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  • Tax gap program summary findings

    The 2017–18 financial year is the most recent year with all tax gap estimates present. The overall tax gap for 2017–18 was $31.1 billion against the total expected tax of $454 billion, representing a net tax gap of 7%.

    Figure 6 shows the overall tax gap. The small business and individuals tax gap at $19.4 billion, represents the largest single component of the total tax gap, accounting for around 60% of the total net gap. However, small business and individuals, also account for 54% of the total expected income tax collected, at $245 billion out of $454 billion in 2017–18.

    Figure 6: Estimated total tax gap for 2017–18

    Figure 6: Chart showing overall tax gap of $31.1b (or 6.9%) comprising: small business $11.1b, individuals not in business $8.3b, goods and services tax $5b, large corporate groups $2b, excise $1.7b, high wealth and medium business $1.7b, other tax gaps $1.3b.

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    Tax views

    Tax gap estimates are derived at a population level rather than a tax type perspective. This requires us to have all estimates published to show these views. We now have tax gaps across the program aligned to the three years from 2015–16 to 2017–18. This means we can start to view the trends relating to specific types of tax. We continue to refine our estimates and will look to examining alternative views, such as taxpayer experience and behavioural perspectives presented by other jurisdictions.

    Personal income tax gap

    The personal income tax (PIT) gap consolidates all the income tax gaps relating to individual income tax returns. It includes the income tax gaps for:

    • high wealth individuals
    • individuals not in business
    • individuals in small business
    • individuals in medium business.

    Overall, we are seeing a shift towards reduced gaps across the majority of these measures, most significantly in the individuals not in business population. For this gap the estimate has started to decline as the new engagement strategies deployed in 2016–17 year begin to take effect.

    Figure 7: Personal income tax gap trend

    Figure 7: Chart showing the three-year trend for the personal income tax gap declining to 7.7% in 2017–18.See also:

    Corporate income tax gap

    The corporate income tax (CIT) gap consolidates all the income tax gaps relating to corporate income tax returns. It includes the income tax gaps for:

    • high wealth income tax gap
    • large corporate groups income tax gap
    • small business income tax gap
    • medium business income tax gap.

    With strong tax growth through the trend period we have seen the gap remain steady. Overall, we continue to see a general trend towards improved compliance engagement across the corporate taxes that are increasing the overall health of the corporate income tax system.

    Figure 8: Corporate income tax gap trend

    Figure 8: Chart showing the three-year trend for the corporate income tax gap declining to 5.6% in 2017–18.

    Income-based tax gaps:

    Goods and services tax gap

    The goods and services tax (GST) gap is our longest published estimate and a critical part of our tax system. The current analysis continues to use a top-down estimate derived from the Australian Bureau of Statistics (ABS) Australian National Accounts data. As such it provides a strong estimate but lacks the insights from a bottom-up approach that would allow us to examine its drivers. With the full program release we will be expanding on our insights into this tax in future releases.

    Overall through the three-year trend period aligned to other gaps, the GST gap has declined from 8.2% to 7.3%. Our published GST gap document provides the expanded analysis, including the 2018-19 year, as well as long-term trends.

    Figure 9: Goods and services tax gap trend

    Figure 9: Chart showing shows the three-year trend for the goods and services tax gap declining to 7.3% in 2017–18.

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    Excise and other taxes gap

    The final core pillar of the tax gap program is formed from the remaining nine tax gaps. These incorporate excise taxes and several smaller transactional and income-based taxes.

    Overall declines in the large super funds and fringe benefits tax gaps see this decline during the trend period. With only moderate gains in the tax base from this group, it does not materially impact the overall estimate.

    Figure 10: Excise and other taxes gap trend

    Figure 10: Chart showing the three-year trend for the excise and other tax gaps declining to 5.1% in 2017–18.

