Compliance

Compliance involves following guidelines, specifications or, in the case of the tax system, the tax laws that govern the system. Compliance protects the integrity of any tax system and allows it to act and achieve against the principles on which it was designed. In theory, tax systems are designed to capture taxes without being over-reliant on those taxpayers who comply readily, compared to those who comply only reluctantly.

The ‘tax gap’ is the difference between taxes collected against the amount of taxes collected if all taxpayers were fully compliant. The ATO estimates the net tax gap to be $37.5 billion or 7% of tax revenue (in 2020‑21).[48] The 2 taxes with the largest tax gaps are small businesses income tax, and individuals income tax, measured at around $16.2 billion (43.2% of the total tax gap) and $10.9 billion (29%) respectively. A smaller amount of around $4.8 billion (12.8%) of the tax gap is attributed to large corporate groups. However, seeking to collect on this gap in its entirety is not costless, and to extract every dollar would require considerable resources and intense scrutiny by the ATO.

Figure 3-3 compares the relative shares of the different sources of the tax gap with the shares of total tax collected by the ATO.

One important area of consideration in the tax gap is the shadow economy. The shadow economy refers to dishonest or criminal activities and includes items such as unreported personal income, unreported business income, unreported GST, illegal alcohol, illegal cigarettes and tobacco. In aggregate, the ATO estimates the shadow economy makes up around $16.3 billion or 43.5% across the income categories of the tax gap, a significant portion of which is spread across a very large cohort making it difficult and costly to close.

A related issue is that of the tax ‘policy gap’, where the tax system does not operate as intended. Cases of policy gaps often relate to where an individual or business is compliant with tax law but reduces the tax they pay by utilising various mechanisms not available to all taxpayers. This may include mechanisms to transfer income to a jurisdiction with a lower tax rate. 

While the tax gap is a result of inability to effectively police tax laws, the tax policy gap is a result of either being unable to make effective tax laws or preferring to offer concessions. 

Figure 3-3: Share of total tax gap and total tax collections, 2020-21

Source: ATO tax gap statistics and 2020-21 Final Budget Outcome.