On 31 October 2022, the ATO released its updated tax gap figures for the 2019–20 income year. The Tax Institute’s Tax Policy and Advocacy’s Associate: Abhishek Shekhawat, examines and explains these latest tax gap figures (in their weekly email to members: TaxVine #42, 11.11.22).
Overview of the tax gaps
The tax gaps are a yearly set of statistics that intend to, broadly, inform the public about the health of Australia’s taxation and superannuation systems.
In the 2019–20 income year, the ATO collected $446.4 billion in tax revenue out of an expected $479.8 billion (for the 15 published tax gaps by the ATO). The overall tax gap for the 2019–20 income year is estimated to be $33.4 billion, or approximately 7%. This represents a large degree of voluntary compliance among taxpayers from all categories, giving weight to the old adage that most taxpayers meet their taxation obligations most of the time.
The interesting part of the analysis is what prevents taxpayers from meeting their taxation obligations as they fall due. A large part of this may be the current design of the relevant legislative provisions and the complicated compliance burden taxpayers face. However, before examining the learnings from the tax gaps, it is important to understand what the figures reveal, how they are calculated, and any shortcomings from the data.
What are tax gaps and how they are calculated?
As stated by the ATO, the tax gap is an estimate of the difference between the amount of tax the ATO collects and what it otherwise would have collected if every taxpayer was fully compliant with the ATO’s interpretation of the legislative requirements. The tax gaps intend to measure what is not directly observable. That is, what has not been reported by taxpayers for any number of reasons.
The tax gap is calculated by either:
- The top-down method that uses externally provided aggregated data to estimate the size of the tax base from which the tax gap is calculated.
- The bottom-up method that uses the ATO’s internal administrative data to determine the extent of the non-compliance across an entire population. This method is more prevalent and can involve the use of random enquiry programs, statistical analysis or model based approaches.
More information about how tax gaps are calculated can be found here.
As the tax gaps are based on external data or modelling, they are subject to a degree of error. They are also a lagging indicator as they provide insights into the historical performance of the taxation and superannuation systems. Any analysis of the tax gaps should acknowledge economic or broader social happenings during that time, such as the impacts of the COVID-19 pandemic on the economy and ATO resourcing.
The goal of the tax gaps is to build community confidence in the administration of the taxation and superannuation systems, fostering an environment of greater voluntary compliance.[One might add identifying legislative reform – such as a ‘default’ or ‘standard’ personal income tax assessment, with returns only required, to vary the standard numbers.] This data can also help identify priorities and risk areas that the ATO may address through a number of different activities including:
- providing guidance and advice to clarify areas of uncertainty;
- improving digital services;
- encouraging taxpayers to obtain high quality professional advice; and
- improving the ATO’s processes and technology, including data-matching capability.
Tax gaps by market segment
In Table 1 below, we have extracted some of the net tax gaps for key market segments from the 2014–15 to 2019–20 income years. A complete list of all tax gaps can be found here.
Table 1: Net tax gaps for key market segments
| Market Segment | 2014–15 | 2015–16 | 2016–17 | 2017–18 | 2018–19 | 2019–20 |
| Individuals not in business | 6.4% | 6.5% | 6.4% | 6.4% | 5.9% | 5.6% |
| High wealth individuals | 6.4% | 7.4% | 7.8% | 6.8% | 7.0% | 6.7% |
| Large corporate groups | 6.2% | 4.8% | 3.3% | 4.1% | 4.3% | 4.2% |
| Medium business | 6.7% | 5.9% | 7.1% | 6.4% | 6.9% | 7.0% |
| Small business | N/A | 12.6% | 13.2% | 12.6% | 12.7% | 11.6% |
| Goods and services tax (GST)* | N/A | 8.8% | 6.3% | 6.8% | 7.7% | 6.3% |
| Fringe benefits tax (FBT) | 26.7% | 28.4% | 21.1% | 22.1% | 22.0% | 20.3% |
| PAYG withholding | 3.9% | 3.6% | 3.5% | 2.6% | 1.9% | 1.5% |
| Large superannuation funds | 1.7% | 3.1% | 1.3% | 1.4% | 1.9% | 1.9% |
| Small superannuation funds | 2.1% | 2.6% | 2.9% | 2.1% | 2.3% | 2.1% |
| Superannuation guarantee | 6.0% | 5.7% | 4.7% | 5.0% | 5.1% | 4.9% |
* The GST tax gap figures for 2020–21 are also available. The net tax gap for this year is 5.9%
What can we learn from the figures?
