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  • Wine equalisation tax gap

    The wine equalisation tax (WET) gap is the difference between WET payments and WET refunds, and the amounts that should have been reported if all taxpayers were fully compliant with the existing laws.

    In 2014–15 and 2015–16, we have estimated the net WET tax gap. This is made up of WET payable minus WET refundable. In previous years, we estimated the WET payable gap only.

    WET applies to wine (and selected products such as cider) consumed in Australia. It generally applies at the last wholesale sale (where the sale is to a retailer), but also applies to direct sales from wine producers to consumers.

    The WET system also includes a producer rebate scheme which entitles wine producers to a rebate of up to $500,000 per financial year. This effectively makes the first $1.7 million of domestic wholesale sales exempt from WET.

    The maximum producer rebate will reduce to $350,000 from the 2018–19 financial year.

    The tax gap may occur for a variety of reasons. There may be taxpayers who should be – but are not – registered. Additionally, some taxpayers may claim WET credits or the producer rebate when they are not entitled.

    We are focussing on reducing non-compliance through:

    • monitoring and assurance, including refund integrity, claim and payment trends as well as specific high risk areas
    • educating taxpayers to help them understand their responsibilities
    • compliance activities, correcting taxpayers who do not get it right.

    Find out about:

    See also

    Measuring the gap

    We calculate the WET gap estimate using two methods.

    The WET gap estimates for 2010–11 to 2013–14 were produced using a top-down method. This methodology estimates the total domestic sales value of products subject to WET. These estimates relate to WET payable only.

    The 2014–15 and 2015–16 WET gap estimates have been produced from the results of a bottom-up random enquiry program (REP), which randomly sampled the population of taxpayers who were registered for WET. The REP improved the reliability and scope of the gap estimate. Unlike the previous top-down method, this estimates net WET gaps (WET payable less WET refundable).

    These estimates do not measure the policy gap (that is, the revenue impact of legislated concessions and other tax and transfer benefits).

    The reliability of this estimate is assessed as medium.

    Random enquiry program

    To undertake our REP, we randomly select a sample of taxpayers who undergo a comprehensive audit.

    Once we have gathered information from the REP, we estimate the gap by using the incidence rate of amendments and mean value of amendments resulting from non-compliance. Amendments refer to the changes we make to items on a business activity statement (BAS) to correct identified errors as part of the review process.

    This method provides insights, not only into the value of non-compliance but also into the proportion of the sample (and by extension the population) that is incorrectly reporting.

    We selected 184 taxpayers in the WET active population for this REP that was stratified based on their WET throughput in the 2014–15 year. This ensured an appropriate representation of the population being assessed.

    The wine equalisation tax gap reflects the compliance gap. That is, it is an estimate of the net WET revenue which is not collected as a result of taxpayers failing to comply with the law at the time, whether inadvertently or intentionally.

    Trends and latest findings

    The current WET gross gap estimate for 2015–16, based on the results of the 2014–15 REP, was $6.2 million. The net gap estimate for WET is relatively small compared to some other taxes.

    The previous top-down gap estimates have been volatile over time and may not be reliable in future. The REP has enabled us to include wine producer rebates in the estimates. The estimates for 2015–16 are of medium reliability.

    The following table shows the tax paid, amendments, and gross and net WET gap estimates for the period 2010–11 to 2015–16.

    WET historical payable amounts and net amounts ($ millions), 2010–11 to 2015–16

    Gap

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Gap basis

    payable

    payable

    payable

    payable

    net

    net

    Tax paid

    959

    975

    1092

    1101

    822

    896

    Gross gap

    42

    55

    8

    73

    7

    6

    Amendments

    2

    4

    3

    4

    6

    2

    Net gap

    41

    51

    6

    70

    1

    5

    Gross gap (%)

    4.2%

    5.4%

    0.8%

    6.3%

    0.8%

    0.7%

    Net gap (%)

    4.1%

    4.9%

    0.5%

    5.9%

    0.1%

    0.5%

    Note:

    • Gap estimate for WET payable only from 2010–11 to 2013–14. 2014–15 and 2015–16 include WET payable and WET refundable. Amounts and percentages may not reconcile due to rounding.
    • Additional changes from previously published estimates are due to revisions to ABS data, updated ATO data and a modified approach to determining liabilities reported but not paid.

