,946

    580,214

    1.3

    Tax paid voluntarily ($m)

    1,472

    1,306

    1,362

    2.1

    Amendments ($m)

    7

    9

    13

    2.2

    Tax paid ($m)

    1,480

    1,315

    1,375

    3.1

    Unreported tax: lodged ($m)

    3

    4

    6

    3.2

    Unreported tax: not lodged ($m)

    <1

    <1

    1

    4

    Non-detection ($m)

    10

    11

    17

    5.1

    Non-pursuable debt ($m)

    4

    4

    4

    5.2

    Gross gap ($m)

    24

    29

    41

    5.3

    Net gap ($m)

    17

    20

    28

    6.1

    Theoretical liability ($m)

    1,497

    1,335

    1,403

    6.2

    Gross gap (%)

    1.6

    2.2

    2.9

    6.3

    Net gap (%)

    1.1

    1.5

    2.0

    Notes:Amounts are rounded, and therefore may not sum exactly.For the registered population, see Self-managed super fund quarterly statistical report – December 2018.

    Limitations

    Tax gap estimation 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 ATO compliance activities.

    The assumptions used to construct this illustrative estimate are informed by actual data and expert opinion.

    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 $17 million in 2016–17.

    Updates and revisions to previous estimates

    The following graph displays the gross gap and net gap from our current model, compared to the previous estimate for the 2014–15 financial year.

    Figure 4: Current and previous small super funds net tax gap estimates, 2014–15 to 2016–17

    Figure 4: This graph provides a visual representation of the previous and current net gap estimates provided at Table 3.

    The revised 2014–15 year estimate differs from the original published version. This is primarily due to the 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.

    Table 3 displays the net gap percentages published in 2019 compared with those published in 2018, over the period 2014–15 to 2016–17.

    Table 3: Summary of published small super funds net tax gap percentages

    Gap release year

    2014–15
    (%)

    2015–16
    (%)

    2016–17
    (%)

    2018

    3.2

    na

    na

    2019

    1.1

    1.5

    2.0

    Data sources

    ATO records we use to estimate the gap include results of audits, reviews and related activities (compliance activities), and demographic information extracted from income tax returns. This approach incorporates the:

    • value of adjustments – from compliance results
    • level of engagement – from the number of cases
    • value of tax reviewed by the ATO – the average coverage per case.

    Reliability

    Based on advice from the independent expert panel, the reliability rating for the small super funds income tax gap estimate is low.

    It uses a reliability assessment framework based on guidance provided by the International Monetary Fund's approach to gap estimation. Details of the assessment framework are described in Principles and approaches to measuring gaps.

    Our gap estimates remain sensitive to assumptions made, particularly to non-detection and the imputed result of compliance activities not undertaken. However, the underlying data and population coverage informing the estimates is high.

    We are looking to expand our data for future gap estimates. To facilitate this, we are considering the following activities:

    • recommencing the random enquiry program for the small super funds population, with further stratification of the population for sampling and methodology application
    • conducting a comprehensive quantitative assessment of risk for the small super funds population that is less reliant on historic compliance results
    • improving estimates for tax covered in the model with compliance activities linked with our tax assurance measures in addition to pre-lodgment cases
    • improving indicators of non-detection for small super funds.

    We are enhancing the way we record information on issues we detect and the tax effect of our compliance activities – both before and after tax return lodgment. This data will become increasingly comprehensive over time and will be integrated into our methodology.

    Figure 5: Reliability rating scale from very low to very high – small super funds income tax gap

    Figure 5: This image is a graphical representation of the reliability rating for the current small super funds income tax gap estimate. It graphically represents a rating of low, which is a score between 11 and 15. The maximum score is 30.

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      Last modified: 17 Oct 2019QC 56336