The payment gap and long-term non-payment
The tax gap estimates the difference between the amount of tax we expect to collect and the amount that would have been collected if every taxpayer fully complied with their obligations under tax law. The tax gap is made up of tax that has not been assessed (but should have been), and tax that has been assessed but is not expected to be paid, referred to as the ‘payment gap’.
The payment gap is drawn from our estimate of long-term non-payment, tax and superannuation liabilities reported to us but expected to remain unpaid after many years.
Long-term non-payment is an accrual measure, which helps us understand how much revenue related to a specific income year is unlikely to be collected. This differs from debt measures that reflect the total stock of outstanding debt at a point in time, regardless of the income year to which the debt relates. Additionally, long-term non-payment (LTNP) only captures tax revenue and superannuation obligations and excludes penalties and interest from the estimate.
This year, payment gap estimates are introduced into the tax gaps we measure to support a more comprehensive view of the impact of payment compliance behaviours, debt recovery outcomes, and the overall performance of the tax and superannuation systems.
Figure 1: Tax gap framework and payment gap
How debt becomes long-term non-payment
The journey from assessment to long-term non-payment can be broadly grouped into the following 3 stages from the end of the tax year.
Figure 2: Life cycle of long-term non-payment in the system
Stage 1: Assessments are processed
The tax year finishes, and at this stage, outstanding tax liabilities increase as lodgments are made and assessments are processed. Liability balances typically peak in around lodgment due dates.
Stage 2: Payments and credits reduce liabilities
Over time, outstanding liabilities are progressively reduced, through:
- voluntary payments
- payment arrangements
- credit transfers and offsets
- reversals or amendments to prior assessments
- debt collection and recovery activities.
Payment activity is strongest in the earlier periods following assessment.
Stage 3: Balances stabilise
As liabilities mature, fewer new assessments are raised, repayment activity slows. Eventually, the outstanding balance reaches a relatively stable position where there is little material change over time.
This stable residual balance is the foundation of the LTNP estimate.
For more recent years where liabilities have not yet fully matured, statistical projections are applied using historical repayment patterns to estimate the level at which the balance is expected to stabilise.
LTNP therefore measures the amount of assessed liabilities that are expected to remain unpaid in the long run (typically 10 years after the end of the tax period).
Why we measure long-term non-payment
Measuring long-term non-payment helps us understand the payment performance of the tax and superannuation systems. It provides insight into the extent to which taxpayers meet their obligations once liabilities have been correctly reported and assessed.