Methodology

We use a 5 step model-based bottom-up methodology to estimate the large corporate groups income tax gap.

Step 1: Calculate amendments

We use the results of amendments, initiated by us and clients, to estimate the tax gap for the entire population. We use:

• the actual result of compliance activities, including the amendments from completed audits and reviews
• taxpayer voluntary disclosures
• expected future compliance outcomes for material amounts in dispute
• projected future amendments.

We project future amendments to account for the time delay between a tax return being lodged, and any final amendments that will be made. As complex tax cases may take years to resolve, the amendments may not be received until several years after the tax return was lodged.

To account for these future amendments, we use data on the value and timing of past amendments to project amendments we are likely to receive in the future. As we revise the gap in future years, we will use refreshed information to update our results and improve projections.

We then aggregate the amendments, including projected amendments, for the population to determine the total result.

Step 2: Integrate coverage data

We use our tax assured data in our estimation, coupled with data collected through our traditional compliance activities, such as audits and reviews. This allows us to calculate unreported tax and derive a figure for non-detection more accurately.

For large corporate groups we assure tax by collecting evidence directly from taxpayers.

More information about our approach is in Tax assured: gaining confidence the right amount of tax is reported.

Step 3: Calculate unreported tax

Unreported tax is the additional tax we estimate may be raised if we were to undertake compliance activities on the entire population.

To estimate unreported tax, we calculate adjustment factors based on actual and projected future amendments.

Then we discount these factors to account for selection bias. This reflects that our compliance activities are biased towards areas of higher risk than the level in the general population.

We then apply these factors to each entity in the population to estimate the total amount of unreported tax. The factors may be discounted where the expected collections have been assured, reflecting our higher confidence in those amounts.

Step 4: Estimate non-detection

We uplift the estimates from the earlier steps to account for non-compliance not detected through our compliance activities. We do this by applying uplift factors to the tax amounts based on the level of tax assurance.

Given the confidence we have in tax amounts assured through our justified trust program, we apply a lower non-detection factor to those amounts.

Find out more about ensuring complete estimates.

Step 5: Estimate theoretical liability – gross gap and net gap

We add total amendments (step 1c), unreported tax (step 3) and non-detection (step 4) to determine the gross gap.

To calculate the theoretical liability, we then add the amount of tax voluntarily reported. Then we subtract total amendments from the gross gap to determine the net gap.

Estimate summary

Table 3 provides a summary of each step of the estimate for each year. It shows the calculation for each of the steps described from 2015–16 to 2020–21. Steps 1 through to step 5d are in dollar values, and steps 5e and 5f are in percentage values.

Table 3:Summary of large corporate groups income tax gap estimation process

Step	Description	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21
1a	Amendments ($m)	1,035	847	891	803	309	289
1b	Projected amendments ($m)	477	709	895	1,140	1,270	1,408
1c	Total amendments ($m)	1,512	1,555	1,785	1,943	1,579	1,697
2	Tax assured ($m)	26,382	32,076	34,089	35,548	34,373	34,684
3	Unreported tax ($m)	843	650	963	1,023	946	1,539
4	Non-detection ($m)	947	973	1,079	1,212	1,231	1,538
5a	Gross tax gap ($m)	3,302	3,178	3,828	4,177	3,756	4,773
5b	Tax voluntarily reported ($m)	38,191	45,384	51,255	56,507	57,328	68,292
5c	Theoretical liability ($m)	41,493	48,562	55,083	60,684	61,083	73,065
5d	Net tax gap ($m)	1,790	1,623	2,042	2,234	2,177	3,076
5e	Gross gap (%)	8.0%	6.5%	6.9%	6.9%	6.1%	6.5%
5f	Net gap (%)	4.3%	3.3%	3.7%	3.7%	3.6%	4.2%

Note: Tax assured amounts are not used directly in the calculation, but feed into our calculations of unreported tax (step 3) and non-detection (step 4).

Find out more about our overall research methodology, data sources and analysis for creating our tax gap estimates.

