5.1 The Inspector-General believes that it is important for the Tax Office and the community to have a sound indication of the number of taxpayers who should lodge a tax return but do not. Without that indicator, neither the Tax Office, the community or the Parliament can make an informed judgement about whether the level of non-lodgement is acceptable, whether the situation is improving, or whether the Tax Office's efforts and strategies are adequate and effective, or indeed whether existing legislation could be improved.
5.2 The Tax Office has a range of sophisticated systems and approaches to identify and address non-lodgement, but does not presently attempt to estimate and monitor non-lodgement levels. Indeed, it has publicly maintained that it cannot do so.
5.3 A combination of a self assessment system and normal demographic churn and change of circumstance are barriers to the Tax Office knowing with certainty the annual lodgement obligation of every individual taxpayer. Self assessment and permutations of other variables such as deaths, retirement, and movements of people into and out of Australia make it:
...difficult to establish with confidence the actual number of individuals who should be lodging.67
5.4 Individual taxpayers in Australia are required to self-assess whether they have an obligation to lodge. Changes in their circumstances may cause lodgement obligations to vary from year to year. Taxpayers do not have to advise the Tax Office where they have assessed that they do not need to lodge.68 Consequently, when the Tax Office's records show that a taxpayer's income tax return has not been received for a particular year, it does not necessarily mean that they are a non-lodger, only that they are a potential non-lodger. The Tax Office has recently stated the outcome of these facts to a Senate Committee:
It is not possible to compile data showing how many individuals have 'dropped out of the tax system'.69
5.5 These variables certainly complicate the task of pinpointing exactly which individual taxpayers are not lodging when they should. However, the Inspector-General considers that the Tax Office is allowing the undeniable difficulties in identifying every non-lodger and precisely arriving at the actual number of non-lodgers, to obscure the clear opportunity for making a regular, accurate estimate of the likely non-lodgement number. The Inspector-General has been able to make a confident estimate of the number of individual non-lodgers. The Inspector-General has taken two approaches to meet the review's preliminary aim of establishing the level of non lodgement:
- stimulating a Tax Office analysis of tax return lodgement data; and
- engaging expert assistance from a professional social research company to undertake an independent survey of lodgement compliance.70
The level of non-lodgement — the Tax Office's analysis
5.6 During the review, the Tax Office undertook an analysis to identify what it termed the 'potential non-lodgement segment' which the Inspector-General believes has produced a good estimate of the likely level of individual non-lodgement. A full copy of the Tax Office analysis is included at Appendix 4. The analysis also contains various Tax Office risk assessment perspectives which this report considers; but a précis of the Tax Office process and results on the likely number of non-lodgers is as follows.
5.7 From its database, the Tax Office extracted a base population of 6.27 million individual taxpayers whom the Tax Office considered to be 'active' but who had one or more tax returns outstanding. The Tax Office then filtered this population by applying two types of indicators:
- indicators that suggested that the taxpayer was not required to lodge because they were either deceased or residing overseas; and
- indicators that suggested they may need to lodge including information that the taxpayer had either:
- Child Support Agency obligations;
- eligibility for a senior Australians tax offset (SATO);
- Centrelink benefits;
- employment income reported by an employer in a payment summary statement (PSS); or
- interest income reported by an investment body (such as a bank).
5.8 This filtering resulted in the Tax Office concluding that 4 million of the 6.27 million taxpayers had direct indications that over recent years they had not lodged one or more tax returns that they potentially should have as shown in Figure 5.1 below. It also showed that many of these taxpayers had more than one of the 'may need to lodge' indicators, increasing the likelihood that they should have lodged.
Figure 5.1: Segmentation of the individual taxpayer population with 'not yet received' lodgements. 71
5.9 The Tax Office broke down the 4 million taxpayers into the years they appeared not to have lodged as follows (Table 5.1). From this table of 4 million potential non-lodging taxpayers, it can also be conservatively estimated that they are potentially responsible for not lodging at least 6.5 million tax returns.72
|Filtered population count of outstanding obligations by latest return yet to be received. 73|
|Number of income tax returns
yet to be received
|1 — 2||592,218||133,528||131,260||107,586||107,654||122,379||1,049,406||2,244,031|
|3 or more||1,122,865||151,508||116,116||94,804||73,139||54,891||152,150||1,765,473|
5.10 The Tax Office then focussed on the 1.7 million taxpayers who appeared not to have lodged a return that was required for the 2005-06 year. This would enable a view to be formed of the approximate number of taxpayers in any (and every) year that might be non-lodgers.
