Form cover page titled 'ATO Minute to the Inspector-General of Taxation'. It is addressed to Rick Matthews, Deputy Inspector-General of Taxation; from James O'Halloran, Deputy Commissioner.

Purpose of Paper

  1. Provide a view of the Individual market segment potential non lodgment population.

Background

  1. There are currently over 31 million entities registered for a tax file number on the Tax Office Client Register, including:
    • 23.6 million individuals,
    • 2.5 million companies,
    • 2.2 million partnerships,
    • 1.9 million trusts and
    • 750 thousand superannuation funds.
  2. Registration for a tax file number does not equate to an obligation to lodge an income tax return. Similarly, where a registered entity has an income tax obligation in any year it does not indicate an obligation to lodge in prior or subsequent years. Entities may only need to lodge income tax returns infrequently, depending upon their individual circumstances.
  3. The Income Tax Rates Act 1986 and the Income Tax Act 1986 together declare and impose income tax on all categories of taxpayers. The annual income tax return is the vehicle by which taxpayers meet their lodgment obligations against these and other Acts (eg The Medicare Levy Act 1986).
  4. Annually the Commissioner of Taxation issues a Legislative Instrument1 calling for lodgment of income tax returns. The instrument sets due dates and also states relevant thresholds and circumstances under which an individual is required to lodge an income tax return.
  5. Under the system of self assessment, taxpayers are required to self determine under the Legislative Instrument whether they have an obligation to lodge, but they do not have to advise the Tax Office where they have determined, that their circumstances do not require them to lodge an income tax return. Consequently, where a taxpayer's income tax record shows that an income tax return has not been received for a particular year, it does not necessarily mean that there is an obligation to lodge.
  6. The Inspector-General of Taxation is currently conducting a review into the non-lodgment of income tax returns. Three formal meetings have been held with the Inspector General of Taxation on the 13th December 2007, the 13th March 2008 and the 5lh June 2008.
  7. At the meeting on the 13th of December, a split of the client register by market segment categorised as 'active' or 'inactive' according to entity type and number of potentially outstanding returns was provided. The "Active" population have one or more income tax returns that have not yet been received but do not necessarily equate to the actual number of outstanding lodgments.
  8. At a meeting held in Canberra on the 13th of March 2008, the Deputy Inspector-General of Taxation requested that the Tax Office develop a view of the client register, to better identify those with a potential lodgment obligation.
  9. It was agreed that the initial view should focus on individual taxpayers within the Individual market segment for whom the Tax Office were yet to receive one or more income tax returns.
  10. A draft of this view was provided at the meeting held on the 5th June 2008.
  11. It was requested that further analysis should concentrate on those taxpayers categorised in the initial draft of the paper as the "Filtered Population" for whom an income tax return for the 2005/06 year had yet to be received. Refer to attachment A for the fuller analysis.

Methodology

  1. The draft view provided at the meeting of 5m June 2008 segmented the target population into clusters of clients with similar characteristics.
  2. This paper provides a more refined view of the Filtered Population for whom we have yet to receive a 2005/06 income tax return.

Terminology

Base Population

  1. The base population used for this analysis was individual taxpayers categorised as "Active" within the Individual market segment for whom the Tax Office were yet to receive one or more income tax returns (relating to 6.27 million tax file numbers). NB: It is recognised that this number represents the base population at a particular point in time only, and it is expected that this base population figure will change over time.

Filtered Population

  1. The 'base population' was initially filtered according to the level of information (potential indicators of a lodgment obligation) held in the Tax Office (from both internal and external sources).
  2. The initial criteria used to filter the population were:
    • Deceased indicator2 (now deleted from the analysis)
    • Overseas indicator3
    • Child Support Agency indicator4
    • Senior Australian Tax Offset (SATO) eligibility indicator5
    • Centrelink indicator6
    • Payment Summary Statements (PSS) available7
    • Annual Investment Income Report (income greater than zero)8
  3. These criteria provide information about the client, including potential income received. All clients which had at least one of the initial filtering criteria were categorised as the 'filtered population'. NB: The existence of one or more oftliese criteria however does not of itself indicate that a lodgment obligation exists. Tor example, an annual investment income report indicator only, where the income reported is less than $100 points to no obligation to lodge.

Residual Population

  1. All taxpayers that did not have any of the above initial filtering criteria were categorised as the 'residual population'.

