Overall 2022–23 tax gap
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 means we can better understand all the factors that may have influenced tax performance in 2022–23.
Overall, we continue to see steady growth in tax paid, with an estimated $582.3 billion expected to be collected for the 2022–23 financial year, a 10% growth from prior year. We estimate a tax gap of $58.2 billion or 9.1%.
Tax gap highlights
On an accrual basis, company income tax reported and paid (including amendments) grew by around 9% in 2022–23 relative to 2021–22 to around $142 billion. The stronger growth rate was driven primarily by large corporates. Medium and small businesses had modest growth, while companies owned by high-wealth networks saw a decrease of around 11%.
Personal income tax reported and paid (including amendments) grew by 11% for 2022–23. This was primarily driven by individuals not in business who contributed around 75% of the growth. The remainder was largely driven by individuals with ownership of or connections to small businesses.
More broadly across the economy, 2021–22 saw total household spending starting to increase significantly on the back of the economy re-opening after COVID-19. 2022–23 was the first year that the economy was free of any COVID-19 restrictions. Strong domestic demand for residential construction and consumer goods, coupled with supply chain disruptions and global price shocks started putting pressure on inflation. At the start of the financial year, the annual inflation rate was 6.1% and by December 2022, it had reached 7.8%.
In May 2022, the Reserve Bank of Australia (RBA) commenced the first of 10 consecutive cash rate increases, lifting the cash rate from 0.10% in April 2022 to 3.60% by March 2023. By June 2023, the cash rate was increased a further 0.50% to 4.10% as the RBA pulled its monetary policy lever to slow inflation.
Cost of living pressures eventually saw consumer spending starting to moderate, but reduced demand, increased costs and residual supply chain issues resulted in a challenging environment for business. Corporate insolvencies also increased in 2022–23. ASIC reported 5,440 corporate insolvencies, up from 4,064 in the previous year. Almost half of those corporate insolvencies were in the construction or accommodation and food services sectors.
Some of these economic challenges started to be seen across the ATO. Activity statement insolvency debt increased to $7.6 billion, up from $5.5 billion, driven predominately by small business. In 2022–23, we reported that 38% of disengaged taxpayers with a collectible debt were in the construction and accommodation and food services sectors. These taxpayers represented $5 billion of the $16 billion of collectible debt for all disengaged taxpayers.
This year's tax gap estimate is for the 2022–23 income year. The net gap is 9.1%, up from 8.5% in 2021–22 and up from 7.7% in 2020–21. The increase in the gap isn’t uniform across all of the market segments. It is predominately driven by increases in the tax gap for small business, including individuals in business (sole traders) as well as for GST.
The small business income tax gap has increased to 17.4% in 2022–23, up from 15.9% in 2021–22 and 15.0% in 2020–21. The upward trend reflects both an increase in mistakes but also deliberate non-compliance by small business. More information about the drivers of this gap can be found at Small business income tax gap. It is important to note, the latest year estimate is a provisional estimate that will be refreshed with additional information from our random enquiry program.
The GST gap for 2022–23 is 9.1%, up from 6.4% and 4.5% in the previous 2 years. The GST gap has returned to levels similar to pre-COVID-19, and we have seen a decrease in the net GST gap due to changes in consumer spending habits and composition of spending. The trend in the GST gap shows how the tax gap can be influenced by economic factors. See more information about the Goods and services tax gap.
Tax performance
Figure 1: Tax performance for published tax gaps in 2022–23
We estimate that for 12 out of the 14 segments, we will receive more than 90% of the tax that is expected to be collected in 2022–23.
Our compliance action continues to be important in ensuring high levels of tax performance, even ignoring any deterrent effect of anticipated compliance actions. We can see this when we compare the gross tax gap outcomes (voluntary performance) to the net tax outcomes (after ATO compliance intervention). For example, looking at the large corporate groups tax gap, the performance in this market improves from 94.1% before our engagement to 96.3% afterward.
Tax performance ratios
Figures 2 and 3 show a breakdown of the tax performance ratios for the 14 tax gaps. It shows the tax performance before any ATO-initiated action (gross performance) and the result after ATO-initiated action (net performance). Figure 2 includes both indirect taxes and excises. Figure 3 includes all income-based taxes.
Figure 2: Tax performance for transaction-based tax gaps in 2022–23
|
Taxes on goods and services |
Gross performance |
Net performance |
Gross gap |
Net gap |
|---|---|---|---|---|
|
Alcohol |
90.4% |
90.4% |
9.6% |
9.6% |
|
Luxury car tax |
95.1% |
96.3% |
4.9% |
3.7% |
|
Wine equalisation tax |
95.0% |
95.7% |
5.0% |
4.3% |
|
Goods and services tax |
87.3% |
90.9% |
12.7% |
9.1% |
|
Fuel excise |
96.1% |
96.1% |
3.9% |
3.9% |
Figure 3: Tax performance for income-based tax gaps in 2022–23
|
Tax on income |
Gross performance |
Net performance |
Gross gap |
Net gap |
|---|---|---|---|---|
|
Fringe benefits tax |
69.1% |
0.5% |
30.9% |
30.4% |
|
Small business |
82.0% |
0.6% |
18.0% |
17.4% |
|
Medium business |
91.0% |
0.6% |
9.0% |
8.4% |
|
High wealth |
91.4% |
1.4% |
8.6% |
7.2% |
|
Individuals not in business |
93.0% |
0.8% |
7.0% |
6.2% |
|
Large corporate groups |
94.1% |
2.2% |
5.9% |
3.7% |
|
Small super funds |
95.6% |
0.7% |
4.4% |
3.8% |
|
Petroleum resource rent tax |
0.0% |
97.3% |
0.0% |
2.7% |
|
Large super funds |
97.8% |
0.9% |
2.2% |
1.4% |
Longer term trend
The longer term trend for tax gap highlights a decline during COVID-19 followed by an increase in the net gap post-COVID-19, reflecting a period of challenging economic conditions and one where the ATO saw large increases in the amount of tax debt. Both factors played out in particular in the small business sector. It is likely that these economic factors will continue to put upward pressure on the net tax gap for the 2023–24 income tax year.
The increase in the overall tax gap over the past 2 years is driven by increases in small business income tax and GST as discussed previously. Combined, these 2 tax gaps account for more than $35.3 billion of the $58.2 billion total. Accounting for more 60% of the total net tax gap in dollar terms, any movements in these gaps (up or down) will move the overall tax gap.
Despite this, the outcomes of the Tax Avoidance Taskforce continue to put strong downward pressure on the large corporate groups net tax gap. Over the last 6 years, the net tax gap for large corporate groups is $12 billion less than the gross (voluntary) tax gap. Put another way, the tax gap would be $2.0 billion higher every year if large corporate groups net gap equalled their gross tax gap, even disregarding the deterrent effect of the taskforce.
Figure 4: Tax gap estimates from 2017–18 to 2022–23
|
Element |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|
|
Net gap % (RHS) |
8.1% |
8.4% |
8.0% |
7.7% |
8.5% |
9.1% |
|
Gross gap % (RHS) |
9.5% |
10.2% |
9.1% |
9.0% |
10.5% |
10.4% |
|
Tax expected to be collected |
412,650 |
423,332 |
436,602 |
484,013 |
531,687 |
582,262 |
|
Net gap |
36,431 |
38,794 |
37,855 |
40,566 |
49,127 |
58,234 |