Measuring 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.
Historically, we used as a proxy measure of non-payment. This represented debt that we classified as not pursuable due to legal or economic reasons. However, this was not a complete measure of long-term non-payment, as not all debt that remains unpaid over the long term is classified as uneconomical to pursue or irrecoverable at law.
As a result, historical approaches based on the proxy for non-payment relied on relatively simple averaging methods that were not sufficiently responsive to changes in taxpayer behaviour, economic conditions, or our operations.
Instead, the long-term non-payment method provides a more robust and comprehensive estimate of unpaid debt by using observed debt balance and historical payment patterns to estimate the amount of assessed liabilities expected to remain unpaid over time.
The estimate provides us with insight into:
- the health and integrity of the tax and superannuation systems
- areas where payment obligations are not being met
- effectiveness of compliance strategies and debt recovery approaches.
Method to measure long-term non-payment
We use an approach that combines detailed transaction-level data with population-level projection techniques.
The method uses historical financial transactions to track how debt balances reduce over time. It estimates the level of debt expected to remain outstanding once repayment behaviour reaches a stable position, known as a steady state.
The key steps are as follows:
- Extract and process financial transactions data to identify assessment liabilities and payments related to each financial year, excluding penalties and interest.
- Calculate outstanding debt balances over time for each financial year and population.
- Measure repayment behaviour by calculating historical rates of debt repayment (decay rates).
- Project future repayment patterns using observed average decay rate for each population.
- Construct confidence intervals and determine when debt balances reach a steady state, where balances show minimal variation over time.
- Estimate long-term non-payment as the amount of outstanding debt remaining at that steady state.
This approach is applied consistently across tax gap programs to ensure comparability and consistency of estimates.
Figure 3: Projected long-term non-payment example