Summary

  1. Not all registered entities have an annual obligation to lodge income tax returns. Obligation to lodge is based on an assessment by a taxpayer of their circumstances in accordance with the Lodgment Instrument.
  2. The majority of taxpayers who need to lodge income tax returns voluntarily meet their lodgment obligations. The Tax Office's Business Model, as outlined in our Strategic Statement 2006-10 sets out how we will conduct our business. Consistent with this Business Model, our corporate lodgment strategies use a balance of educational and compliance activities to improve taxpayers understanding of their lodgment obligations, and subsequently manage those who do not meet their obligations.
  3. The Tax Office recognises the important role played by Tax Agents in the administration of the taxation system and especially their role in the lodgment of income tax returns (accounting for approximately three quarters of all income tax returns lodged annually).
  4. The Lodgment Working Group, involving representatives from the Tax Office, Tax Agents and professional associations, is one avenue that allows the Tax Office to work with the profession in a collaborative nature. Meeting regularly, the forum discusses relevant lodgment issues. The primary example is the annual Lodgment Program, which allows a series of concessional lodgment due dates for tax agent prepared returns and statements, and which is co-designed in consultation with this group.
  5. The Tax Office is conscious of the potential risk to revenue and also community confidence in the taxation system and consequent impact on future voluntary compliance where taxpayers do not meet their income tax lodgment obligations.
  6. The Tax Office uses differentiated, risk based treatments to prioritise our lodgment compliance activities. Risks considered include:
    • the risk to revenue,
    • the risk to community confidence, and
    • the risk to the integrity of the tax system.
  7. In accordance with the Inspector-General of Taxation request, the attachment to this paper provides a view of individual taxpayers within the Individual market segment, concentrating on those taxpayers categorised as the "Filtered Population" for whom an income tax return for the 2005/06 year has yet to be received.

Attachment A: Analysis of the Individual Market for Inspector General of Taxation

1.0 Updating in Base Population figures (as per figures provided at meeting of 5th June 2008)

As discussed at the meeting on the 5th June 2008, there had been a move in the population figures that were originally provided to the Inspector-General of Taxation at the 13th December meeting. Details of these shifts as at the end of March 2008 can be summarised as:

  • A decrease of over 1.05 million (from 7.32 million to 6.27 million) to the overall number of clients with one or more income tax returns not yet received.
  • A corresponding increase of over 711,000 clients (from 7.48 million to 8.19 million) to the "Nil outstanding" category (eg due to late lodgments received either voluntarily or as a result of compliance action undertaken by the Tax Office).
  • A decrease of 337,000 (from 14.8 million to 14.465 million) in the overall "Active" population of individual taxpayers in the Individual market segment.
    NB: This can be attributed to a number of reasons including the movement of taxpayers across market segments (eg from individuals segment to the micro business segment), as well as a shift from being categorised from an Active to an Inactive taxpayer (eg due to the taxpayer having an "Further Returns Not Necessary" indicator input on their file, or the taxpayer being insolvent).

2.0 Stratification

As outlined on page 3 of this paper, the base population was filtered according to a number of initial filtering criteria. (NB: The existence of one or more of these criteria does not of itself indicate that a lodgment obligation exists)

Table 1 and Figure 1 (below) provide details of this initial segmentation of the population, into those with at least one of the initial filtering criteria (ie the Filtered Population) and those without any of the criteria (the Residual population).

Table 1: Taxpayer counts for the selected characteristics (figures as at 30 March 2008)
Initial Filtering Criteria Taxpayer Count
with this criteria
Number of taxpayers without
any of the criteria in the above rows9
Residual Population
1 or more ITRs not received 6,270,919   6,270,919
Deceased indicator 12,141 12,141 6,258,778
Overseas indicator 91,459 91,451 6,167,327
CSA Indicator 367,031 365,112 5,802,215
SATO 93,944 90,189 5,712,026
Centrelink indicator 1,342,770 1,068,811 4,643,215
PSS 2,586,212 1,803,716 2,839,499
AIIR 1,789,910 578,084 2,261,415

Figure 1: Segmentation of the Individual Population with Not Yet Received Lodgments

Graphic showing the segmentation of the Individual Population with Not Yet Received Lodgements.

As previously stated, the 'base population' relates to individual taxpayers categorised as "Active" within the Individual market segment for whom the Tax Office are yet to receive one or more income tax returns. Figures shown in this paper do not equate to the number of outstanding lodgments.

3.0 Breakdown of Base population into Filtered and Residual Populations

At the meeting of the 5th June 2008, the Deputy Inspector-General of Taxation stated that, rather than keep progressing the refinement of this client view over time, he wanted to lock in some numbers. Recognising that the client population view changed over time, it was proposed (and agreed) that the March 2008 figures as used in the paper be accepted as the final figures to be analysed as part of the current review.

