Methodology for estimating the GST gap

Five-step top-down method

We use a 5-step top-down methodology to estimate the goods and services (GST) gap.

Step 1: Compile GST-able consumer spending

The main information used to construct the theoretical GST base is the Household Final Consumption Expenditure data compiled by the Australian Bureau of Statistics (ABS). This is a comprehensive measure of consumer spending.

We remove specific expenditures included in the ABS measure of consumer spending but for which GST concessions or exemptions apply. These expenditures are not part of the estimated theoretical GST base. We base our estimates of these expenditures on Treasury estimates of GST foregone by policy decisions to exempt or concessionally tax certain spending.

Adjustments are made to account for the different treatment of spending associated with international travel.

An adjustment is made to uplift the ABS estimates of shadow economy spending by consumers broadly into line with the more contemporary estimates published by the Black Economy Taskforce in 2017.

Step 2: Add estimates of other components of the GST

There are other components of the GST base which are not part of the ABS measure of consumer spending; but which are subject to the GST. These need to be quantified and separately added into our estimate of the GST base. These include:

• the value of dwelling completions and alterations and additions (both based on ABS published data)
• consumers' share of ownership transfer costs based on ABS data
• an estimate of land sales.

Step 3: Determine theoretical GST liability

The total theoretical GST base estimated above includes the GST (which equals 10% of the GST exclusive price).

We estimate the total theoretical GST liability by dividing the theoretical GST base by 11 (given the fixed GST rate of 10% is incorporated in the estimated GST base).

Step 4: Estimate the net gap

We subtract the actual GST liabilities reported on an accrual basis, including our compliance activities, from the theoretical total GST liability to estimate the net gap.

Mature non-pursuable debt relates to tax liabilities that we believe will never be received by the ATO. Initially all debt, including mature non-pursuable debt, is included in the GST liabilities reported on an accrual. Non-pursuable debt is considered part of the net gap and therefore, we add our best estimate of non-pursuable debt to estimate the net gap including debt. This is the most accurate measure of the tax gap for GST.

Step 5: Estimate the gross gap

Actual GST revenue under the economic transaction method (ETM) framework included the additional liability generated by ATO compliance actions. Hence, we need to add back any compliance amendments to derive the gross tax gap. The gross gap therefore is an estimate of the tax gap before the impact of ATO compliance activity.

The gross tax gap (including debt) is obtained by adding to the net tax gap an estimate of the likely mature level of liabilities raised from ATO compliance activities.

Some of the key assumptions of the methodology include that:

• ABS estimates of consumer spending reliably capture spending by all consumers and households in the observed economy
• Taxation expenditures published annually by Treasury are a reliable indicator of GST foregone associated with policy decisions and can be reliably grossed-up to quantify spending that does not attract the GST. This ensures that our estimates of the GST base align with Treasury estimates of tax foregone on spending not subject to the GST
• Estimated average value of house and land transfers in the ABS data on all transfers is a reliable proxy for the average value of new house and land transfers
• Uplift to the shadow economy adjustment made by the ABS in their published estimates of HFCE reliably captures the impact of the shadow economy on the theoretical GST base
• Share of dwellings construction in aggregate construction is a reasonably reliable way to apportion aggregate ownership transfers costs to consumers
• No adjustment is made for any timing mismatch between the purchase of inputs and the economic activity (final consumption) generating payment of the associated net GST paid to the ATO.

Summary of the estimation process

Table 2a to Table 2e provide a summary of each step of the estimation process and the results for each year from 2018–19 to 2023–24.

Find out more about our overall research methodology, data sources and analysis for creating our tax gap estimates at Principles and approaches to measuring gaps.

Limitations

The GST top-down tax gap model relies on various economic aggregates published by the ABS to construct an estimate of the GST base. The reliability of the gap estimates therefore depends on the accuracy and completeness of that data. National accounts data includes a margin of error which imposes some limitations on gap estimates.

Specific issues include:

• Sampling and non-sampling errors may exist
• Underlying data is subject to routine revision by the ABS, which can change the gap estimates and vary historical trend
• Timing differences can exist between the national accounts and GST treatment for certain supplies.

The latest ABS annual national accounts data were released in October 2024 with the ABS revising their previous estimates of consumer spending.

The GST effect of concessions and exemptions are identified and estimated in the annual Treasury Tax expenditures and insights statement. The statement estimates can have a wide range and are not exhaustive, with only major exemptions and exceptions identified.

Updates and revisions to previous estimates

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

• improvements in methodology
• revisions to data (both internal and external)
• additional information becoming available.

This program we have identified better data to estimate the component of the theoretical GST base associated with house and land sales. The improved data significantly increases the value of the land component included in the estimated theoretical GST base; resulting in higher gap estimates than previously published.

The Australian Bureau of Statistics (ABS) regularly updates and revises its estimates of consumer spending, dwelling investment and other aggregates used to construct the GST base. Incorporating these latest data into our gap calculations also results in revisions to our gap estimates.

The ABS generally revise their published estimates for the prior 3 years. However, they also periodically undertake more comprehensive reviews benchmarking against other independent data and resulting in more extensive revisions.

The effects of these changes to methodology and underlying data on our gap estimates are demonstrated in Figure 2.

Figure 2: Effect of data and methodological changes on GST net gap estimates, share of theoretical GST liability, 2014–15 to 2023–24

This data is set out in Table 3, shown as a percentage of theoretical GST liability.