ATO isn't being honest with us about the $2.5b corporate tax gap

The Australian Taxation Office was working with the government to ensure that it had the right public "messaging" before releasing its tax gap figures, Freedom of Information documents reveal.

Correspondence between the ATO and government and Treasury, obtained under FOI, proves that prior to releasing its tax gap figures - it was supposed to be in the ATO's 2016 annual report - the ATO consulted with them to ensure there was "lead time" to allow the agency "to develop the narrative and messaging".

The detail of that consultation isn't included in the FOI material, obtained by staff at Labor MP Andrew Leigh's office, but it's clear the ATO and government knew releasing such figures would be controversial and that any figure would be closely scrutinised.

On Wednesday, more than one year after that correspondence was sent, the ATO finally revealed its first-ever tax gap estimates, but only for large companies (it estimates a gap of $2.5 billion in 2014-15 or 5.8 per cent of tax payable). The agency delayed the release of small business and individual tax gaps. I'll come to why later.

The tax gap is not an actual amount of missing revenue. It's the theoretical difference, one that's prone to errors, between the total amount of income tax collected and the amount the ATO estimates would have been collected if every one of those taxpayers was fully compliant.

As experts have noted, $2.5 billion is a conservative estimate. The ATO cannot tax what it does not count or see.

The ATO admits it isn't counting companies it chooses not to audit. It's hit several companies with $4 billion worth of tax bills, mainly in relation to transfer pricing issues, but this doesn't capture all companies that may be dodging tax.

As former ATO employee Martin Lock (he took a redundancy in June 2014 when there were massive ATO staff cuts) had told the Senate inquiry into corporate tax avoidance, the ATO is giving up billions of dollars in revenue and uses an imperfect "risk rating" system to determine who it audits and how aggressively it audits large companies.

The ATO's annual list of company tax data shows more than a third of large public and private companies paid no tax in 2014-15, with 36 per cent of large firms reporting zero tax payable. (While it is difficult to extrapolate which taxpayers did not pay their fair share of tax from this data, as the ATO reports company losses as "nil tax payable", it's unlikely all companies with zero tax made a real "loss".)

Further, for the ones it has chosen to audit, the variance between tax bills issued and what finally came into the federal revenue chest were massive. The ATO just loves cutting deals with big companies rather than heading to court. It did so with Chevron and Microsoft recently. And it will do so in the coming years.

Not only is the ATO underestimating the amount of possible tax dodging going on by multinationals, it's also saying they are generally honest. "We find that large corporate groups lodge income tax returns as required and pay the liabilities that are due," it said upon releasing the tax gap figures.

And this brings me back to the earlier issue of why the ATO didn't release the tax gap figures for other market segments: highly wealthy individuals, small businesses and individuals - those it suspects are participating in the illegal black economy, or cash economy.

You should expect a figure much higher than $2.5 billion for these segments of taxpayers. Rightly so for the Highly Wealthy Individuals HWI market - not only are they playing with big money, but as we saw in the Panama Papers leaks, some of them engage in tax fraud and evasion and hide behind secret shell companies.

But should the blame fall on the rest of us? Tax Commissioner Chris Jordan and his underlings have been hammering the point for some time now: It's not the corporates that the ATO need to worry about, it's you and I. You and I are making too many illegitimate work expense deductions, Mr Jordan has said.

Saying multinationals are good corporate citizens and the rest of us are the problem isn't being honest. The ATO needs to work on better messaging.

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The story ATO isn't being honest with us about the $2.5b corporate tax gap first appeared on The Sydney Morning Herald.

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