5.11 Applying the filtering indicators to the 1.7 million 2005-06 population first reduces the number by 170,000 due to recent lodgements or confirmation that a return is not required, because of deceased and living overseas indicators. Of the remaining 1.54 million, the indicators are as follows:
|Filtered population where the 2005-06 income tax return is yet to be received 74|
|Characteristic||Client Count with this characteristic||Number of clients without the previous characteristics||Residual Population|
|2005-06 ITR not yet received (as at 30 March 2008)||1,715,083||1,715,083|
|2005-06 ITR now finalised (lodged or not necessary) or categorised as Inactive (For example, deceased) as at 23 July 2008.||84,731||1,630,352|
5.12 Taking that into account and applying 2005-06 as an indicative year, the Inspector-General considers that the Tax Office analysis supports a conclusion that in an average year around 1.5 million individual taxpayers do not lodge income tax returns that they should. With the Tax Office having received a total of 11,510,959 individual 2005-06 returns,75 the level of lodgement represents around 87 per cent of the total required.76
The level of non-lodgement — the independent community survey
5.13 The Inspector-General engaged a leading social research company, Colmar Brunton, to conduct research into the level of non-lodgement of income tax returns by individuals in Australia as well as community attitudes towards the situation.77 A full copy of the Colmar Brunton report, including the methodology is at Appendix 3. Colmar Brunton state that the margin for error for the findings is +/-5 per cent.
5.14 The main survey result was that of those taxpayers required to lodge a return in the 2006-07 financial year, 90.65 per cent reported they lodged and 9.35 per cent reported they did not lodge. The Colmar Brunton survey also found that a small but significant proportion of returns are being lodged by taxpayers with no obligation to do so (4.51 per cent of the Australian population aged 16 years or older).78
Figure 5.2: Proportion of required taxpayers who submitted and did not submit a tax return.79
Applying the survey results to establish the non-lodgement population
5.15 To establish the current individual non-lodgement population, the Inspector-General has adopted as a base, the Tax Office's own figure80 of 11,800,000 individuals lodging income tax returns annually. Applying this number to the results produced as part of the Colmar Brunton survey would lead to a total individual population as indicated below in Figure 5.3:
Figure 5.3: Proportion of total community81
5.16 As the above indicates, the Tax Office lodgement population figure of 11,800,000 is comprised of the required lodgers and non-required lodgers. Including the non-required non-lodger and the required non-lodger figures provides a total community (Australians aged 16 or over) of 14,469,650.
5.17 The Colmar Brunton survey therefore indicates that in 2006-07 approximately 1,149,000 individuals (7.94 per cent of the total community surveyed in stage 1) have failed to lodge — this is the equivalent of 9.35 per cent of the total number of taxpayers who had a requirement to lodge.
5.18 This estimate of the 2006-07 situation can be applied to past years and indicates the current, fairly constant level of non-lodgement in the individual taxpayer community.
5.19 The survey also indicated that 4.51 per cent of the community may have lodged returns when not required to do so. However, after analysing ATO data on this question the Inspector-General concludes that this finding probably reflects the confusion or difficulty in understanding lodgement requirements rather than an accurate indication of non-required lodgement.
5.20 Stage 1 of the survey also enabled the researcher to look at the proportion of survey respondents who have submitted a tax return over the past three financial years.
Figure 5.4: Proportion of survey respondents who submitted a tax return82
5.21 The survey results indicate that lodgement has remained at a consistent level of around 80 per cent. Although there has been a 2.96 per cent increase in lodgement since 2004-05, the researcher stated in its report that:
... this does not necessarily reflect a trend of improvement. A change of this magnitude is not statistically significant and may simply be a reflection of the survey's margin of error.83
5.22 However, the Inspector-General considers that the results suggest an improving, not worsening, situation.
Conclusions — combining Tax Office and community analyses
5.23 There is strong convergence between the numbers reached by the Tax Office and the independent researcher. IGT is therefore of the view that, at any point in time, in any given year, it can be conservatively estimated that between 1.2 million and 1.5 million individual taxpayers fail to lodge a tax return when they should.
