International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, March 17, 2020

Australia Revenue Estimates of High Wealth Income Tax Gap from Noncompliance

The high wealth income tax gap is an estimate of the difference between the total amount of income tax collected from high wealth private groups and the amount we estimate would have been collected if every one of these taxpayers was fully compliant with the law.

High wealth private groups are defined as Australian resident individuals who, together with their associates, control wealth of more than $50 million. For the purpose of estimating this gap, we include:

  • registered individuals linked to a high wealth private group
  • companies where ownership by the head individual is 40% or more.

Companies with total business income greater than $250 million are included in the large corporate groups income tax gap.

The income of high wealth private groups includes distributions from trusts and partnerships that are part of their structure; these amounts are accounted for as part of this gap estimate.

In 2016–17, there were approximately 5,000 high wealth private groups with more than $50 million in net wealth. They comprised 9,000 individuals and 18,000 companies. In total, they paid $9.3 billion in income tax and employed 780,000 employees.

Estimate of the tax gap

For 2016–17, the net income tax gap estimate for high wealth private groups was $772 million or 7.7%. This means we estimate that high wealth private groups paid more than 92% of the total theoretical tax payable for 2016–17.

The estimate is an aggregate of the income tax gap for individuals and companies in our population of high wealth private groups. On average, high wealth individuals contribute to 53% of the total net gap and high wealth companies account for slightly less, approximately 47%.

High wealth income tax performance

High wealth private groups voluntarily contributed over $9 billion in income tax for the 2016–17 income year. This is more than 90% of the revenue we were expecting from them.

This shows the vast majority are reporting and paying tax correctly. We understand sometimes people will make honest mistakes, this is usually due to:

  • not correctly recording or reporting transactions outside of the normal course of business
  • not correctly accounting for private use of business funds or assets
  • not reporting income earned from overseas investments or related partnership or trust distributions.

We encourage you to seek advice from your tax advisor as part of your tax governance.

The majority of high wealth private groups are already taking the right steps to avoid these errors and pay the right amount of tax. These include:

  • investing in strong tax governance practices and system controls
  • talking to your tax advisor, or us, if you’re planning to change your business or wealth management arrangement
  • using our tools and services to get greater certainty about the tax consequences, including early engagement and commercial deals services.

We have a number of strategies in place to help reduce the gap. We are improving our detection of errors and deliberate tax avoidance through data and analytics. We are also:

  • increasing our engagement to talk to you about our view of your tax affairs, supporting you to correct past mistakes, and mitigate future tax issues and risks
  • providing guidance in the form of practical compliance guidelines, rulings and taxpayer alerts.

Also, from 2020–21 the expansion of the reportable tax position schedule will apply to large private companies and corporate groups.

This is our first release of the income tax gap estimate for the high wealth population. As we calculate additional estimates over future years, we will be able to see clearer long-term trends.

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See also

https://lawprofessors.typepad.com/intfinlaw/2020/03/australia-revenue-estimates-of-high-wealth-income-tax-gap-from-noncompliance.html

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