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09 Nov 2018 Regarding Senior Tax Adviser’s Report ‘The suitability of Australia’s ‘tax bracket regime’

TaxVine 42 (2 November 2018) 

MEMBER 363 writes: 

I noticed in the last TaxVine 42 some commentary on the release of the ATO annual report, it referred to ‘real time analytics’ and ‘nudge messages’ to myTax users. All good stuff. The report quotes 230,000 messages to save almost $24 million in revenue, some good compliance work being touted, fair enough. The result in simple terms is $100 per person in tax, but the Tax Gap is $1,000 per person, so is therefore the ATO being 10% successful in reaching the Tax Gap?  I know this is simplistic but I am sure you can see the doubt that is being placed on the Tax Gap measurement, rather than myTax users still getting away with $900 tax payable. When are we going to get full transparency of the 858 tax gap sample? 

MEMBER 364 writes: 

That tax gap again. Checking to see how it might fit with my client base. I remember the ATO quotes some $8 billion tax gap on 8 million work-related individuals –  thus about $1,000 tax gap per person. 

I am a suburban firm, drawing clients from, I think, a diverse range of people. Using my tax software, I randomly selected 100 individuals with work-related expenses, of my just over 2,000 individuals. 

Of the 100 individuals, I looked at the total work-related deductions and rental loss: 

  • 53 individuals had less than $1,000
  • 16 individuals had between $1,000 to $2,000
  • 12 individuals had between $2,000 to $4,000
  • 10 individuals had between $4,000 to $10,000
  • 9 individuals with over $10,000 of work related deductions and rental loss. 

I apply very generously in the ATO favour adjustment levels on each group of 30% adjustment to the upper threshold of the group.[CG1]  [CG2] [CG3] So, for the under $1,000 group, assume an adjustment of $300 for every 53 tax returns, this is clearly very generous as there will be a significant number who will have adjustments of some 50% of their claims, because their deduction might only be $600 in total.  And the same effect will occur in the other groups. I have critically browsed through the sample and cannot see how this level of adjustment across every one could be possible,  but let’s bear with the assumption. 

With these adjustments, and being generous again to the ATO, we apply a marginal tax rate of 37% and Medicare rate of 2%, then my end tax collected for the 100 sample is some $48,411, which equates to $484 per person. That’s less than half the ATO gap. 

So, to get to the ATO’s 858 sample tax gap of $1,000 per person, the adjustments need to be double the amount I have applied to my sample – just not possible, and it does not make sense. Thus, the rhetorical question: how representative is that miniscule sample of 858?

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