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  • The core of the system is strong

    Individuals who are not in business are the largest of our taxpayer segments. This group of people contribute around 36% of all the tax we collect.

    The majority of individuals who are not in business receive income from salary and wages. This is usually taxed at source and paid during the year under the pay as you go (PAYG) withholding system.

    In 2017–18, individuals not in business had an obligation to pay $125.4 billion in income tax. We collected $138.6 billion in PAYG withholding during the year, and returned $18.4 billion to individuals in tax refunds. We also issued $5.2 billion in debit assessments to individuals who owed tax.

    Our PAYG withholding system ensures that most tax is collected automatically from individuals not in business, requiring little intervention from us.

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    The individuals population

    There are around 22 million active tax file numbers (TFNs) registered to individual people in Australia. Of those, around 17 million are registered to individuals who are not in business.

    Not all individuals who are registered for a TFN have an obligation to lodge a tax return. The majority of those who do not lodge are not required to. In 2017–18, there were 11.2 million individuals not in business who we predicted were required to lodge, and 10 million who lodged their 2018 tax return.

    Who are individuals not in business

    We define individuals not in business by separating people who earn some or all their income from operating a business as a sole trader (including contractors) or through a related entity such as a partnership, company or trust. These people are part of our small business client group.

    We also exclude individuals classified as high wealth who, together with their associates, each control a net wealth of $5 million or more. These taxpayers have distinct characteristics, needs and obligations which are managed by our privately owned and wealthy groups area.

    This publication focuses on individuals who are not in business. That is, people who earn income from salary or wages, investments, superannuation or Australian Government assistance payments, and do not have links to a business.

    For the purposes of estimating the tax gap for individuals not in business we have refined the population. This population includes individuals who are connected to a high wealth group with less than $50 million in net assets. This adds an additional 500,000 clients to our usual population. The population definitions can be found in  Australian tax gaps – overview.

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    Working together

    We work with other government agencies to maintain the health of Australia’s tax and superannuation systems. Our role is to administer the tax law and key elements of the superannuation law, and provide advice to the Treasury to support the development of tax legislative measures. We are also responsible for administering benefits, tax offsets and programs relating to a range of government policies, some in conjunction with other government agencies.

    The Treasury is responsible for the design of the tax system and its components, and retirement income policy, in relation to economic efficiency, equity, income distribution, budgetary requirements and economic feasibility.

    Tax and financial professionals, along with the associations that support them, also play a key role in the tax system. They help individuals navigate the tax laws and assist them to meet their tax obligations.

    The Tax Practitioners Board is responsible for regulating tax agent services. The Board aims to assure the community that tax practitioners meet appropriate standards of professional and ethical conduct.

    Individuals also have a role to play. We have a responsibility to contribute to public programs and community services by participating in the tax system, reporting correctly and paying the tax we owe.

    Collectively, as stewards of and participants in the tax and superannuation systems, we all have something to gain by ensuring they work effectively, and are sustainable and viable into the future.

    Characteristics of the personal income tax system

    The principles in the law for determining how much income tax a taxpayer needs to pay are relatively simple in theory, but applying the principles in practice can be complex. This has been noted by various reviews of Australia’s tax system.Footnote1

    The personalised nature of deductions, cost of compliance, changing circumstances, income from sources other than salary and wages and interactions between other government systems, all contribute to the complexity involved in completing an individual’s tax return.

    These factors are reflected in the high proportion of individuals not in business that use the services of tax agents to help them prepare and lodge their personal income tax return (around 63%).

    We also know that personal circumstances, financial literacy and perceptions of fairness can affect attitudes and behaviour in complying with tax obligations.

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    The four pillars of compliance

    We monitor the level of willing participation of taxpayers against the Organisation for Economic Co-operation and Development’s (OECD) four pillars of tax compliance framework:

    • registration
    • lodgment
    • correct reporting
    • on-time payment.

    We consider these elements in conjunction with indicators of public perceptions.

    Based on our knowledge of how the system operates in practice:

    • the majority of individuals who should be registered in the system are registered – although the growing instance of identity fraud is concerning
    • while the on-time lodgment performance of individuals is improving, some individuals (including those who are due a refund) are not meeting their obligation to lodge a tax return or are doing so late
    • most individuals report the right amount of income, although we have concerns about non-reporting of cash wages, and many, including those who use tax agents, are making errors when claiming deductions
    • of all our client groups, individuals have the lowest rate for on-time payment of tax liabilities (outside of employer withholdings) and the level of debt is higher than we would expect.

    The majority of individuals think we are fair and professional in administering the tax and superannuation systems and we are continually working to improve community perceptions.

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    Tax gap

    The tax gap is the difference between the tax payable according to law and the tax actually collected from taxpayers in a given period. The vast majority of tax due is paid voluntarily and audit activity collects some of the remainder. What is left uncollected is known as the tax gap.

    The community expects us to manage all aspects of the tax and superannuation systems, including advising on tax gaps, what is driving them and what we are doing about them. Estimating tax gaps is consistent with contemporary international best practice in tax administration.

    Over recent years, we have been working to estimate tax gaps for particular areas and segments of the Australian tax and superannuation systems. Last year for the first time we had a reliable and credible estimate of the income tax gap for individuals not in business for the 2014–15 financial year.

    The tax gap for individuals not in business is a relatively small proportion of the total income tax base for this segment. This year we released the 2015–16, estimated net tax gap, of 6.4% or $8.4 billion.

    While there are many components of the individuals tax gap, analysis shows that deductions for work-related expenses are the main contributor. Deductions for rental property expenses are also a factor, along with omitted income, particularly in relation to undeclared cash wages (an aspect of the black economy).

    How we measured the tax gap for individuals

    To measure the tax gap for individuals not in business, we drew on operational data for specific compliance risk areas; for example, failure by employers to withhold, non-lodgment and non-payment of debts. We then combined this data with findings from a random enquiry program to estimate the difference between what we expected to collect, and what was actually collected for the given year.

    Tax gaps can be split into two components:

    • gross gap – the difference before active compliance activities are taken into account
    • net gap – the difference after active compliance activities are taken into account.

    Our ultimate goal is to reduce the gross tax gap to a minimum, by increasing willing participation, noting that a zero tax gap is not practically achievable. No regulatory agency is resourced to eliminate the gap completely.

    Individuals not in business tax gap estimates

    Element

    2013–14

    2014–15

    2015–16

    Gross gap ($m)

    7,506

    8,550

    9,089

    Adjustments ($m)

    754

    696

    645

    Net gap ($m)

    6,752

    7,854

    8,444

    Gross gap (%)

    6.3

    6.8

    6.9

    Net gap (%)

    5.6

    6.2

    6.4

    Tax gap estimates and their trends over time provide useful insights into the longer-term operation of the tax and superannuation systems. Along with other measures, they tell a story about the performance and integrity of the system, including levels of willing participation and significant shifts in compliance.

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    Footnote 1
    For example, Australia’s future tax system (2010), Re:think Tax discussion paper (March 2015) and House of Representatives Standing Committee on Economics Report on the inquiry into tax deductibility (2017).

    Return to footnote 1 referrer

    Last modified: 11 Nov 2019QC 56220