Initial discussion centred on Table 1, as shown above, which highlighted that of a base population of 6.27 million individual taxpayers with one or more income tax returns yet to be received, that just over 4 million had at least one initial filtering criterion present for the 2005/06 income tax year.

The Deputy Inspector-General of Taxation explained that he wanted to get the Tax Office's perspective of the number of individuals who should be lodging income tax returns. He considered that five of the seven initial filtering criteria shown in Table 1 were potential indicators of a lodgment obligation, and that this was more likely where there were multiple indicators present. He requested that future analysis concentrated on the 4 million taxpayers categorised as the "Filtered population" in the draft paper and accordingly a view was to be established as to how many of these 4 million taxpayers had an expected obligation to lodge income tax returns.

It was noted by the Tax Office that many of the 4 million taxpayers may have some level of income but have self assessed that they did not have an obligation to lodge and so didn't. Further, they are not obliged to inform the Tax Office where they had formed this opinion.

It was further noted that the Tax Office, by necessity with the volumes of taxpayers and taxpayer information, can not count down to the last person with an expected lodgment obligation. Rather the Tax Office looked at areas of potential risk, and how they were responding to this. The Tax Office's risk framework to address non lodgment of income tax returns includes using matching of specific data sets and also the use of predictive analytical models.

Of the 4 million "Filtered population", 2.3 million (or approximately 60% of the total) had to 30 March 2008 finalised their 2005/06 income tax lodgment obligations. After further discussion, it was agreed that the Tax Office would focus on providing a breakdown of the 1.7 million taxpayers of the "Filtered Population" from whom we had yet to receive a 2005/06 income tax return.

Updated data

Accordingly, this paper focuses on the 1,715,083 Individual entities of the Filtered Population for which we are yet to receive a 2005/06 income tax return. After removing those that should have been excluded from the initial population (eg Deceased) and those for whom the 2005/6 income tax return has since been finalised (eg either lodged or not necessary), there are just over 1.63 million Individuals remaining (Table 2 below).

Table 2: Filtered Population where the 2005/06 income tax return is yet to be received
Characteristic Client Count with this characteristic Number of clients without the previous characteristics Residual Population
2005/06ITR not yet received (as at 30 Mar 08) 1,715,083   1,715,083
2005/06 ITR now finalised (lodged or not necessary) or categorised as Inactive (eg Deceased) as at 23 July 2008. 84,731   1,630,352
Overseas 85,403 85,403 1,544,949
CSA Payers 235,663 235,663 1,309,286
SATO 56,262 54,957 1,254,329
Centrelink 596,482 426,016 828,313
PSS 717,805 458,006 370,307
AIIR 732,216 370,307 0

4.0 Assessing the risk of a lodgment obligation for the 2005/06 income tax return

Further analysis of Table 2 above shows:

4.1 Taxpayers with an overseas address

The 85,000 taxpayers shown as being overseas are either non residents living outside of Australia or residents who have moved permanently overseas. By itself this is not an indication as to whether the person has an obligation to lodge income tax returns in Australia. This will instead be determined according to their sources and level of income earned either within or outside Australia.

Of the 85,000 taxpayers with an overseas address:

  • 53,000 (62%) are recorded as Australian residents.
  • Only 8,200 (9.6%) have been identified as either being a CSA payer or having had an amount withheld from a payment received from within Australia,
  • Our experience is that only a small percentage of these taxpayers have a requirement to lodge.

Where someone resides offshore, we would generally only pursue lodgment for these taxpayers where we have specific information. Accordingly, these taxpayers have been excluded from the analysis in this paper.

4.2 Child Support Agency (CSA) Payers

All 235,000 of these taxpayers have a legislative requirement to lodge, however many do not comply with this. Reasons for not lodging include:

  • There are often highly emotive issues involved, often connected with family breakups.
  • 42% (100,000) have estimated assessable income of less than the $6,000 threshold.
  • After accounting for amounts withheld, approximately 93% (219,000) are estimated to result in either a nil or a credit assessment (ie refund).
  • For any taxpayers entitled to refunds these will be intercepted by the Tax Office against their CSA obligations.

Accordingly, the majority of these taxpayers are considered to be low risk.

The Tax Office has a Memorandum of Understanding (MOU) with the Child Support Agency, whereby we receive specific funding to undertake lodgment compliance activities against CSA clients as nominated by the Agency. Under the MOU the Tax Office has agreed to annually prioritise lodgment compliance action against 125,000 CSA clients as nominated by the Child Support Agency as their highest risk clients.

To reflect the work underway we can advise that 78,000 (33%) taxpayers of the total 235,000 population included in this analysis have been contacted as part of targeted lodgment compliance activities during the 2007/08 year. Further work on this population will continue in the 2008-09 year. In addition to these MOU referrals, this population will also receive lodgment compliance activity where identified as high risk.

