4-step top-down method
We use a 4-step top-down methodology to estimate the GST gap.
Step 1: Construct theoretical GST base with expenditure data
Starting with the Australian Bureau of Statistics (ABS) estimate of household final consumption expenditure (HFCE), we add estimates of other expenditure that are subject to GST to:
- new private dwellings investment expenditure (based on ABS published data on investment in new dwellings, alterations and additions)
- consumers' share of ownership transfer costs based on ABS data
- a proportion of land sales.
Step 2: Subtract expenditures where GST does not apply
We then remove specific expenditures included in the ABS measure of HFCE but for which GST concessions or exemptions apply. These expenditures are not part of the theoretical GST base.
These include:
- expenditures that are exempt or concessionally taxed, such as food and education
- input-taxed supplies, such as rent
- certain financial supplies and reduced GST credits
- concessions for entities with turnover less than $75,000 ($150,000 for not-for-profit entities).
The residual amount is our estimate of the theoretical GST base subject to GST.
Step 3: Determine theoretical GST liability
The total theoretical GST base estimated above consists of the GST exclusive price and the appropriate GST (which equals 10% of the GST exclusive price).
We estimate the total theoretical GST liability by dividing the theoretical GST base by 11 (given the fixed GST rate of 10% is incorporated in the estimated GST base).
Step 4: Consolidate the gap estimates
We subtract the actual GST liabilities reported on an accrual basis, including our compliance activities, from the theoretical total GST liability to estimate the net gap.
Non-pursuable debt is considered part of the net gap. Therefore, we add this amount back to estimate the net gap including debt. This is the most accurate measure of the tax gap for GST.
We obtain the gross gap (including debt) by adding the liabilities raised from our compliance activities to the net gap estimate.
Some of the key assumptions of the methodology include:
- The ABS estimates of HFCE reliably capture spending by households in the observed economy. See below for assumptions about non-observed or shadow economy spending by households.
- No adjustments have been made for timing issues in some of the national accounts aggregates used to quantify total theoretical GST revenue, despite some known conceptual misalignments in private dwelling investment.
- The estimates of each HFCE component not subject to GST are derived from various Tax expenditures and insights statements published annually by Treasury. This ensures that our estimates of the GST base align with Treasury estimates of tax foregone on spending not subject to the GST.
Summary of the estimation process
Table 2 provides a summary of each step of the estimation process and the results for each year, from 2017–18 to 2022–23.
|
Step |
Description |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|---|
|
1 to 3 |
Total theoretical tax liability ($m) |
69,004 |
70,197 |
68,872 |
72,257 |
79,308 |
88,659 |
|
4 |
Less final GST reported ($m) |
64,308 |
65,633 |
65,799 |
70,630 |
77,822 |
82,775 |
|
4.1 |
Equals final GST liabilities not reported |
4,696 |
4,564 |
3,072 |
1,627 |
1,485 |
5,884 |
|
4.2 |
Add non-pursuable debt ($m) |
699 |
781 |
1,301 |
1,503 |
2,909 |
2,054 |
|
4.3 |
Net gap with debt estimate ($m) |
5,394 |
5,345 |
4,373 |
3,130 |
4,395 |
7,938 |
|
4.4 |
Add compliance outcomes and taxpayer adjustments ($m) |
2,662 |
2,855 |
2,200 |
3,016 |
6,404 |
3,268 |
|
4.5 |
Equals gross gap with debt estimate ($m) |
8,056 |
8,200 |
6,573 |
6,146 |
10,798 |
11,206 |
|
4.6 |
Gross gap (%) |
11.7 |
11.7 |
9.5 |
8.5 |
13.6 |
12.6 |
|
4.7 |
Net gap (%) |
7.8 |
7.6 |
6.3 |
4.3 |
5.5 |
9.0 |
Find out more about our overall research methodology, data sources and analysis for creating our tax gap estimates.
Limitations
The GST top-down tax gap model relies on various economic aggregates published by the ABS to construct an estimate of the GST base. The reliability of the gap estimates therefore depends on the accuracy and completeness of that data. National accounts data includes a margin of error which imposes some limitations on gap estimates.
Specific issues include:
- Sampling and non-sampling errors may exist.
- Underlying data is subject to routine revision by the ABS, which can vary historical trend results and the estimated GST gap.
- Timing differences can exist between the national accounts and GST treatment for certain supplies.
The latest ABS annual national accounts data were released in October 2023 with the ABS revising a number of previous estimates of HFCE.
The GST effect of concessions and exemptions are identified and estimated in the annual Treasury Tax expenditures and insights statement. The statement estimates can have a wide range and are not exhaustive, with only major exemptions and exceptions identified.