Generally, most tax gaps appear to have remained stable or trended downwards. However, on their own, the figures do not reveal why tax gaps arise or how we can mitigate them. The ATO helpfully provides a summary of the main drivers of the tax gap based on its analysis of the relevant data which provides further insights. Below, we provide our thoughts on some of the key learnings from the ATO’s tax gap figures and additional information.
Complexity remains a key driver of the tax gaps
When examining the reasons for the tax gap in many of the market segments, a common theme emerges when analysing these tax gaps, particularly the tax gaps for FBT, small business and individuals. This is that, the compliance of these taxpayers is impeded due to inadvertent misunderstandings of complex tax provisions.
For example, individuals are often required to undertake difficult calculations with arduous substantiation requirements for some of their work-related expenses. A prime example is trying to figure out electricity costs, or the appropriate method to apportion internet expenses in a home with several users and multiple purposes when calculating their home office expenses.
Complexity exists in all aspects of our taxation and superannuation systems and these need to be simplified. A simpler tax system with less arduous record-keeping requirements will make it easier for taxpayers to comply with their obligations. As noted in our Case for Change report and numerous Budget submissions to the Government, this simplification needs to be part of a holistic reform process.
The ongoing complexity also demonstrates the need for clear ATO guidance on these issues. Ideally, advice should clearly explain the application of the law and be delivered through channels that are likely to be utilised by the relevant taxpayers. However, producing clear and concise guidance is challenging when the underlying legislative provisions are riddled with convolutions that cannot be readily explained.
The importance of accurate record-keeping
Another recurring issue is the importance of accurate record-keeping. For example, almost half of all incorrect claims for individuals not in business relate to difficulties in substantiating expenses. Many medium and small businesses are noted as having incorrectly recorded transactions or inadvertently omitting income/including deductions. The ATO’s statements do not imply that these are predominantly driven by a deliberate intention on the taxpayer’s behalf. These difficulties likely result from shortcomings in record-keeping practices or corporate governance procedures.
Taxpayers and tax practitioners from all segments should pay particular attention to their record-keeping. This also raises concerns regarding the time pressures and costs the required substantiation places on all taxpayers. Streamlining substantiation requirements by reducing the amount of information needed, or through which it is required to be provided, will likely assist taxpayers meet their obligations and better demonstrate their tax positions, in turn reducing the tax gap.
The ATO cannot resolve the tax gap through audits alone
The tax gap measurements can be viewed from two perspectives:
- the gross tax gap, being the gap before the impact of the ATO’s engagement has been considered; and
- the net tax gap, being the final uncollected amount after the impact of the ATO’s action.
The gaps in this article above have all referred to the net tax gap. Table 2 below shows the difference between the net and gross tax gaps across key market segments.
Table 2: Difference between gross and net tax gaps across key market segments
| Market Segment | 2019–20 gross tax gap | 2019–20 net tax gap |
| Individuals not in business | 6.0% | 5.6% |
| High wealth individuals | 7.4% | 6.7% |
| Large corporate groups | 7.4% | 4.2% |
| Medium business | 8.4% | 7.0% |
| Small business | 12.6% | 11.6% |
| GST | 8.6% | 5.9% |
| FBT | 20.8% | 20.3% |
| PAYG withholding | 2.6% | 1.5% |
| Large superannuation funds | 3.2% | 1.9% |
| Small superannuation funds | 3.2% | 2.1% |
| Superannuation guarantee | 5.9% | 4.9% |
Table 2 highlights that although the ATO’s engagement activities have an impact on tax collections, audit action alone cannot resolve the tax gap. There are several systemic issues, such as the complexity and record-keeping issues noted above, that need to be addressed in order to have a meaningful impact on the tax gap.
Future impacts of non-pursuable debt
An interesting and recent development has been the impact of non-recoverable debts on the tax gap. The ATO estimates that 10% of the tax gap for small businesses, and 3% for individuals in business, is related to non-pursuable debt. Growing concerns over the size of the ATO’s debt book may result in this factor being a larger portion of the tax gap going forward. If it is not addressed, Australia may have a drastically reduced amount of revenue available to support our future needs.
Closing comments
The tax gap statistics provide us with plenty of opportunities to analyse opportunities to increase awareness about the key issues preventing or discouraging taxpayers from voluntary compliance. Although there will always be those who will avoid tax, the vast majority of taxpayers will attempt to meet their obligations. We should apply any learnings to try and make it easier and more equitable for these taxpayers to comply.
Our Tax Policy Assistant, Zoe-Marie Beesley has posted in Community about this preamble.
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