Methodology for estimating the alcohol tax gap

Method to estimate the alcohol tax gap

We use a 5-step bottom-up channel analysis approach to estimate the alcohol tax gap. We consider the different channels where non-compliance can occur and make an estimate for each of these.

Step 1: Calculate gap associated with large manufacturers

A small group of large-scale manufacturers pay over 90% of the total alcohol collected each year. Given their contribution, we work closely with these taxpayers to maximise voluntary compliance. We draw on our understanding of their business arrangements to inform the overall estimate.

Step 2: Estimate gap for small manufacturers

We estimate the gap for small-scale manufacturers, sometimes referred to as micro-breweries and micro-distilleries, using risk analysis and operational intelligence. We apply the identified rates of non-compliance to our gap estimate each year.

Step 3: Estimate gap for large scale illicit activity

We estimate the amount of large-scale illicit alcohol activity from operational data and internal expert judgment. Using operational data, we identify the minimum amount of tax lost through large-scale illicit alcohol activity. We then use internal expert judgment to uplift this amount to account for large-scale illicit alcohol activity we assess is occurring but not detected. This is due to these entities operating in the shadow economy and therefore outside the system.

Step 4: Estimate gap for small scale illicit activity

We estimate the duty evaded from 2 key sources of non-compliance in relation to small scale illicit alcohol activity:

• illicit home distillation
• undeclared imports from international passenger arrivals.

For illicit home distilling, we use sales data on stills to estimate how much alcohol is produced. We apply assumptions around the volume produced by these stills over time.

For undeclared imports of alcohol (that are excess to international passenger concessions), we estimate a percentage of arrivals that did not declare their excess alcohol and the amount they carried. This allows us to calculate a volume imported and the customs duty evaded. Notably the fall in passenger numbers due to COVID-19 restrictions resulted in a reduced figure in the 2019–20 and 2020–21 years.

Step 5: Consolidate the estimate

The gross gap is the total of Steps 1 to 4. It does not consider any amendments or detections. We estimate the:

• theoretical liability by adding together tax reported and unreported tax
• gross gap by subtracting tax voluntarily reported and paid from the theoretical tax
• net gap by subtracting amendments from the gross gap.

Summary of the estimation process

Table 2 provides a summary of each step of the estimation process and the results for each year.

Find out more about our overall methodology, data sources and analysis used for Principles and approaches to measuring gaps.

Limitations

Due to limitations with data, we rely on these assumptions:

• Given the nature of illicit alcohol activity, it is difficult to estimate the amount that it contributes to the gap. To overcome this, for
  • large scale-illicit alcohol activity – we rely on operational data and apply an uplift which is informed by expert judgment
  • small-scale illicit alcohol activity – we apply several assumptions based on research and other data.
• Customs duty paid on alcohol is collected by the Department of Home Affairs. While we can use customs data for parts of our estimate, there are still components of the estimate which relate to non-compliance with paying customs duty which we have limited data for. These limitations mean that we rely on assumptions when forming our estimate.

Accounting for the shadow economy

The large and small illicit alcohol activity components of the gap are attributed to the shadow economy. This captures activity where the participants are deliberately avoiding their obligations to pay duty.

Updates and revisions to previous estimates

Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:

• improvements in methodology
• revisions to data
• additional information becoming available.

Figure 2a: Current and previous net tax gap estimate ranges, 2015–16 to 2023–24

Figure 2b: Current and previous net tax gap estimates, 2015–16 to 2023–24

The data for both figures is presented in Table 4.