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  • The performance of the tax system

    Understanding the tax gap allows us to understand the overall performance of the tax system. Viewing the performance of the tax system with the economic environment at the time, enables us to better understand what may have influenced performance.

    This year we have a complete view of the overall tax base with gap measures in place for the 2017–18 financial year. In 2017–18, tax collections were $423 billion with strong growth in the year coming from company tax collections.

    A part of the reason for the growth in the tax base was the strength of the Australian economy. 2017–18 was the 27th consecutive year of economic growth, characterised by strong labour market conditions with low unemployment, robust export growth and low inflation. This economic environment produced positive business conditions which saw company profits and business investment levels soar.

    Combined with our successful enforcement activity, through the establishment of the Tax Avoidance Taskforce and extension of the multinational anti-avoidance law (MAAL), company tax collections grew significantly. In addition, preparations had begun to implement the new Black Economy Taskforce to combat the effects of the shadow economy.

    Total individuals tax collections also rose considerably, partly due to strong employment growth and increased labour force participation. Older workers were encouraged to delay leaving the labour force by favourable labour market conditions along with structural factors including increases to the age pension and preservation ages. In 2017–18 we also expanded our work-related expenses program to include 'nudge' messages through myTax to encourage taxpayers to review claims when preparing their tax returns. Higher total income tax collections were also driven by increased capital gains tax (CGT) receipts as most super funds had largely exhausted their accumulated capital losses.

    Above average consumer sentiment and modest growth in household consumption boosted goods and services tax (GST) collections in 2017–18. Correspondingly, several tax integrity measures were introduced to combat GST avoidance and abuse of small business CGT concessions, particularly in the precious metals and property industries.

    There are nine income tax gaps and six transactional tax gaps that together give us complete coverage of the tax and superannuation systems. For the 15 published tax gaps, we see $423 billion in overall tax paid for 2017–18 and a resulting tax gap estimate of $31 billion. This gives us an overall estimate of published gaps of 7%. This indicates that for 2017–18, over 93% of tax we expected to receive was received, the bulk of which was voluntary (see Figure 1).

    Figure 1: Tax performance for published tax gaps in 2017–18

    Figure 1: Doughnut chart reflecting tax paid of 93% and a tax gap of 7%.

    When we review each tax gap individually, it reveals that in 13 out of the 15 tax gaps we are collecting more than 90% of the tax that we would expect to collect if everyone was fully compliant with the tax law. This doesn't mean non-compliance doesn't exist or that we are not targeting specific areas. More detail about the drivers for each tax gap and what we are doing about it is explained in the web document for each tax gap.

    Figures 2 and 3 below show a breakdown of the tax performance ratios for the 15 tax gaps. Figure 2 includes both indirect taxes on goods and services and excise taxes. Figure 3 includes all income-based taxes.

    Figure 2: Tax performance for transaction-based tax gaps in 2017–18

    Figure 2: Bar graph depicting the tax performance for transaction-based tax gaps all ranging at over 90%.Figure 3: Tax performance for income-based tax gaps in 2017–18

    Figure 3: Bar graph depicting the tax performance for income-based tax gaps with Fringe benefits tax sitting at 79% and all others sitting at 80% or higher.

    Comparing tax gap estimates at one point in time can be problematic when you consider each tax gap is an estimate with a different reliability rating. For this reason, we always recommend viewing tax gap estimates over time. We suggest a focus on the longer-term trend rather than an estimate of any one year.

    With the full release of the all 15 income and transactional tax gap estimates, we are now able to view the performance of the tax system over the past three years. The tax gap, as a percentage of the amount of tax revenue that should be collected, has reduced in each of the past two years. Some of the results contributing to this reduction in the overall tax gap are:

    • the small business tax gap reduced from 12.2% in 2015–16 to 11.5 % in 2017–18
    • the goods and services tax gap reduced from 8.2% in 2015–16 to 7.3% in 2017–18
    • the individuals not in business income tax gap has improved, falling from 6.2% in 2015–16 to 5.6% in 2017–18.

    Figure 4: Tax gap trend from 2015–16 to 2017–18

    DE-24869_Australian-tax-gaps-overview_Fig4 Figure 4: Image showing the three-year trend for the overall tax gap declining to 6.9% in 2017–18.

    Other key measures

    The health of the tax system is supported by other key measures. One such measure is tax assured which is a measure of how confident we are that the tax reported is correct. Based on concepts of justified trust and verifying taxpayer reported data with third party data, we are highly confident that 48% of the total tax reported in 2017–18 is correct. For the remaining 52%, we use our risk management approaches to give us confidence that the right amount of tax is being paid, and where it isn't, we take measures to address that. Through data matching via the PAYG withholding system, we know that 93% of all salary and wages reported by individuals are correct. One-on-one engagement with large businesses gives us assurance the $25 billion of income taxes they report is correct.

    Another measure of the performance of the tax system is the measure of the impact of our activities on the performance of the tax system, which we call total revenue effects. In 2017–18, we reported 11.8 billion in audit yield as we sought to address issues that contribute to the tax gap. One of our goals is to improve taxpayer behaviour and to see that sustained into the future. We measure this sustained improvement in compliance and define it as the wider revenue effect. In 2017–18 we reported $4.2 billion in wider revenue effects. This represents additional revenue resulting from improved compliance from taxpayers treated through our interventions in previous years.

    Taken together, these measures tell us that the tax system is operating well, but not perfectly. Tax gaps do exist, but we are seeing:

    • high levels of voluntary compliance
    • positive changes in taxpayer behaviour
    • tax collected via audits when taxpayers aren't paying the right amount of tax.

    Tax gap estimates are what is known as a lag indicator, that is they measure the performance of the tax system in the past. The latest tax gap estimates (for 2017–18) are not affected by the impact of the COVID-19 pandemic which emerged in 2019–20. We anticipate future releases of tax gap estimates for 2018–19 to include the effects of COVID-19.

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      Last modified: 19 Oct 2020QC 53161