2022–23 overall tax gap
Our estimate for the overall tax gap for 2022–23 is $58.2 billion against our estimate of the total theoretical amount of $640 billion. This represents an overall net tax gap estimate of 9.1%.
Figure 6 shows the overall tax gap. The largest contributors (in dollar value) to the overall tax gap remain the same as last year.
Figure 6: Estimated total tax gap for 2022–23
The overall gap of $58.2 billion (or 9.1%) includes:
- small business $27.2 billion
- individuals not in business $12.5 billion
- goods and services tax $8.1 billion
- large corporate groups $3.7 billion
- high wealth and medium business $2.9 billion
- excise $1.6 billion
- other administrative tax gaps $2.2 billion.
Market segments
Australia's tax gap program estimates component tax gaps for various market segments. This is done to provide greater insights into the overall tax performance of these market segments. However, internationally, it is common for tax gaps to be grouped into 4 main groups – personal income tax, corporate income tax, value added tax (GST) and excise taxes. The following section brings together the relevant gap components according to those 4 groups.
Personal income tax gap
The personal income tax gap consolidates all the income tax gaps relating to individual tax returns.
It includes the income tax gaps for:
- High wealth individuals
- Individuals not in business
- Individuals in small business
- Individuals in medium business.
Overall, we are now seeing an upward trend in the personal income tax gap since 2019–20. The sole contributor to this is individuals in small business (sole traders) who are a component of the small business income tax gap. Since 2019–20, the net tax gap for individuals associated with high wealth groups, medium businesses and individuals not in business have all declined. The net tax gap for individuals in small business has increased from 14.7% in 2019–20 to 17.1% in 2022–23.
Figure 7: Personal income tax gap 2017-18 to 2022-23
|
Element |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|
|
Net gap % (RHS) |
8.9% |
9.7% |
9.4% |
9.7% |
10.1% |
10.3% |
|
Gross gap % (RHS) |
9.6% |
10.4% |
9.9% |
10.3% |
10.7% |
11.0% |
|
Tax expected to be collected ($ b) |
219,981 |
226,821 |
236,893 |
248,855 |
278,267 |
309,312 |
|
Net gap ($ b) |
21,365 |
24,338 |
24,552 |
26,740 |
31,098 |
35,511 |
Corporate income tax gap
The corporate income tax gap consolidates all the income tax gaps relating to corporate 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.
The overall corporate income tax gap estimate increased from 2019–20 to2021–22 driven by increases in the small company tax gap. The other components of the corporate income tax gap have remained steady over the same period.
Figure 8: Corporate income tax gap 2017-18 to 2022-23
|
Element |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|
|
Net gap % (RHS) |
5.8% |
5.5% |
5.3% |
6.1% |
7.0% |
7.1% |
|
Gross gap % (RHS) |
7.9% |
8.8% |
6.9% |
7.8% |
9.2% |
8.8% |
|
Tax expected to be collected ($ b) |
84,339 |
90,123 |
90,335 |
109,061 |
130,270 |
141,632 |
|
Net gap ($ b) |
5,219 |
5,218 |
5,014 |
7,145 |
9,797 |
10,789 |
Goods and services tax gap
The latest GST gap estimates indicate an increase in the estimated net tax gap to $8.7 billion in 2023–24, up from $8.1 billion in 2022–23. Measured relative to theoretical GST – which controls for growth in the GST system – the net gap is estimated to have increased from 9.1% in 2022–23 to 9.4% in 2023–24. The GST gap is returning to pre-COVID-19 levels after the reported declines in 2019–20 and also 2020–21.
Figure 9: Goods and services tax gap 2018-19 to 2023-24
|
Element |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
2023–24 |
|---|---|---|---|---|---|---|
|
Net gap % (RHS) |
9.0% |
7.3% |
4.5% |
6.4% |
9.1% |
9.4% |
|
Gross gap % (RHS) |
12.7% |
10.2% |
8.4% |
14.4% |
12.7% |
12.5% |
|
Tax expected to be collected ($ b) |
64,849 |
64,503 |
69,132 |
74,928 |
81,031 |
84,178 |
|
Net gap ($ b) |
6,421 |
5,046 |
3,271 |
5,086 |
8,113 |
8,722 |
Excise and other taxes gap
The remaining tax gap estimates include excise taxes and several smaller transactional and income-based taxes. Collectively they contribute $3.8 billion, or 6.5% of the total net tax gap for 2022–23. Fringe benefits tax (FBT), alcohol and fuel excise represent 90% of this total gap. Fuel excise is the most volatile estimate, where much of the variation in due to temperature sensitivity associated with measuring the volume of fuel, as opposed to actual changes in compliance.
