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11 February 2020

In the world of government a regulator is like a referee. And we assume referees are there to catch out people doing the wrong thing.

But the Australian Taxation Office (ATO) is getting better results by paying attention to what people do right.

The ATO have started including information on what people are doing right when paying their taxes (also known as assurance information), and incorporating this into their tax gap estimate.

But what is the tax gap and why do we care about it?

The ATO collects tax. They also make an estimate each year of how much tax they think they should be able to collect. The difference between these two large and complex numbers is called the tax gap.

Around the world, the normal way of researching the tax gap is to assume the worst (well, sort of, this is a reductive summary). Tax offices make an estimate based on what people are doing wrong when paying their taxes. The technical term for this is compliance information.

This used to be the way the ATO researched the tax gap. They started with information from audits and compliance activities, working out the average rate of people not reporting tax. They then also estimated the amount of unpaid tax the audits don’t capture.

But the ATO shifted its approach. They now take information from tax returns and other information gathered from individual taxpayers, to extrapolate a much better estimate of the tax gap.

This work was inspired by the ATO’s Justified Trust Program, which is about taking a proactive approach with large corporations to encourage them to pay their tax. This in turn increases citizen’s trust that large corporations are paying their fair share.

There are roughly 800 large corporations in Australia. They all have professional finance teams. And it’s usually more valuable to these corporations to be seen as good corporate citizens (who pay their tax) than to save money through aggressive accounting practices.

The ATO does things like issue taxpayer alerts about risky ways people (and organisations) might organise their tax or superannuation. This is like the ref saying to the captain ‘Jenny, your players are pushing offside. I’m not giving a penalty now, but I’m watching.’

The alerts warn the boards of the large corporations, who can, in turn, tell their finance teams – ‘hey, let’s not do this high risk thing’.

The public needs to trust that everyone is paying their fair share. By taking into account what people are doing right, as well as what they’re doing wrong, the ATO has been able to give the public a much better picture of what tax is being paid vs what tax we expect to be paid.

It’s a fresh approach that’s resonating around the world. It also resonated with the judges of the 2019 Public Sector Innovation Awards – the ATO won the special Judges’ Award. If you’re interested in taking a similar approach to the ATO, drop us a line and we can put you in touch with the team who did it.

Read more

Learn more about the teams who won Public Sector Innovation Awards in 2019

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Email psi@industry.gov.au