    Amount paid and net gap, 2010–11 to 2015–16

    This graph shows the trend in tax paid and the WET gap over the same period.

    Graph shows the trend in tax paid and the WET gap over the period 2010-11 and 2015-16.

    Note:

    • Gap estimate up to 2013–14 for WET payable. 2014–15 and 2015–16 include WET payable and WET refundable.
    • Data sources: Department of Home Affairs, ABS, IBISWorld and ATO data.

    This diagram displays the gross and net gap percentages from 2010–11 to 2015–16

    Graph: This graph provides a visual representation of the trend in percentage terms of the gross WET gap and net WET gap. This information is provided in the table listed after this graph.

    ATO action to reduce the gap

    Incorrect reporting and payment of WET is a significant risk. Simple errors or lack of awareness regarding WET obligations may be contributing factors. However, deliberate non-compliance is also an issue. We have observed non-compliance with:

    • claiming producer rebate when not entitled
    • claiming producer rebate on exported wine
    • incorrect quoting and inadequate quotation documentation
    • overvaluing wine for WET producer rebate
    • accounting for WET on wine for own use.

    Despite this, WET is relatively low risk. As it is reported on the BAS, it generally aligns with under-reported GST income and is identified and treated in that way.

    An assessment of recent cases show the most common reasons for revisions are:

    • incorrectly claiming WET producer rebate or WET credits
    • clerical errors
    • using wrong reports to generate amounts reported in activity statements
    • using GST inclusive figures to calculate WET.

    The largest liability cases all addressed deliberate schemes to over claim the producer rebate. Although the amount of revenue at risk is relatively low, the existence of those schemes is well known.

    WET is subject to regular scrutiny and reform efforts. Legislative reforms to improve the integrity of the producer rebate were passed in August 2017. Some of the WET changes are expected to reduce the WET gap. The producer rebate cap has been reduced and eligibility rules for producer rebate tightened.

    Our goal is to improve compliance and have the correct amount of WET reported. The WET compliance strategies will focus on:

    • providing education and support for new and existing registrants to ensure they report with a good understanding of their obligations particularly in light of recent legislative changes
    • increased help and education activities to provide assistance and information about the WET reform changes.

    Methodology

    WET applies to wine consumed in Australia. It is generally applied at the last wholesale sale (where the sale is to a retailer) but it also applies to direct sales from wine producers to consumers.

    WET payable on wholesale sales is calculated by applying the rate of 29% to the taxable value, and it is usually paid by wholesalers, producers or importers. Overpaid amounts are refundable.

    The wine equalisation tax system also includes a producer rebate scheme which entitles wine producers to a rebate of 29% of the taxable wholesale value of eligible domestic sales. The maximum rebate amount is $500,000 per financial year, effectively making the first $1.7 million of domestic wholesale sales exempt from WET.

    The maximum producer rebate will reduce to $350,000 from the 2018–19 financial year.

    The WET gap is the difference between WET payments and refunds and the amounts that should have been reported if all taxpayers were fully compliant with the existing laws.

    Here we outline the methodology we have selected to estimate the WET gap. We detail our assumptions, limitations, data sources and reliability rating as assessed by our independent expert panel.

    Selecting the methodology

    The 2015–16 WET gap has been estimated from the results of the 2014–15 REP. The results remain valid as the WET system has not had any major changes subsequent to the REP. We plan to use the results for three years. Previously, the WET gap estimates for 2010–11 to 2013–14 were produced using a top-down method.

    By introducing the new bottom-up REP program, we are able to estimate WET refundable in addition to WET payable when estimating the WET gap.

    In addition to expanding the scope of the estimate, the REP also improved the reliability of the gap estimate. The previous top-down gap estimates have been volatile over time and may not be reliable in future. This is primarily due to changes in the underlying datasets and some changes to assumptions.

    This approach has been endorsed by the independent expert panel. It is considered the most appropriate given the nature of the market, the design of the tax and the data available.

    Applying the methodology

    There are four steps in applying the bottom-up methodology to estimate the WET gap, as shown in the below figure. These steps are then described in more detail.

