The Australian Tax office (ATO) has reported a 7.3% tax gap between what was supposed to be collected in the 2018-19 financial year versus what was collesmallcted. This has amounted to an estimated $33.5 billion tax loss, the bulk of which has been attributed to small businesses and individuals. Small businesses were found to be responsible for a gap of about $12.5 billion and individuals $8.4 billion. Corporate entities were reported to have a gap of just $2.4 billion. Overall, it is an increase on the previous year’s tax gap of $32 billion.
According to ATO commissioner, Jeremy Hirschhorn, one of the key reasons small businesses and individuals caused the tax gap was underreporting of income. He noted that small businesses in the shadow economy behaviours accounted for most of the omissions. He added that errors during reporting and poor record-keeping were also causes. The $8.4 billion loss from individual taxpayers was found to relate to work-related and rental income related deductions.
To help combat these problems, the ATO intends to focus more on the prevention and elimination of errors by heightening digitisation efforts. Hirschhorn said that there would be an emphasis placed on maintaining voluntary compliance. This would be supported by preventative and deterrent approaches like sharing web material including compliance guidelines and tax alerts. Advisers and intermediaries would also be provided with guidance products.
These strategies are expected to be more helpful than using audits that would require a greater commitment of resources. While the ATO does not expect to fully eliminate tax gaps as the cost involved would be extreme, it still hopes to sustainably reduce the amount with time.
The ATO has noted that tax gaps are created by taxpayers not reporting their true tax positions and avoiding their obligations. It has found the reasons behind this to be due to misunderstanding tax laws, deliberately taking a tax position that differs from the ATO’s view of the law, or a conscious choice not to report certain incomes.
The ATO is yet to report on tax gaps during the more recent financial years. It has been less stringent on compliance issues during the pandemic, making it uncertain what kind of outcome should be expected. ATO commissioner, Chris Jordan, confirmed that compliance work was halted last year due to the impact of the pandemic. He added that as compliance work resumed, the ATO had opted to remain flexible given the financial hardship many taxpayers were experiencing.
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