Goods and services tax
The goods and services tax (GST) is a broad-based consumption tax of 10% levied on the majority of goods and services sold in Australia. GST revenue is collected by the ATO and the Department of Immigration and Border Protection, then distributed to the states and territories.
There has been no change to the GST rate or significant changes to the regime since its inception on 1 July 2000. Under certain circumstances, businesses can claim tax credits for GST paid on items purchased and used in the business (termed 'input tax credits').
All sales of goods and services in Australia are taxable unless they are:
- an input taxed supply, where no goods and services tax is levied on the sale price and no input tax credits are allowed, or
- designated GST-free, such as basic food, some medical and educational expenses, and goods for export.
The GST gap is the difference between the amount of GST payable under the law (theoretical GST liability) and the amount actually collected by us (actual GST revenue) for a defined period, typically a financial year.
The gap can arise from a number of taxpayer behaviours. These include, but are not limited to, the non-reporting of GST, under-reporting of GST and over-claiming of GST refunds.
We adopt a top-down methodology to estimate the GST gap using a combination of ATO data and external data, such as:
- Australian Bureau of Statistics (ABS) National Accounts
- ABS Household Expenditure Survey
- Treasury Tax Expenditure Statements.
Actual GST revenue is calculated on an accrual basis, matching revenue to the income year in which the liability occurred, rather than to the income year in which the revenue is received. The economic transaction method is used; this is the revenue recognition basis applied for GST in ATO Financial Statements.
- any estimations made under the economic transaction method are immaterial
- the expenditures that we do not adjust for, or that cannot readily be measured and are not measured, have an immaterial impact on our gap estimates
- the limitations contained in external data sources are immaterial.
We use a top-down approach to estimate the GST gap which compares total GST liabilities for an income year with the theoretical total GST liabilities for that year.
The Australian GST system is a tax on final consumption expenditure on goods and services within the domestic economy. We apply the appropriate GST rate to the modified total household final consumption expenditure. This provides the theoretical total tax liability, which is compared to actual GST revenue to estimate the gap.
We adjust household final consumption expenditure data for concessions, exemptions and expenditures that are likely to have a material impact or can be readily measured.
We then add estimates of expenditure for the following items to household final consumption expenditure:
- new private dwellings investment expenditure
- consumer share of ownership and transfer costs
- a proportion of land sales
- net impact of international tourism.
We then remove specific expenditures included in household final consumption expenditure. These are expenditures for which GST concessions or exemptions apply or that fall outside the concept of household consumption. These include:
- expenditures that are exempt or concessionally taxed, such as food and education
- input taxed supplies, such as rent
- certain financial supplies and reduced input tax credits
- concessions for entities with turnover less than $75,000 ($150,000 for not-for-profit entities).
The residual amount is our estimate of total household final consumption expenditure that is subject to GST.
We then multiply this figure by the appropriate GST rate to determine the theoretical total GST liability.
We subtract the actual GST liabilities reported prior to ATO compliance activities and GST liabilities that are irrecoverable at law or not economical to pursue, from the theoretical total GST liability, to estimate the gross gap.
The net tax gap is obtained by subtracting the liabilities raised from ATO compliance activities from the gross gap figure.
The GST gap is estimated primarily on the basis of ABS National Accounts data. The reliability of the gap estimate therefore depends on the accuracy and completeness of that data. National Accounts data includes a margin of error and imposes some limitations on the estimate. Specific issues with the National Accounts data are:
- sampling and non-sampling errors may exist
- underlying data are subject to revision which can vary historical trend results and the estimated GST gap
- timing differences can exist between national accounts and GST treatment for certain supplies
- there is a time lag between the completion of a period and the publishing of National Accounts.
In addition, concessions and exemptions are identified and estimated in Treasury Tax Expenditure Statements. The Tax Expenditure Statement estimates can have a wide range and are not exhaustive, with only major exemptions and exceptions identified.
The GST gap estimate may not reflect the true level of under-compliance in the GST system as there is likely to be a degree of over-compliance. This may occur where taxpayers under-claim GST credits they are entitled to, or incorrectly classify supplies as subject to GST when they are actually GST-free. As a result, the real revenue gap using a top-down methodology may be understated.
We have not produced a confidence interval for the estimate of the GST gap. Each of the assumptions used in the top-down model has its own errors, many of which are unquantifiable.
The GST gap estimates are assessed to be of medium reliability. Data used to estimate the theoretical tax liability is derived from independent survey and incorporates a factor for the non-observed economy.
The methodology is based on the approach recommended by the International Monetary Fund and applied to value added tax (VAT) / GST gap estimation globally. We retain some concerns over the completeness of the tax base covered, and the estimates for concessional and exempt expenditure.
The GST system evidences over-compliance in certain areas. The ATO continues to work on estimating the value of over-compliance with GST and how to illustrate and integrate these results within the GST gap estimates.
We continue to refine our work on the GST gap by industry and by behaviour.