Accounting for shadow economy activity in a top-down model
The top-down GST gap model relies extensively on macroeconomic data published by the ABS to estimate the GST base. We have consistently applied the ABS estimates of HFCE as published, without further adjustment. As a result, the reliability of the estimates depends on the accuracy and reliability of the ABS data; and critically its estimates of the non-observed or shadow economy.
Estimating the size of the shadow economy in normal economic times is subject to significant uncertainty resulting in a wide margin for error. Divergent impacts associated with COVID-19 have increased the range of uncertainty relating to contemporary shadow economy estimates.
Reflecting this uncertainty and the higher estimates published by the Black Economy Taskforce,1 we now consider it prudent to reflect a more contemporary view of the shadow economy into the GST gap. The purpose of this updated adjustment is not to provide precise estimates of the shadow economy as it relates to HFCE, but to move towards estimates that better reflect the impact of the shadow economy on the GST gap estimate.
This methodological change increases the estimated net gap by $1.4 billion in 2022−23 and by relatively similar amounts in earlier years.
|
Element |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|
|
Net gap based on ABS shadow economy ($m) |
4,301 |
4,218 |
3,280 |
2,003 |
3,183 |
6,576 |
|
Net gap based on ABS shadow economy (%) |
6.3 |
6.1 |
4.8 |
2.8 |
4.1 |
7.5 |
|
Net gap based on ABS & BETF shadow economy ($m) |
5,394 |
5,345 |
4,373 |
3,130 |
4,395 |
7,938 |
|
Net gap based on ABS & BETF shadow economy (%) |
7.8 |
7.6 |
6.3 |
4.3 |
5.5 |
9.0 |
We have commenced dialogue with the ABS on these and related issues with a view to supporting revised estimates of the shadow economy using data we collect through our administration of the GST system.
To support this, over the past few years, we have been developing a new bottom-up model to estimate the GST gap using microdata generated by operational (risk-based) audits. Indicative estimates using the bottom-up approach suggest the GST net gap is higher than those from the top-down model which further supports our assumption that the shadow economy is understated in the top-down analysis. The estimates generated by a bottom-up approach will complement the top-down estimates and greatly enhance our understanding of the GST gap and its key drivers.
It is envisaged that estimates based on the bottom-up approach will be published next year.
Updates and revisions to previous estimates
Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:
- improvements in methodology
- revisions to data
- additional information becoming available.
The ABS regularly updates and revises its estimates of HFCE, dwelling investment and other aggregates used to construct the GST base. Incorporating these latest data into our gap calculations results in revisions to our gap estimates. All top-down gap estimates relying on macroeconomic data are subject to this risk.
The ABS generally revise their annual benchmarks for the prior 3 years. However, they periodically undertake more comprehensive reviews resulting in more extensive revisions.
The effects of these changes to methodology and underlying data on our gap estimates are demonstrated at Figure 2.
Figure 2: Effect of ABS revisions and methodological changes on previous GST net gap estimates, 2010–11 to 2021–22
This data is set out in Table 3, shown as a percentage of theoretical GST revenue.
|
Program year |
2013–14 |
2014–15 |
2015–16 |
2016–17 |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
2022–23 |
|---|---|---|---|---|---|---|---|---|---|---|
|
2024 |
n/a |
n/a |
10.1 |
7.3 |
7.8 |
7.6 |
6.3 |
4.3 |
5.5 |
9.0 |
|
2023 |
n/a |
n/a |
8.3 |
5.7 |
6.3 |
7.2 |
4.5 |
2.7 |
3.6 |
n/a |
|
2022 |
n/a |
n/a |
8.8 |
6.3 |
6.8 |
7.7 |
6.3 |
5.9 |
n/a |
n/a |
|
2021 |
8.4 |
8.9 |
10.2 |
8.4 |
7.8 |
7.8 |
7.8 |
n/a |
n/a |
n/a |
|
2020 |
7.3 |
7.5 |
8.2 |
6.9 |
7.3 |
8.1 |
n/a |
n/a |
n/a |
n/a |
|
2019 |
7.3 |
7.1 |
8.2 |
7.2 |
7.3 |
n/a |
n/a |
n/a |
n/a |
n/a |
|
2018 |
7.1 |
7.4 |
8.7 |
7.9 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
|
2017 |
6.1 |
6.7 |
7.3 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
|
2016 |
6.1 |
6.5 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
|
2015 |
6.5 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
1 The Black Economy Taskforce considered that the black economy was likely around 3% of contemporary nominal GDP in 2017; compared with the ABS continuing to apply adjustments totalling around 1.5% of nominal GDP.