Figure 10: Excise and other taxes gap 2017-18 to 2022-23
|
Element |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|
|
Net gap % (RHS) |
5.6% |
6.3% |
6.7% |
5.6% |
6.1% |
7.1% |
|
Gross gap % (RHS) |
6.4% |
7.9% |
7.5% |
6.1% |
6.4% |
7.3% |
|
Tax expected to be collected ($ b) |
44,720 |
41,539 |
44,870 |
56,965 |
48,222 |
50,286 |
|
Net gap ($ b) |
2,674 |
2,816 |
3,243 |
3,409 |
3,145 |
3,821 |
Shadow economy findings
The shadow economy refers to legal and illegal economic activity that is not reported or taxed.
The shadow economy is behavioural driven and is a result of opportunistic or deliberate actions to evade tax or exploit the regulatory system. These activities are not victimless crimes, they put pressure on Australians who are doing the right thing and have harmful consequences such as:
- workers missing out on their entitlements (for example, proper wages, leave or employee protection)
- honest businesses being undercut when others don’t pay the tax or superannuation they're supposed to
- criminal or illegal activities that are funding organised crime.
The shadow economy is constantly changing and adapting. In particular, the shadow economy can be impacted by new and emerging business models, changes in the way employees work, growth in the digital economy, technology advance, wider social changes and the broader economic environment. This can lead to new shadow economy activities emerging and some existing ones expanding in scale or scope.
If left unchecked, shadow economy participation can lead to a dangerous dynamic. It can foster a culture which legitimises and supports this participation, spurring its further growth. As tax revenues fall, those remaining in the formal economy may be faced with higher tax burdens, providing a greater incentive to move into the shadow economy. Most countries are grappling with shadow economy issues – Australia is not alone.
While the shadow economy is not limited to tax and superannuation, this is our focus in tax gap contexts. The tax effects of shadow economy activities are components of the tax gap which is measured against full compliance with relevant tax arrangements. For tax gap purposes, we focus only on the resultant tax effects – that is, the tax revenues lost due to shadow economy activities.
Most tax types will experience some behaviours that are indicative of shadow economy involvement. The taxes included in this summary are those where the tax effects of shadow economy behaviours are both material and estimable. It should not, therefore, be concluded that other tax types not included in this summary are free from shadow economy activities.
This year, we have excluded the tobacco tax gap from this analysis as the current methodology does not give a sufficiently robust estimate of the illicit tobacco market. To assist with comparability across time, estimates of shadow economy behaviours associated with tobacco have been excluded from all years in our analysis below.
Activities associated with the avoidance of fringe benefits tax (FBT) appear to have the characteristics of shadow economy behaviours. Our estimates of FBT foregone from these behaviours are now included in our estimates of overall tax foregone due to shadow economy behaviours. We have included an estimate in past years to better support the analysis of the trend.
See more information about the shadow economy and the actions we take to address it at Shadow economy.
The key findings from our tax gap analysis related to shadow economy activities are summarised below. The latest tax gap estimates relate to the 2022–23 financial year. The publication lag reflects the complexity of tax issues and the time to finalise relevant compliance activities.
System-wide aggregates
Our latest tax gap estimates indicate that around $25.0 billion of tax was foregone in 2022–23 due to shadow economy activities associated with transaction-based and income-based taxes. Shadow economy tax foregone grew faster than gross domestic product (GDP) in 2022–23 and is significantly higher than our updated estimate for 2021–22 of $21.4 billion. The estimated tax lost due to shadow economy activities in 2022–23 represented around 44.5% of the aggregate gross gap for these taxes, up from a revised estimate of 42.4% in 2021–22.
Representing tax foregone due to shadow economy behaviours as a share of theoretical tax, where all relevant taxpayers are fully compliant, controls for growth in the tax system. As a share of theoretical tax revenue for these taxes, shadow economy tax lost increased steadily from 3.9% in 2017–18 to 5.4% in 2022–23. See Table 12 below for more detail.
The share of shadow economy tax effects associated with income-based taxes has steadily increased from around 85% in 2017–18 to around 90% in 2022–23, despite reductions in relevant tax rates across that period. Conversely, the share associated with transaction-based taxes has fallen from around 15% in 2017–18 to around 10% in 2022–23.
Shadow economy effects associated with administered programs are not included in these system-wide aggregates.