5.24 As indicated in Figure 5.2, the numbers of individual taxpayers that are failing to lodge annually would translate to around 9.35 per cent of those required to lodge. This is a number that would draw at least some concern. However, in its analysis, and based on its risk analysis methodology, the Tax Office opines that the risk to tax revenue of these non-lodgers is low, given their view of the likely profile of the people involved:
The vast majority of the focus population is considered to be relatively low risk.84
5.25 Based on the Tax Office's risk management approaches and the profiles of the non-lodging population detailed in the community survey, the Inspector-General agrees with this conclusion.
5.26 The survey also indicates that the community expects the Tax Office to keep the level of non-lodgement lower than is presently being achieved. The community survey found that just under two-thirds (61 per cent) of the compliant taxpayer community85 expect the Tax Office to keep the level of non-lodgement within the community at or below 8 per cent. Of interest, 40 per cent of the compliant community even expects the Tax Office to keep non-lodgement within the community at 0 per cent — that is, they believe that everyone who is required should submit a tax return, with no exceptions.
5.27 This suggests that the majority of the community would find the actual level of non-lodgement as measured in the survey (9.35 per cent) is higher than the level they expect the Tax Office to maintain.
5.28 Notwithstanding that it is not quite achieving community expectations, the review does not suggest that the Tax Office should increase the resources it commits to tackling individual non-lodgement. This is consistent with the relative risk to the system.
Community understanding of lodgement requirements
5.29 In respect of required non-lodgers, the reasons for not lodging remained consistent from year to year in the survey, suggesting that one of the main reasons for not lodging, even among those required to lodge, is the belief they are not required to do so. For example, common reasons given by required non-lodgers for failing to lodge included:
- they thought they were below the income threshold (20 per cent of the required non-lodger population);
- being unemployed and not working and therefore believing there was no need to lodge (19 per cent of the required non-lodger population); and
- being on a pension or receiving Centrelink payments and therefore believing there was no need to lodge (18 per cent of the required non-lodger population).
67 Tax Office minutes from a meeting with IGT on 13 March 2008 (at page 2).
68 However, taxpayers have the option to complete a Non-lodgement advice form which is available on the Tax Office website.
69 Answers to questions on notice - Budget Estimates hearing 30 May 2006 (Question BET-144: Tax Returns).
70 IGT notes that the Tax Office frequently uses similar approaches and companies to monitor and report trends and performance in other areas.
71 ATO Minute 'Individual Market Segment Analysis' - dated 7 August 2008 (at page 7).
72 Applying an average of 1.6 returns outstanding for each taxpayer in view of the break-up of the numbers of returns yet to be received contained in the two categories in Table 5.1 (that is, 1 - 2 returns and 3 or more returns).
73 ATO Minute 'Client Population View - Individuals' - dated 26 May 2008 (at page 11).
74 ATO Minute 'Individual Market Segment Analysis' - dated 7 August 2008 (at page 9).
75 Tax Office publication 'Taxation statistics 2005-06' at page 9 [data for this publication was at 31 October 2007].
76 Applying the above Tax Office analysis (1.5 million fail to lodge as required) to the number of lodgements actually received in 2005-06 (11.5 million) results in an approximate population of 13 million taxpayers having a requirement to lodge in 2005-06.
77 Refer to Appendix 3 for a copy of the final Colmar Brunton report (including the research objectives). Discussion regarding the community attitudes is provided in Chapter 4 of the report.
78 Refer to Figure 5.3 of this report.
79 Source: Appendix 3 at page 76. These results are solely a product of the Stage 1 Colmar Brunton survey.
80 Source: 2008-09 Compliance Program (Tax Office publication released on 13 August 2008 - at page 11).
81 These results are solely based on the Australian community aged 16 years or older that participated in Stage 1 of the Colmar Brunton report contained in Appendix 3 (in contrast to the required to lodge population used in Figure 5.2 of this report).
82 Refer to Appendix 3. These results are solely a product of the Stage 1 survey.
83 Refer to 4.1.2 in Appendix 3.
84 ATO Minute 7 August 2008 titled 'Individual Market Segment Analysis' (refer to Appendix 4).
85 The 'compliant community' includes the views of all survey respondents except required non-lodgers. In some instances in this report the views of required non-lodgers have been removed in order to prevent any distortion of the overall perception of the total community surveyed (refer to Appendix 3 of this report).