You are correct. The track gauge (inside of rail to inside of rail) is commonly shortened to the gauge. The inside of flange to inside of flange on a wheel set is LESS than the specified gauge.
For instance (in live steam), The gauge is 7.5". This is the track gauge. The back to back dimension of the wheels on the axle is 7.130". The dimension of the flange on the wheel is 0.047"
With two wheels, the total flange width is 0.094" (two wheel castings equals two flanges). and the wheelset "gauge" is 7.224".
Pennsylvanaia Railroad used a track gauge of 4' 9" and interchanged with many roads that had 4' 8.5".
Many railroads widened the track gauge on sharper curves for slow speed operation and some not only widened the gauge but also used easements and superelevation on high speed curves.
The first recorded example of widdening the gauge was by James Watt when he built his demonstration track in England. He built it to 4' 8". He later found that the train stayed on the track better when he widened the gauge by 1/2" (4' 8.5").
Note, the gauge width is important but not minutely so. Many live steam tracks have been built to allow both 7.5" and 7.25" trains to run on the same track. The main issue is flangeways and guard rails. By using a rotation piece of rail at the frog location, guardrails on switches are not needed.
Doug vV