Yesterday the Australian Taxation Office (ATO) released information about the personal income tax gap for the first time.
The tax gap is the difference between the amount the ATO believes it should have collected, and what it actually collected.
The ATO estimates that for 2014-15 the net individual income tax gap attributable to salary / wage earners and investors was $8.76 billion, or 6.4 percent.
The ATO attributes this tax gap principally to three causes:
1. incorrect claims for deductions for work-related expenses
2. undeclared salary and wage income, particularly in respect of cash wages
3. incorrect claims for deductions for rental property expenses.
Importantly, the ATO’s figures do not include any estimate of potential revenue leakage in relation to individuals who derive business income, or high wealth individuals. The ATO intends to cover these groups in future releases.
The tax gap statistics highlight the difficulty for the ATO in taking action to achieve a higher level of compliance. Across 10.7 million taxpayers covered by the analysis, in 2014-15 it was only able to secure an additional $530 million in revenue through audit and other review activity – less than 7 percent of the gross gap. In a sample of returns that the ATO reviewed, 72 percent required adjustment. However, for more than half of those adjusted returns, the adjustment was for an amount of $300 or less.
In the 2018 Budget, the Government announced anti-black economy measures such as the denial of an income tax deduction for wage payments made by employers who do not withhold and remit pay as you go (PAYG) income tax from those wages. These measures are welcome and should contribute to a reduction in this tax gap.
However undeclared salary and wage income is far from the largest contributor to this tax gap. A considerably higher proportion is due to the over-claiming of work- and investment-related deductions. Modifications to Australia’s rules on claiming tax deductions have been the subject of debate for many years now. The size of this tax gap may generate renewed focus on whether New Zealand’s approach (adopted in the 1980s) of eliminating all work-related deductions (with a corresponding reduction in marginal tax rates) has merit in the Australian context.