Figure 11: Shadow economy tax effects and theoretical tax, $ billion and % of theoretical tax
|
Tax gap program |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|
|
Transaction-based ($m) |
1,869 |
1,947 |
1,918 |
2,049 |
2,229 |
2,559 |
|
Income-based ($m) |
10,989 |
13,491 |
14,404 |
16,384 |
19,146 |
22,439 |
|
Total of transaction and income-based taxes ($m) |
12,858 |
15,438 |
16,322 |
18,433 |
21,374 |
24,999 |
|
Total theoretical tax liabilities ($m) |
332,918 |
343,111 |
351,490 |
371,753 |
412,790 |
462,392 |
|
Proportion of total theoretical tax liabilities (%) |
3.9 |
4.5 |
4.6 |
5.0 |
5.2 |
5.4 |
The evolution of estimated tax effects of shadow economy activities for transaction and income-based taxes is shown in Figure 11.
Transaction-based taxes
Transaction-based taxes relate to taxes that are paid when you buy, sell, manufacture, produce, store or import certain goods or services.
Alcohol excise gap
All illicit activity is regarded as shadow economy behaviour and is the major contributor to the overall alcohol excise gap. This captures activity where the participants are deliberately not reporting solely to avoid their obligations to pay alcohol excise. The tax effects of shadow economy activities have increased from $660 million (88.4% of the gross gap for alcohol excise) in 2021–22 to around $709 million (88.7%) in 2022–23, and further to $767 million (88.7%) in 2023–24. Small scale illicit activity declined in years impacted by COVID-19 as international passenger volumes declined, but has returned to its pre-COVID-19 trend in subsequent years. Large scale illicit activity continues to trend higher.
GST gap
Our estimate of shadow economy consumer spending blends information from the Australian Bureau of Statistics (ABS) and the Black Economy Taskforce to provide an indicative estimate of shadow economy spending. The purpose of this blended estimate is not to provide precise estimates of the shadow economy as it relates to the GST, but to move towards estimates that are likely to be more accurate. This re-alignment has added over $1 billion to the estimated GST foregone due to shadow economy activities in recent years.
Shadow economy spending by consumers is estimated to have resulted in foregone GST revenue of around $1.6 billion in 2021–22 (13.6% of the gross gap for GST) before rising to around $1.9 billion (16.4%) in 2022–23.
The shadow economy estimates relevant in this context relate to real economy activities (sales) that have been hidden and thus not captured in the ABS spending estimates used to estimate theoretical GST. As GST fraud relates to invalid claims for input credits, there are no real underlying activity (sales) that have been under-represented by those taxpayers. As a result, there is no adjustment required to augment the estimated GST base (GST relevant sales) for GST fraud and we have not included this as shadow economy activity in the GST gap.
|
Transaction-based program |
Shadow economy estimation |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|---|
|
Alcohol excise ($m) |
Illicit channels only |
420 |
448 |
490 |
615 |
660 |
709 |
|
GST ($m) |
Based on internal estimates |
1,448 |
1,499 |
1,427 |
1,434 |
1,569 |
1,850 |
|
Total transaction-based tax effect ($m) |
Based on varying internal estimates |
1,869 |
1,947 |
1,918 |
2,049 |
2,229 |
2,559 |
|
Proportion of theoretical tax liability of transaction taxes above (%) |
n/a |
2.4 |
2.5 |
2.5 |
2.6 |
2.5 |
2.6 |
Income-based taxes
Income-based taxes relate to taxes based on income from various sources.
Small business gap
Shadow economy activities for small business mainly relate to under-reported business income, over-claimed business deductions, people deliberately remaining outside the taxation and regulatory systems and hidden wages for individuals associated with these small businesses. Overall, the tax effects due to shadow economy activities in the small business sector increased from around $14.2 billion (61.1% of the small business gross gap) in 2021–22 to around $17.1 billion (60.9%) in 2022–23.
The main driver of this increase related to undisclosed business income and over-claimed business deductions, the combined tax effects of which increased by around $2.4 billion in 2022–23. The small business gap remains the largest contributor to aggregate tax foregone due to shadow economy behaviours (around 61% in 2022–23).
Individuals not in business gap
Shadow economy activities relate to hidden wages and to people who intentionally stay outside the taxation and regulatory systems. The tax effects of both these activities grew from around $3.5 billion in 2021–22 to around $3.8 billion in 2022–23, resulting in an increase in the shadow economy contribution to the Individuals gross gap from 26.5% in 2021–22 to 27.1% in 2022–23. The tax effects of hidden wages were the main driver, increasing by $363 million in 2022–23.