    Steps to estimate the WET tax gap

    The four steps to estimate the WET tax gap are:  Step 1: Estimate unreported amounts of the sample and extrapolate to population. Step 2: Apply estimate for non-detection. Step 3: Add Steps 1 and 2 to determine the WET gross gap. Step 4: Subtract Compliance outcome from Step 3 to detrmine the WET net gap; add Tax voluntarily reported and paid to Step 3 to estimate theoretical liability.

    The random enquiry program randomly sampled the population of taxpayers who were registered for WET. The REP assesses five strata based on WET throughput (the sum of Labels 1C and 1D, that is, WET payable and WET refundable, on the business activity statement).

    Step 1: Estimate unreported amounts for sample and extrapolate to population

    This is the main step which identifies the mean and incidence rate of amendment for taxpayers from the REP. Next this is extrapolated to the relevant population.

    All top ten WET payers are individually assessed and form a single stratum. As for the remaining four strata, samples were taken from each and the results are extrapolated to the respective population strata.

    Step 2: Apply estimate for non-detection

    For the resulting gross gap in Step 1, we calculate an uplift based on the non-detection uplift factor.

    Step 3: Estimate gross gap

    Next, we add the results of Step 1 to Step 2 to arrive at the gross gap estimate.

    Step 4: Estimate net gap and theoretical liability

    The final step takes the gross gap from Step 3 and deducts the compliance outcomes and voluntary disclosure amounts (sum of all amendments) to arrive at the net gap estimate. We then add the gross gap from Step 3 to the tax voluntarily reported and paid amount to estimate the theoretical tax liability.

    Summary of estimation process ($ millions)

    Step

    WET estimate

    Step 1: Extrapolate to population

    4.98

    Step 2: Non-detection error

    1.24

    Step 3: Gross gap

    6.22

    Step 4.1: Compliance results

    1.68

    Step 4.2: Net gap

    4.53

    Step 4.3: Tax paid

    896

    Step 4.4: Total theoretical liability ($)

    901

    Step 4.5: Gross gap (%)

    0.7%

    Step 4.6: Net gap (%)

    0.5%

    Limitations

    • The precision of the tax gap estimate is affected by the sample size and the variability in the scale of non-compliance found in the sample. The estimates will have wide confidence intervals if there is large variability with a small sample size. For this population, the relative large size of the sample and the relatively small confidence interval gives us assurance that the results produced by this estimate are reliable and credible.
    • The extent of non–detection is unknown and is extremely challenging to measure. We use a figure based on expert opinion and operational data.
    • For the current model it is difficult to isolate WET debt that is irrecoverable and uneconomical to pursue from other elements in the client accounts. Therefore for the WET tax gap estimates for 2014–15 and 2015–16 it is assumed that non-payment is zero.
    • Similarly, the calculation of the impacts of the back economy on WET revenue is difficult to measure. For this estimate, we have included an amount within the non-detection estimation for black economy activity. This amount however is small, and is in keeping with expert opinion that black economy activity, where present, is infrequent and irregular, and would have a negligible impact on the WET gap. We have not provided an estimate of the impact of black economy activity in this estimate.

    Definitions

    WET payable

    Amounts of WET that an entity registered for WET is liable to pay us in a reporting period.

    WET refundable

    Amounts of WET that an entity is entitled to claim a credit for in a reporting period.

    WET producer rebate

    Wine producers may be entitled to a credit (rebate) of the WET amount they have paid on a wine dealing, or the amount of WET they would have paid had the buyer not quoted, up to a maximum of $500,000 each financial year (2015–16).

    Data sources

    We used the following ATO and external data sources:

    • ATO compliance data of WET compliance cases
    • results from the random enquiry program of the WET population
    • ATO data of WET reported in lodged business activity statements.

    Reliability assessment

    Our estimate of the WET gap has been assessed by an independent expert panel, as described in our Principles and approaches to measuring gaps document.

    Based on advice from the independent expert panel, the reliability rating for the wine equalisation tax gap estimate is medium.

    We take the results from the random enquiry program, and project those results over the total lodged population of taxpayers, including those who lodge late. Both WET payable and refundable is investigated to ensure taxpayers are correctly reporting and paying WET liabilities as well only claiming the amount of WET rebate they are entitled to claim. Taxpayers are also checked to ensure all business activity statements are lodged.

    The key assumption with the random enquiry program is that the observations of the sample apply to the population. We have stratified the sample to ensure it is representative given the small population.

    See also:

      Last modified: 26 Oct 2018QC 57167