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 of the factors that may have influence tax performance in 2020–21.
The Australian economy rebounded strongly in 2020–21, underpinned by high vaccination rates across its population and the government's economic support measures in response to the COVID-19 pandemic. Significant levels of economic support were provided to the community through the JobKeeper, Cash Flow Boost, Coronavirus Supplement, the bringing forward of Stage 2 of the Government’s Personal Income Tax Plan and business investment incentives. The flow-on stimulatory impact of these measures, combined with higher savings in the household sector, have helped to put the private sector balance sheet in a strong position.
On an accrual basis, company tax voluntarily reported grew by around 20% on average in 2020–21 relative to 2019–20 to around $107 billion. The growth rates were relatively similar across large corporates, companies owned by high-wealth networks, medium and small businesses. Apart from the stimulatory impact from the government's stimulus measures, corporate profits have been supported by a sharp increase in commodity prices, especially iron ore.
On aggregate, personal income tax voluntarily reported grew significantly less than corporate income tax at 4% for 2020–21, underpinned by uneven growth across individuals who are in business and those whose primary income source is salary and wages. Individuals who owned or had connections to businesses reported 14% more personal income tax voluntarily in 2020–21 compared to the previous year, while individuals who were employees reported a deterioration of 1% over the same period. This disparity reflected the higher returns from business-related activities experienced by individuals-in-business at a time when wage growth of employees was constrained, and unemployment rate remained relatively elevated (average unemployment rate across the year of 6.2%) as a result of disruptions from COVID-19.
Meanwhile, GST voluntarily reported grew by 5% in 2020–21, also notably lower than that of corporate income tax, supported by a recovery in household spending as health outcomes improved and COVID-19 restrictions were lifted.
Additional liabilities raised by the ATO through compliance activity for 2020–21 remained below pre-COVID level as we redirected a significant amount of our resources towards administering stimulus payments.
The relatively strong growth in voluntarily reported tax relative to growth in the estimated theoretical tax liabilities saw improvements in 9 out of the 15 gap estimates that constitute the whole-of-system gap estimate. For the system, we expect to collect $495.6 billion in overall tax revenue for 2020–21 and a tax gap estimate of $37.5 billion. This gives us an overall estimate of the net tax gap of 7.0%.
This indicates that for 2020–21, we estimate that we will collect 93% of the tax that should have been reported, 91.3% was reported voluntarily (including results of sustained improvements in compliance from prior year interventions) and 1.7% was the result of compliance amendments and voluntary disclosures (see Figure 1).
Figure 1: Tax performance for published tax gaps in 2020–21
Across our tax gap program, we estimate that for 12 out of the 15 segments, we received more than 90% of the tax that is expected to be collected in 2020–21.
ATO compliance action continues to be important in ensuring high levels of tax performance. We can see this when we compare the gross tax performance (voluntary performance) to the net tax performance (after compliance intervention). For example, looking at the large corporate groups tax gap, the performance in this market improves from 93.5% before our engagement to 95.8% after.
For our transaction-based taxes, compliance action has the biggest impact for tobacco duty, where the performance improves from 78.1% before the action of illicit tobacco taskforce, to 89.6% after the actions of the joint Australian Border Force and ATO Taskforce. Find out more about the drivers for each tax gap and what we are doing about it.
Figures 2 and 3 below show a breakdown of the tax performance ratios for the 15 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 2020–21
Figure 3: Tax performance for income-based tax gaps in 2020–21
In the 6-year period between 2015–16 and 2020–21, our overall tax gap estimates have been showing a downward (improving) trend. When viewing the tax gap estimates, we suggest a focus on the longer-term trends rather than the year-on-year changes due to statistical variations and revisions.
Figure 4: Tax gap trend from 2015–16 to 2020–21