In terms of the finalised lodgment cases we can advise that we have recently completed the second year of this MOU and to date have actioned over 250,000 cases (including individuals in business). Results of this targeted lodgment compliance activity have been the finalisation of over 211,000 income tax lodgments, raising a net credit amount of $20.5 million. Over $36 million has also been intercepted to meet child support obligations. This has exceeded original estimates, and consequently the CSA are looking at negotiating an extension of this strategy beyond 2010 (the end date of the current MOU).

4.3 Senior Australians Tax Offset (SATO)

Certain low income aged persons, both pensioners and self funded retirees are entitled to a special additional tax offset, generally referred to as the "Senior Australians Tax Offset" (SATO).

Accordingly, by design most of these taxpayers eligible for this tax offset should not have to pay taxation, and so consequently the 55,000 taxpayers in this category have also been excluded from further analysis in this paper.

4.4 Summary of resultant population

For reasons stated above, after excluding those taxpayers either with an overseas address, with Child support obligations or eligible for the Senior Australians Tax Offset, the revised population of taxpayers to be further analysed is 1,254,000 (refer Table 2).

4.5 Analysis of the lodgment risk for the remaining population of 1,254,000

The focus population of 1,254,000 taxpayers all have at least one dollar of income for the 2005/06 year disclosed to the Tax Office in the following data sources; the Annual Investment Income Report (AIIR), Centrelink data and Payment Summary Statements (PSS).

It should be noted that the income estimates established may be affected by many factors for example data integrity issues (eg incorrect details as contained in one of the externally obtained data bases used), as well as a multitude of other factors that can affect the true assessable income level but which have not been considered in this analysis, including:

  • Rebates available, including Private Health Insurance Rebate
  • Family Tax Benefits
  • Any eligible work related deductions
  • Income from other sources.

The 1,254,000 taxpayers can be further broken down by:

  • 370,000 (30%) only have ADR income
  • 268,000 (21%) only have PSS income
  • 214,000 (17%) only have Centrelink income
  • Remaining 402,000 (32%) have a combination of two or more sources of income.

705,000 (56%) taxpayers have some amount withheld for the 2005/06 year, whilst the balance of 549,000 (44%) taxpayers have no amounts withheld.

Generally, under the Legislative Instrument, the Commissioner of Taxation requires individuals whom have had an amount withheld from payments or an amount paid to the Commissioner of Taxation under the Pay As You Go (PAYG) withholding system to lodge an income tax return for the relevant year of income.

However, although there may be a legislative requirement for a taxpayer to lodge an income tax return, many taxpayers still make a judgement as to whether for them it is worthwhile lodging. For example many taxpayers who have low levels of income may either not be aware of the need to lodge (especially where only minimal withholding has occurred), or may not considering it worthwhile to lodge their income tax return to get a ref und of less than a certain amount (the dollar amount of which will be dependent upon the individual).

4.6 Taxpayers with evidence of greater than SI withholding for the 2005/06 year

Further analysis of the 705,000 (56%) taxpayers that have had an amount of greater than $1 withheld for the 2005/06 year:

  • 34% (242,000) had only income from Payment Summary Statements data - and so could be expected to have been taxed appropriately through the PAYG system.
  • After accounting for amounts withheld, approximately 81% (572,000) were estimated to result in either a nil or a credit assessment (ie a refund). (NB: This was without considering allowable deductions, rebates and tax offsets which would increase this number).
  • Accordingly, the majority of these taxpayers are considered to be low risk, and many may have self determined that regardless of their lodgment obligation it was not worthwhile lodging an income tax return. NB: The Tax Office has provided a number of initiatives (eg E-tax, pre-filling) to make it easier and cheaper for taxpayers to be able to meet their lodgment obligations. The use of these products continues to grow, and offers an effective alternative for taxpayers who may not be able to afford the financial costs associated with tax agent services.
  • To reflect the work in course we can advise that during 2007/08 87,000 (12.4%) of these taxpayers have lodgment compliance action taken to pursue the outstanding income tax returns. Further work on this population will continue in 2008-09.