Limitations

Estimating the tax gap for large corporate groups is difficult and involves inherent uncertainty. Tax issues and tax laws are complex and contestable.

The estimates do not account for differences where there are alternative views on the appropriate interpretation of the tax law. Differences can exist between reasonably arguable positions presented by us and taxpayers.

Non-detection is also challenging to estimate. We use tax assured data to improve estimates where possible.

The current methodology only provides an aggregated estimate of the large corporate groups tax gap. While this may allow generalised comparisons with other taxes, it does not measure relative risk between corporate groups or issues within this market.

The gap estimate is a lag measure because compliance results take several years to flow through. This is due to the complexity of the tax issues in this population and how much time it takes to finalise our compliance activities.

Assumptions

Assumptions we use to construct this estimate are informed by actual data and expert opinion. The key assumptions are:

• For those large corporate groups that we don't audit or review, we assume
  • a certain degree of non-compliance with tax law occurs
  • the degree of non-compliance in these groups is less than those we do audit or review due to our risk detection approaches.
• For those large corporate groups that we do audit or review, we assume
  • adjustments to their tax liabilities are representative of the value of non-compliance with tax law
  • we don't detect all instances of non-compliance
  • adjustments to their tax liabilities from completed audits and reviews are correct with the law at the time of estimation.
• For projected estimates, we assume
  • past outcomes of audits, reviews, settlements, and objections are reasonable representations of future outcomes.

Accounting for non-detection in the gap

We do not detect all errors through audit and assurance activity. We account for this by applying a non-detection uplift to the unreported tax estimate.

We apply different non-detection uplift rates depending on the level of assurance we have over the tax reported in each return. Where we reviewed a tax return and have a high level of confidence in the amounts reported, we apply a lower non-detection uplift rate. We apply a higher non-detection uplift rate for tax returns we have not reviewed.

For the 2020–21 year, we estimated the impact of non-detected errors to be $1.5 billion.

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
• our tax assurance activities improve the accuracy our tax gap estimates.

Due to timing of lodgments, some of our assurance activities will be reflected in the next years published gap. This will likely mean refreshed estimates of the 2020–21 tax gap will be lower than the estimate published this year.

Figure 2 displays the gross gap and net gap from our current model compared to our previous estimates and shows a downward trend.

Figure 2: Current and previous large corporate groups income tax gap estimates, 2015–16 to 2020–21

There have been no major changes made to the methodology since the last release of estimates in 2022. The overall size and trend of the gap is similar to previous estimates.

As standard practice, the estimates have been revised using updated data. This provides additional information on the amount of tax assured and the actual amount of amendments which reduces the reliance on earlier projections.

The data used in Figure 2 is presented in Table 4 below.

Table 4: Current and previous large corporate groups net tax gap estimates (percentage), 2010–11 to 2020–21

	2010–11	2011–12	2012–13	2013–14	2014–15	2015–16	2016–17	2017–18	2018–19	2019–20	2020-21
2023 program	n/a	n/a	n/a	n/a	n/a	4.3%	3.3%	3.7%	3.7%	3.6%	4.2%
2022 program	n/a	n/a	n/a	n/a	6.2%	4.8%	3.3%	4.1%	4.3%	4.2%	n/a
2021 Program	n/a	n/a	n/a	6.2%	5.4%	4.0%	3.6%	3.8%	4.3%	n/a	n/a
2020 Program	n/a	5.4%	6.4%	5.8%	4.9%	3.8%	3.5%	3.7%	n/a	n/a	n/a
2019 Program	4.9%	5.4%	6.1%	5.2%	5.0%	4.7%	4.0%	n/a	n/a	n/a	n/a
2018 Program	5.5%	5.5%	6.5%	6.1%	4.5%	4.4%	n/a	n/a	n/a	n/a	n/a

We will publish revisions to these results in future years as information becomes available.

New information generally relates to later years. By including this we can reduce the uncertainty in the estimates and improve their reliability and credibility.

Given the higher level of uncertainty with later year gap estimates, caution should be taken in extrapolating these results.