Fringe benefits tax (FBT)
Shadow economy behaviours relate to unreported FBT and an estimate of FBT that should be reported by employers who should but do not participate in the FBT system. The FBT tax effects (net of recognising that FBT paid is deductible for corporate income tax purposes) associated with these activities was estimated at $1.5 billion in 2022–23, around the same level as in 2021–22. As a share of the estimated gross gap for FBT, tax effects associated with shadow economy behaviours declined from 83.1% in 2021–22 to 81.8% in 2022–23.
|
Income-based program |
Shadow economy estimation |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|---|
|
Small business ($m) |
Estimated using sample |
6,771 |
9,065 |
9,836 |
11,684 |
14,188 |
17,103 |
|
Individuals not in business ($m) |
Estimated using sample |
2,926 |
3,120 |
3,197 |
3,256 |
3,473 |
3,828 |
|
FBT ($m) |
Based on non-reporting |
1,293 |
1,306 |
1,371 |
1,444 |
1,484 |
1,508 |
|
Total income-based tax effect ($m) |
Based on non-reporting |
10,989 |
13,491 |
14,404 |
16,384 |
19,146 |
22,439 |
|
Proportion of theoretical tax liability of income-based taxes above (%) |
n/a |
4.3 |
5.1 |
5.2 |
5.6 |
5.9 |
6.1 |
Administered programs
The ATO administers a range of payments and transfers on behalf of the Australian Government, including incentives and rebates delivered through the tax and superannuation systems. Shadow economy effects associated with administered programs remain significant but are not included in the system-wide aggregates discussed above.
Superannuation guarantee gap
The sole shadow economy behaviour relates to various forms of hidden wages designed to reduce or evade the obligation by employers to deduct superannuation guarantee amounts from ordinary time wages (that is, excluding payments relating to overtime) paid to employees, and to forward those amounts to relevant super funds. The shadow economy estimate for superannuation guarantee is around $2.4 billion for 2022–23 (representing around 31.6% of the estimated gross gap for the superannuation guarantee) compared with around $2.2 billion (35.5%) in 2021–22. The increase generally reflected moderate employment and wages growth and the higher minimum contribution rate applicable in 2022–23 (10.5% in 2022–23). The continued increase in the minimum contribution rate in future gap years (beyond 2022–23) will tend to increase estimated shadow economy contribution effects in dollar terms (assuming an unchanged propensity to participate in the shadow economy).
Pay as you go (PAYG) withholding gap
Hidden wages are the only type of shadow economy activity included for this tax gap. As the PAYG withholding gap and income tax gaps are estimated separately, missing income tax that should have been withheld by employers is initially captured in both gap estimates. To avoid double counting, we capture the tax effect of shadow economy only once across the PAYG withholding and income tax gaps. As a result, some of the tax impact of hidden wages estimated for the PAYG withholding gap is said to have been 'passed-through' to be reflected in income tax gaps. After accounting for this pass-through, the residual total shadow economy estimate for PAYG withholding is around $587 million for 2022–23 (representing around 8.3% of the estimated gross gap for PAYG withholding) down from around $659 million (10.2%) in 2021–22.
Fuel tax credit
Fuel tax credits were previously considered free of shadow economy activities. However, there was an increase in the number of relatively low value fraudulent claims in the fuel tax credits system through 2021–22 and subsequent years. We now consider these to be part of the shadow economy and estimate their tax effect was around $95 million (20.7% of the estimated gross gap) in 2021–22 before falling to $21 million (6.7%) in 2022–23, and further to $16 million (4.3%) in 2023–24.
|
Administered program |
Shadow economy estimation |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|---|
|
Superannuation guarantee ($m) |
Hidden wages based on 2.3% uplift |
1,796 |
1,891 |
1,964 |
2,047 |
2,196 |
2,410 |
|
PAYG withholding* ($m) (See Note) |
Hidden wages based on 2.3% uplift |
626 |
616 |
573 |
640 |
659 |
587 |
|
Fuel tax credits ($m) |
Fraudulent claims |
0 |
0 |
0 |
0 |
95 |
21 |
|
Total administered programs ($m) |
Total of above |
2,422 |
2,507 |
2,537 |
2,687 |
2,949 |
3,019 |
|
Proportion of theoretical liability (%) |
n/a |
0.9 |
0.9 |
0.9 |
0.9 |
0.9 |
0.8 |
* This is the estimated residual hidden wage withholding effect considered remaining in PAYG withholding context after the pass-through income tax effects have been captured in the Individuals and Small business tax gaps respectively.