Individuals tax gap of $8.7 billion highlights need for action
Today the Australian Taxation Office (ATO) has published the income tax gap for individuals not in business. The gap is an estimate of the difference between the tax the ATO collects and the amount that would have been collected if every one of these taxpayers was fully compliant with the law.
“Individuals are important contributors to our tax system. There are around 9.6 million individuals who are not in business and lodge tax returns. These taxpayers earn their income from salary and wages and investments,” Deputy Commissioner Alison Lendon said.
Over 93 per cent of income tax received from individuals not in business is paid voluntarily or with little intervention from the ATO. The estimated net tax gap for individuals not in business in 2014-15 is approximately 6.4 per cent, or $8.7 billion.
The tax gap for individuals not in business is primarily driven by incorrectly claimed work-related expenses. Common mistakes include claiming deductions where there is no connection to income, claims for private expenses, or no records to show that an expense was incurred. Other areas of concern include high rates of incorrect claims for rental property expenses and non-reporting of cash wages.
“Seven out of ten returns randomly selected for review had one or more errors.
“What we have seen is that most people make small, but avoidable, errors so we will ramp up our assistance to help these people understand their obligations and get things right.
“But we are also asking people to take just a little extra care with what they claim, because all of those little amounts add up.
“A smaller number of people are deliberately doing the wrong thing – that has a significant impact on revenue. These people can expect closer attention from us, especially this tax time,” Ms Lendon said.
The ATO will increasingly use data and technology to identify outliers, as well as to tailor advice and guidance products, auto‑correct mistakes, streamline reporting and substantiation processes, access third party data to verify claims and provide pre-fill information in tax returns.
“The Government announced additional funding in the 2018 Budget to support our efforts. This will allow us to continue to make lodging returns simpler for taxpayers and their agents by improving services and preventing errors. It will also see us ramp up our focus on higher-risk behaviours such as repeated and intentional non-compliance, fraud and deliberately taking positions contrary to law.”
“We are also taking further steps to address the error rate in agent-prepared returns, which is currently higher than the error rate for self-prepared returns. While the majority of mistakes made by agents are avoidable, we are concerned to see a minority of tax agents exaggerating or falsifying claims to attract clients or retain their market share. The ATO works alongside the Tax Practitioners Board to identify and closely monitor these agents. Where we see evidence of unprofessional conduct, we will take action to protect the community and the integrity of the tax system.”
This year, the ATO expects to undertake over one million interactions with taxpayers and tax agents claiming work-related expenses - encompassing everything from help and education through to reminders, reviews and audits. Appropriate action to close the gap will increase the trust and confidence in the tax system.
In comparison to the gap for individuals not in business, the net income tax gap for large corporates was estimated at 5.8 per cent or $2.5 billion in 2014-15, the most recent published gap.
“The ATO will continue to focus on multinationals and large corporates, where in the last three years we have already made substantial progress from a strong base,” Ms Lendon said.
The community can be assured that the ATO is resolute on further increasing the level of voluntary compliance by large companies operating in Australia.
“We are better equipped than ever before to fulfil this commitment through increases in resources and stronger laws, especially the establishment of the Tax Avoidance Taskforce, and the introduction of new laws such as the Multinational Anti-Avoidance Law (MAAL), the Diverted Profits Tax (DPT) and Country-by-Country reporting (CbC). These initiatives are already showing we are making a difference.”
The estimation and publication of tax gap estimates is an emerging feature of revenue authorities around the world.
To measure the tax gap for individuals not in business, we draw on operational data for specific compliance risk areas and combine 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.
The majority of individuals not in business receive income from salary and wages which is usually taxed at source and paid during the year under the Pay As You Go (PAYG) withholding system.
More information about the individuals tax gap is available through the ATO website.
The ATO’s compliance approach for the individuals segment is outlined in Tax and individuals not in business. This publication is available through the ATO website.
ATO media unit
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