Gaps analysis
The gaps are grouped into 3 programs of analysis:
- Transaction-based tax gaps – taxes collected and paid by an entity further up in the supply chain (with the cost generally borne by the consumer), such as goods and services tax (GST) and fuel excises.
- Income-based tax gaps – income tax for individuals and businesses, large and small super funds, and fringe benefits tax gaps.
- Other tax gaps – these include programs that are administered by the government on behalf of the community, including pay as you go (PAYG) withholding, superannuation guarantee and other administered programs.
Figure 1: Tax gap research program overview
Relationship between gaps
The relationship between the various gaps is complex. While some are mutually exclusive, some are closely related or form subsets within the established gap estimates. For example:
- work-related expenses, levies, rebates and concessions are subsets of the income-based tax gaps for small business and individuals
- some gaps arise through employment – employment-related gaps include PAYG withholding, superannuation guarantee and fringe benefits tax (for individuals).
In addition, we see varying degrees of deliberate avoidance of tax, referred to internationally as the shadow economy. We see this in a number of gap estimates – for example, unreported income is included in individuals not in business, small business, PAYG withholding and superannuation guarantee.
These complexities demonstrate why caution is needed when aggregating the gap estimates into one figure.
Tax gap populations
We have a specific tax gap population framework to define and allocate every taxpayer to a gap estimate to ensure we can construct a complete picture of the tax and super systems. We develop a specific set of rules to use given the complexity in the populations, particularly in the business populations. These rules ensure there is no overlap between gap estimate populations.
Our early gap estimates were transaction-based taxes, such as GST and excise. The populations for these estimates are readily defined. All taxpayers that interact with these taxes can be grouped together. For example, all entities pay the same rate of GST, regardless of their structure or turnover.
As we began estimating income tax gaps, we realised the design of the gap program would require segmenting of the income-tax-paying population. We segment populations to ensure that gap research findings are meaningful for the community, government and us as an administrator of the system.
Transaction-based tax gap populations
Unlike income-based tax gaps, transaction-based gap populations are generally easier to determine.
Broadly, an entity only needs to be registered to participate in that activity to be included in a transaction-based gap estimate. For example, a business can only charge or claim GST if it is registered for GST. Additionally, entities need to lodge the required forms (generally an activity statement) to demonstrate that they are an active business. This principle holds true regardless of the size or type of the entity being assessed.
Transaction-based tax gaps include:
- Alcohol tax gap
- Fuel excise tax gap
- Goods and services tax gap
- Luxury car tax
- Tobacco tax gap
- Wine equalisation tax
Income-based tax gap populations
Taxpayers can only be allocated into one tax gap population. We allocate them in accordance with the hierarchy shown in Figure 2. All companies and individuals are allocated from left to right to the first relevant category in the hierarchy.
Figure 2: Income tax gap population hierarchy
Large corporate groups
As businesses tend to operate as a collection of entities, we consider business taxpayers from a group perspective. That is, one group may be made up of multiple tax entities that have a common owner. Our large corporate groups income tax gap estimate includes all economic groups with turnover greater than $250 million.
High wealth
We consider individuals and private groups that control total net assets of $50 million and over as high wealth private groups. Like large corporates, we consider the whole business group associated with the high wealth private group. The exception is any part of the group that is already included in our large corporate group analysis. This is in keeping with the tax gap principle of no double-counting.
Individuals not in business
These are taxpayers who mainly receive salary and wages with some other income, including non-business income from the sharing economy, and what we refer to as ‘passive income’. Passive income can include dividend, interest and rental income. In defining this taxpayer population, we exclude individuals that form part of the high wealth private groups to avoid double-counting. We refer to these taxpayers as individuals not in business.
We recognise there are many businesses that do not fall into these groups above. These businesses fall into the 2 categories of small or medium business, described as follows.
Small business
We define a small business as a business with an aggregate turnover of less than $10 million. This includes various operating structures, such as sole traders, corporate groups, small business proprietors, trusts and partnerships.
These small businesses are subject to different tax treatments and certain concessions. The compliance challenges of these businesses are different from those of larger businesses. We differentiate them from larger business to enable us to have insights that are more appropriate to the small business population.
Medium business
We define the final group of taxpayers as medium businesses. These comprise corporate economic groups with an aggregate turnover of $10 million to $250 million, as well as the individuals controlling these business groups. These businesses tend to have more complex structures compared to small businesses and, consequently, more complex tax affairs.
Populations for super and fringe benefits tax are covered separately to the income tax populations and are expanded on within their own method sections.
Other tax gaps: Administrative and PAYG withholding gap populations
Broadly, the administrative gap populations are defined by legislation. As is pay as you go (PAYG) withholding which can only occur where an entity has an employee. Therefore, if a business has an employee, regardless of the type of business they are, they are captured as part of this gap population.
These tax gaps include:
- Fuel tax credits gap
- PAYG withholding gap
- Product stewardship for oil gap
- Superannuation guarantee gap
Tax gaps internationally
According to the OECD's latest tax administration report, 28 countries estimate the tax gap in some form. Of those 28 jurisdictions, 8 publish an overall tax gap, and of those, only 3 publish their tax gap annually. Other jurisdictions publish their tax gaps on a 2, 3 or 4-year basis. The countries that publish their tax gap estimates annually are:
- Australian Taxation Office – Australia
- Agenzia delle Entrate – Italy
- His Majesty’s Revenue and Customs (HMRC) – United Kingdom
The other countries that estimate and publish tax gap are:
- Canada Revenue Agency (CRA) – Canada
- Internal Revenue Service (IRS) – United States
- Receita Federal do Brasil – Brazil
- Skatteverket – Sweden.
The European Commission (EU) uses external researchers to identify the value-added tax (VAT) gap in each of its 28 member countries. The Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) provide support to jurisdictions in estimating tax gaps.