ATO tax gap and beyond
Put simply, the tax gap is difference between the amount of tax that should be received by the ATO and the amount that is actually received. After almost 10 years of estimating the tax gap, the ATO is now moving to use this operational intelligence to determine the changes that need to be made to improve tax performance and reduce the gap. To realise this new way of thinking, the ATO will be analysing optimal investment across each of the gaps to drive performance towards the aspirational gap in every segment by an efficient allocation of existing resources.
At a recent conference, the Second Commissioner of ATO, Jeremy Hirschhorn provided some insights into an area of tax administration called “beyond tax gap thinking”. This recognises that the tax gap can be utilised by revenue authorities such as the ATO to drive strategic and operational thinking, as well as prioritising.
Since the heady days of 2012, when the ATO published its first tax gap estimates by releasing the GST and LCT (luxury car tax) gaps, the latest figures released by the ATO encompass every income and transactional tax as a measure of the total tax performance of the system. The most recent overall estimate of tax performance is around 92.7% which means that the ATO received 92.7% of the total tax revenue that should be reported according to current law, equating to around $428bn.
This in turn means that another 7.3% or $33.5bn was not collected, which is the tax gap (ie the amount not correctly reported under current law). This figure varies according to different markets, and different types of taxes. For example, while most indirect taxes perform at more than 90%, FBT tax performance is under 80%. Similarly, large and medium business tax performance hover at around the 92% lodgment mark, which is noticeably lower compared to individuals.
Now that the ATO has consistently estimated the tax gap data, the Second Commissioner notes that the next logical steps in beyond tax gap thinking is to use the operational intelligence to determine the changes that need to be made to improve tax performance. Currently, this is done by inspecting the building blocks of each gap closely to get a clearer picture of how the ATO’s actions impact on the performance of the tax system and more importantly, how sensitive performance is to the action and inaction of the ATO.
To realise this beyond gap thinking, the ATO has developed 4 new concepts:
maximum tax performance (or addressable gap) – is the theoretical maximum revenue that could be collected within the current legislative framework and plausible levels of resourcing.
baseline tax performance (or gap at risk) – is the performance that would result if the ATO reduced its investment and strategies to a baseline investment.
aspirational tax performance – is the performance the ATO is targeting through its strategies and resourcing.
tolerable tax performance – is the bare level of performance acceptable to stakeholders in the tax system.
The ATO hopes that this strategy will help set not only the optimal investment across each of the gaps to drive towards the aspirational gap in each market and type of tax, but also with the best knowledge of the areas that it can disinvest without significant disruption to the tax system.
“This will allow us to realise the ambition of sustainably reducing the tax gap without just ‘squeezing the balloon’ and seeing gains made in one area eroded by losses in another.” – ATO Second Commissioner, Jeremy Hirschhorn
The challenge now, according to the ATO is to reduce the income tax gap which requires performance improvements across all segments. It notes that short-term success will see the tax gap component decrease and a commensurate increase in amendments. Long-term success will be accompanied both a reduction in the tax gap and amendments but more than offset by an increase in voluntary payments. This will represent a system where the correct amount of tax is correctly reported to the ATO at lodgment.
How will it affect your business?
As ATO starts to implement this beyond the tax gap strategies, it will be paying closer attention to some taxes (eg FBT) and segments (eg small businesses), we can ensure that your tax affairs are in order so you don’t get caught out by increasing use of sophisticated analytics. Contact us today for help and advice.