• 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 businesses were fully compliant with the existing laws.

    In 2014–15, 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, currently, 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 clients 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
    • helping clients to understand their responsibilities through education
    • through compliance activities, correcting clients who do not get it right.

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    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 WET gap has been estimated 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 relates to both WET payable and 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.

    Trends and latest findings

    The current WET payable gross gap estimate for 2014–15, based on the results of the REP, was $14 million (the WET gross gap is $5.8 million, inclusive of WET refundable). This is in line with the latest estimate for 2012–13 of $8 million.

    The net tax gap estimate for WET payable remains steadily below 6% and the dollar value of the gap 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 for the first time. As a result, the estimates for 2014–15 are of medium reliability.

    The following table shows the tax reported, adjustments, and gross and net WET payable gap estimates for the period 2010–11 to 2014–15.

    WET historical payable amounts and net amounts ($ millions), 2010–11 to 2014–15 (a) (b)

    Gap

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    Tax reported

    958

    971

    1,090

    1,097

    819

    Gross gap

    42

    55

    8

    73

    5.8

    Adjustments

    1

    4

    2

    4

    1.2

    Net gap

    41

    51

    6

    70

    4.7

    Gross gap (%)

    4.2%

    5.4%

    0.8%

    6.3%

    0.7%

    Net gap (%)

    4.1%

    4.9%

    0.5%

    5.9%

    0.6%

    (a) Gap estimate for WET payable only from 2010–11 to 2013–14. 2014–15 includes WET payable and WET refundable. Amounts and percentages may not reconcile due to rounding.
    (b) 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.

     

    The graph below shows the trend in tax reported and the WET gap over the same period.

    Amount reported and net gap – WET payable, 2010–11 to 2014–15 (a)

    Graph: This graph provides a visual representation of the trend of the WET reported and net WET gap. This information is provided in the table listed earlier in this document.

    (a) Gap estimate up to 2013–14 for WET payable. 2014–15 includes WET payable and WET refundable.
    Data sources: Department of Immigration and Border Protection, ABS, IBISWorld and ATO data.

    ATO action to reduce the gap

    Several known schemes are affecting the size of the gap. These typically involve manipulating sales values to lower the amount of WET payable.

    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:

    • under-reporting WET sales
    • undervaluing wine for WET payable
    • overvaluing wine for WET producer rebates
    • incorrect quoting
    • diversion of product reported as exports to local retail
    • misclassification of imports.

    Despite this, WET payable is relatively low risk. As it is reported on 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 reason for WET payable revisions are:

    • clerical errors
    • using wrong reports to generate amounts reported in activity statements
    • using GST inclusive figures to calculate WET.

    The producer rebate is also an area of concern. The largest liability cases all addressed 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. Tax gap issues for WET payable also remain in scope for compliance improvements. Legislative reforms to improve the integrity of the producer rebate were passed in August 2017.

    Our focus for WET compliance is on WET claims – mainly producer rebate claims.

    Our goal is to improve compliance and have the correct amount of WET reported. We are pursuing several strategies to address WET compliance. These include:

    • 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
    • conducting a higher proportion of reviews on a broader selection of the WET population as pre-issue cases
    • using analytic models to identify high-risk activity statements, and conduct reviews and audits.

    Our strategies to address non-compliant behaviour have been effective in raising liabilities. However, we observe that entities are liquidating and restarting as new companies, leaving behind insolvency debts.

    Voluntary compliance ratio

    The voluntary compliance ratio (VCR) complements the WET gap by measuring the proportion of taxpayers fully compliant with all four pillars of compliance (registration, lodgment, reporting and payment). To be fully compliant, the taxpayer must:

    • be correctly registered
    • lodge by the required due date
    • report the correct amount of tax
    • pay the amount on time.

    The proportion of taxpayers voluntarily complying with their obligations and the value of WET remitted voluntarily are important indicators of the health and community confidence in the income tax system.

    Measuring the VCR

    For the purposes of calculating the VCR, a taxpayer that fails to comply with any of the four pillars of compliance is deemed to be non-compliant. It is a fail-one, fail-all test. For example, Taxpayer A is correctly registered for WET, lodges their BAS on time, correctly reports their liabilities but fails to pay by the due date. This taxpayer will not be considered to be voluntarily complying with all of their tax and related obligations and is excluded from the VCR.

    The WET voluntary compliance ratio is measured at two levels:

    • Taxpayer level – the proportion of taxpayers who completely meet all their obligations for the financial year.
    • Value level – the amount of WET, by throughput value, that is voluntarily provided to us in accordance with the law.

    VCR trends and latest findings

    Overall we see that the level of voluntary compliance at the taxpayer level has been stable in the last three years at around 63%. At the tax-value level we see that trends remain steady at 85%.

    Voluntary compliance ratio, 2011–12 to 2014–15

    Graph: This graph is a visual representation of the voluntary compliance ratio percentage from 2011-12 to 2014-15 by taxpayers and WET value.The trend is relatively stable around 80 to 90 percent for WET value, and around 60 percent for taxpayers.

    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 businesses were fully compliant with the existing laws.

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

    Selecting the methodology

    The 2014–15 WET gap has been estimated from the results of an enquiry program (REP). 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 producer rebate 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 will be extrapolated to the respective population strata.

    Step 2: Apply estimate for non-detection

    For the resulting gross gap in Step 1, we 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 positive 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.

    This diagram displays the gross and net gap percentages from 2010–11 to 2014–15

    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.

    Table 1: Summary of gap estimate from 2010–11 to 2014–15 ($ millions)

    Gap

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    Gross gap

    42

    55

    8

    73

    5.8

    Net gap

    41

    51

    6

    70

    4.7

    Gross gap (%)

    4.2%

    5.4%

    0.8%

    6.3%

    0.7%

    Net gap (%)

    4.1%

    4.9%

    0.5%

    5.9%

    0.6%

    Table 2: Summary of estimation process ($ millions)

    Step

    WET estimate

    Extrapolate to population

    4.68

    Non-detection error

    1.17

    Gross gap

    5.84

    Compliance results

    1.19

    Net gap

    4.65

    Tax reported

    819

    Total theoretical liability ($)

    825

    Gross gap (%)

    0.7%

    Net gap (%)

    0.6%

    Limitations

    The precision of the tax gap estimate is affected by the sample size and the variability in the magnitude of the non-compliance found in the sample. The estimates will have wide confidence intervals if there is large variability with a small sample size.

    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 this WET tax gap estimate it is assumed that non-payment is zero.

    Definitions

    WET payable

    Amounts of WET that an entity registered for WET is liable to pay the ATO 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.

    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

    The estimate is based on a random sample of taxpayers, resulting in an unbiased estimate of the gap.

    The reliability of the estimate is assessed as medium.

      Last modified: 30 Oct 2017QC 53166