4.7 Taxpayers with no evidence of having amounts withheld for the 2005/06 year

Further analysis of the remaining 550,000 (44% of the focus population) taxpayers with no evidence of having any amounts withheld for the 2005/06 year:

  • 58% (320,000) have estimated assessable income of less than the $6,000 threshold
  • 47% (257,000) had only income from investments (per AIIR data)
  • 36.5% (200,000) had only income from Centrelink,
  • 5% (26,000) had only income from PSS.
  • Only 1.3% (7,300) of this category of taxpayers are estimated to have an assessable income of over $25,000. As previously stated, these would be further reduced by entitlement to deductions, rebates etc. As part of our lodgment compliance workloads the higher level of income is a factor in determining priority for case selection.
  • 95% (523,000) were estimated to result in a nil assessment for the 2005/06 year.
  • Accordingly, the majority of these taxpayers are considered to be low risk, and many may have self determined that they had no lodgment obligation but just not informed the Tax Office of this fact.
  • The relative risk for this category of taxpayer is lower than others such as business taxpayers.
  • To reflect work in course we can advise that during 2007/08 39,000 (8.9%) of these taxpayers have lodgment compliance action taken to pursue the outstanding income tax return. Further work on this population will continue in 2008-09.

4.8 Summary

This paper has analysed the 1.7 million taxpayers (as at 30 March 2008) of the "Filtered Population" from whom we had yet to receive a 2005/06 income tax return.

Of the 1.7 million taxpayers (as per figures contained in Table 2):

  • Shift in overall target population for whom the Tax Office has yet to receive a 2005/06 income tax return.
    Since the March data was provided (as at 23rd July 2008), 85,000 taxpayers had either finalised their 2005/06 income tax obligation (lodged or not necessary) or are now categorised as Inactive (eg Deceased).
  • 85,000 resided overseas:
    This is not by itself an indication of a lodgment obligation. Information held within the Tax Office indicates that approximately 8,200 may have an obligation to lodge due to being either a CSA Payer or having an amount withheld from a payment received from within Australia. We generally only pursue lodgment for these taxpayers where we have specific information.
  • 235,000 were CSA payers:
    As such they have an obligation to lodge an income tax return for the 2005/06 year. Recent changes to CSA legislation will change the obligation to lodge in future years.
  • 55,000 were eligible for the Senior Australian Taxation Offset (SATO):
    This is not by itself an indication of no lodgment obligation, but generally these taxpayers should not have an obligation to lodge.

Of the remaining 1,254,000 taxpayers:

  • 705,000 taxpayers had a lodgment obligation under the Legislative Instrument guidelines, as they had an amount withheld during the 2005/06 year.
  • 241,000 (19.2%) taxpayers are estimated to have an assessable income of greater than $25,000 (NB: Estimated assessable income does not consider potential work related expenses that may be allowable, and which would consequently reduce the estimation).
  • 1.097 million (87.7%) taxpayers are estimated to have either a nil (524,000) or a credit assessment (573,000). Where allowable deductions, rebates and tax offsets are taken into account, both these numbers would increase.
  • Our corporate lodgment strategies use a balance of educational and compliance activities to improve taxpayers understanding of their lodgment obligations, and subsequently manage those who do not meet their obligations.
  • The vast majority of the focus population is considered to be relatively low risk. Many of the taxpayers appear to have made a considered determination as to whether they need (or want) to lodge an income tax return.
  • We select cases for lodgment compliance action based on an assessment of their relevant risk - beyond this population this includes balancing decisions with business taxpayers' income tax returns and other forms such as activity statements with significantly higher risk.
  • During 2007/08, we undertook lodgment compliance activity for over 136,000 (11%) of the taxpayers included in this population. Further work on this population will continue in 2008-09.

1 http://atolaw/view.htm?DocID=OPS/TPAL2007001/00001

2 These taxpayers should he classified as "Inactive", and have been removed from this analysis.

3 A taxpayer has an 'overseas' indicator where the current address on file is an overseas address.

4 This information is provided by the Child Support Agency for their clients currently recorded as CSA payers.

5 A taxpayer has a SATO indicator if, from the information available, they met all of the relevant conditions. The conditions relate to an age test, eligibility for Commonwealth age pension or similar type payments from the Department of Veterans' Affairs, taxable income thresholds and whether the taxpayer has been in jail for the income year.

6 This information is provided by Centrelink for clients registered for benefits during the 2005/06 year.

7 A taxpayer has been reported on a payment summary statement as having tax withheld from earnings. PSS data for the 2005/06 year only has been included in this analysis.

8 A taxpayer has been included on an Annual Investment Income Report on as having received reportable earnings. AIIR data for the 2005/06 year only has been included in this analysis.

9 As taxpayers may have more than one of these criteria we have ensured that they are only counted once for the purposes of reducing the population. Each entry corresponds to the number of taxpayers with each criterion, less the number of taxpayers who have other criteria already considered in the previous rows of the table. For example, the entry for CSA taxpayers consists of those CSA taxpayers who are neither deceased nor overseas as these would have already been accounted for in the previous rows.