ATO tax gap and beyond

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 hovers at around the 92% lodgment mark, which is noticeably lower compared to individuals.

Now that the ATO has consistently estimated the tax gap data, it notes that the next logical step is “beyond tax gap thinking” which involves the 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 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.

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 by 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.