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    Shadow economy findings

    In our previous releases, we provided tax gap estimates for 'the black economy'. For tax gap purposes, we now refer to this as the 'shadow economy', in line with other jurisdictions internationally. Although these terms are often used interchangeably, the term 'shadow economy' is more commonly recognised when referring to tax.

    The Black Economy Taskforce final report examines the economic impact of underground production and illegal activity. The OECD definition of underground production covers economic activities that are productive and legal but are deliberately concealed to avoid payment of taxes or compliance with regulations (or both).

    For tax gap purposes, we focus on the tax effect of underground production. This means economic activities (whether legal or illegal), which are required by law to be fully reported to the tax administration but are not reported and therefore go untaxed. Internationally, these amounts are more broadly referred to as estimates of the shadow economy.

    Shadow economy estimates do not form a part of the aggregate $50 billion economic effect estimate by the taskforce for 2015–16. They more correctly represent taxes missing as a result of this unreported economic activity.

    The total amounts for transactional-based taxes or income-based taxes cannot be aggregated then compared to the economic estimate. They must be held apart. The most complete and aligned estimate for the shadow economy are the income-based estimates. This amount has fallen to $8 billion in the 2017–18 year, reducing the proportion of the shadow economy to only 2.4% of the income tax base.

    In aggregate, the shadow economy estimates have held steady across the three-year trend period. We estimate there are around $11 billion in missing taxes as a result of the shadow economy each year. The following features maintained the trend:

    • The relative growth in illicit tobacco is a key contributor to the overall amounts remaining steady over the period.
    • Declines in the small business income tax shadow economy amounts prevent the overall tax impact from increasing.
    • Additionally, our conservative estimate for hidden wages accounts for over $3 billion in employer obligations not accounted for in any one year.
    Table 4a: Shadow economy latest findings – transaction-based taxes

    Transaction-based program

    Shadow economy estimation

    Tax effect 2015–16

    Tax effect 2016–17

    Tax effect 2017–18

    Alcohol excise ($m)

    Illicit channels only

    522

    526

    552

    Tobacco excise ($m)

    All channels

    676

    1,136

    1,332

    GST ($m)

    1.5% of theoretical liability

    956

    1,002

    1,043

    Total transaction-based tax effect ($m)

    Total of above

    2,154

    2,664

    2,927

    Proportion of all transaction taxes (%)

    Ratio

    2.2

    2.6

    2.7

    Table 4b: Shadow economy latest findings – income-based taxes

    Income-based program

    Shadow economy estimation

    Tax effect 2015–16

    Tax effect 2016–17

    Tax effect 2017–18

    Small business ($m)

    Estimated using sample

    7,605

    6,718

    6,677

    Individuals not in business ($m)

    Estimated using sample

    1,480

    1,501

    1,476

    Total income-based tax effect ($m)

    Total of above

    9,085

    8,219

    8,153

    Proportion of all income taxes (%)

    Ratio

    3.0

    2.6

    2.4

    Table 4c: Shadow economy latest findings – administered programs

    Administered program

    Shadow economy estimation

    Tax effect 2015–16

    Tax effect 2016-17

    Tax effect 2017-18

    Superannuation guarantee ($m)

    1.2% uplift to wages

    800

    819

    856

    PAYG withholding ($m)

    1.2% uplift to wages

    2,174

    2,237

    2,364

    Total administered programs ($m)

    Total of above

    2,974

    3,056

    3,220

    Table 4d: Shadow economy latest findings – total published program

    Tax gap program

    Shadow economy estimation

    Tax effect 2015–16

    Tax effect 2016–17

    Tax effect 2017–18

    Transaction-based ($m)

    Various

    2,020

    2,307

    2,457

    Income-based ($m)

    Estimated using sample

    9,085

    8,219

    8,153

    Administered programs ($m)

    1.2% uplift to wages

    2,974

    3,056

    3,220

    Total tax gap program ($m)

    Various

    14,079

    13,582

    13,830

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      Last modified: 19 Oct 2020QC 53161