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Tax Expenditures Statement 2011

Chapter 4: Revenue gain estimates of tax expenditures

4.1 Introduction

The revenue gain approach is often considered an alternative to the revenue forgone approach used to produce the tax expenditure estimates in Chapter 3. This is because the revenue gain estimates for individual tax expenditure items are thought to be comparable to estimates of the revenue impact of budget measures.

The 2008 Tax Expenditures Statement (TES) incorporated, for the first time, estimates of six tax expenditures based on the revenue gain approach. Those six tax expenditures were chosen in order to highlight the effect of the difference in approaches on the tax expenditures estimates. The following year, the TES reported revenue gain estimates for eight of the largest tax expenditures.

The publication of revenue gain estimates has been undertaken in response to a recommendation by the Australian National Audit Office (ANAO) audit report Performance Audit Report No. 32 2007-08 - Preparation of the Tax Expenditures Statement. The ANAO recommended that Treasury and the Australian Taxation Office 'identify opportunities to develop estimates of large or otherwise significant tax expenditures using the revenue gain approach'.1 In June 2009, the Joint Committee of Public Accounts and Audit (JCPAA) recommended, in its report on the ANAO audit of the TES, that 'Treasury publish a paper for inclusion in the Tax Expenditures Statement calculating the twenty largest tax expenditures using both the revenue foregone and revenue gained methods to allow comparison with the Budget Papers'.2 Treasury's response to these reports has been that, notwithstanding that there are significant practical difficulties in making revenue gain estimates (including estimating behavioural responses and the need for a policy specification for the removal of each tax expenditure examined), it would prepare revenue gain estimates for selected tax expenditures to illustrate the differences between the revenue gain and revenue forgone methods.

This statement presents Treasury estimates of the revenue gain from ten of the largest tax expenditure items. Estimates for the revenue gain from the CGT concessions for housing and the CGT discount for individuals and trusts have not been quantified because those estimates are either very small and uncertain (housing) or because of the significant uncertainty regarding the magnitude of response effects to a change (CGT discount).

There are considerable practical difficulties in producing estimates of the value of tax expenditures on a revenue gain approach for all 364 tax expenditures identified in this statement.

  • As there are no Government decisions to remove tax concessions, estimating the revenue gain from doing so requires the making of ad hoc policy assumptions. While the revenue gain estimates use a standard policy specification as far as possible, the estimates presented only represent one of a range of possible policy outcomes.
  • Estimating revenue gain requires information about existing taxpayer behaviour and the behavioural responses of taxpayers to policy changes for each estimate. In most cases this information is not available and assumptions need to be made to arrive at an estimate.
  • Calculating comprehensive revenue gain estimates that provide a reliable estimate of aggregate tax expenditures would require the specification of assumptions regarding the order in which tax expenditures are removed and how activity would flow to alternative concessions.

In this statement, revenue gain estimates are being provided for ten of the largest tax expenditures.3 These tax expenditures have been chosen because they best illustrate the considerable differences that can arise between estimates calculated on the revenue forgone basis and those prepared on the revenue gain basis, and how those differences can vary between tax expenditure items.

4.2 Standard assumptions for the revenue gain estimates

The tax expenditures listed below have been estimated using both the revenue gain and revenue forgone approaches. The revenue gain estimates all assume that the tax expenditures concerned:

  • are removed with effect from 1 July 2011;
  • apply prospectively to transactions entered into after that date; and
  • include other specific assumptions concerning likely policy specifications for the removal of each concession as set out in the description.

The revenue gain estimates also incorporate the impact of direct behavioural responses from the change where these are expected to have a significant impact on the estimates. The revenue gain estimates do not include any allowance for second round effects (that is, those arising from the flow-on of a change, beyond those directly affected, into the wider economy) because of the considerable uncertainty regarding the magnitude and timing of such impacts.

4.3 Guide to revenue gain estimate descriptions

The descriptions of the revenue gain estimates included in this chapter present the revenue forgone and revenue gain estimates for a four year period for comparison. A brief outline of the reasons for any difference in the estimates is then provided.

Guide to revenue gain estimate descriptions

A1: Title of the tax expenditure

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
                 
Reason for difference

4.4 Tax expenditures based on revenue gain approach

C5: Superannuation - concessional taxation of employer contributions

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  14,850 15,500 16,700 18,800 10,900 11,850 12,800 14,450
Reason for difference It is assumed that the Superannuation Guarantee remains and therefore compulsory contributions continue. Voluntary contributions are assumed to be directed to alternative tax preferred investments. Because more voluntary contributions come from those with higher marginal tax rates, the average tax rate for residual compulsory contributions is lower.

C6: Superannuation - concessional taxation of superannuation entity earnings

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  14,000 15,100 16,750 19,550 12,150 12,350 12,100 12,850
Reason for difference It is assumed current preservation rules remain. In the accumulation phase voluntary concessional contributions are assumed to cease (as in C5) and most non concessional contributions are also not invested in superannuation after the start date. Over time this reduces the superannuation asset base and thus the revenue gain on withdrawing the earnings tax concession. Additionally, a significant proportion of funds in the retirement phase (not preserved) are withdrawn. Because of other tax concessions for older Australians (particularly the Senior Australians Tax Offset), the funds withdrawn attract minimal tax in the new investments chosen.

H29: GST - Food; uncooked, not prepared, not for consumption on premises of sale and some beverages

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  5,900 6,300 6,600 7,000 5,800 6,100 6,500 6,900
Reason for difference Removing the GST exemption applicable to certain types of food would be expected to decrease demand for those items. However, the impact of this behavioural response is expected to be small as demand for GST-free food is likely to be relatively unresponsive to changes in price.

H19: GST - Health; medical and health services

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  3,050 3,350 3,650 3,950 3,000 3,300 3,550 3,900
Reason for difference Removing the GST exemption for medical and health services would be expected to decrease demand for those services. However, the impact of this behavioural response is expected to be small as demand for medical and health services is likely to be relatively unresponsive to changes in price.

H16: GST - Education

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  2,900 3,150 3,400 3,650 2,600 2,850 3,050 3,300
Reason for difference Removing the GST exemption for education would be expected to decrease demand for education services. This is primarily due to an expected fall in demand for private education and 'discretionary courses'.

F24: Customs duty

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  -2,460 -2,860 -3,060 -3,060 -2,460 -2,860 -3,060 -3,060
Reason for difference Under the customs duty benchmark, goods imported into Australia are free from customs duty except to the extent that the duty is equivalent to taxes imposed on domestically produced goods. Bringing the customs duty tax expenditure into line with the benchmark would remove the revenue currently collected from tariffs on imports (which is reported as a negative tax expenditure). While the change may increase demand for imported goods, this would have no impact on customs duty revenue once the tax rate has been reduced to zero.

H2: GST - Financial supplies; input taxed treatment

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  2,450 2,600 2,800 3,050 2,450 2,600 2,800 3,050
Reason for difference Removing the input taxed treatment of financial services is not expected to materially impact the demand for these services. This is because of the relatively small increase in the price of financial services that would result from applying the normal GST rules and the lack of substitutable services that are available.

A43: Exemption of Family Tax Benefit, Parts A and B, including expense equivalent

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  2,060 2,170 2,280 2,370 2,060 2,170 2,280 2,370
Reason for difference Removing the exemption of Family Tax Benefit, Parts A and B could be expected to result in a change in labour force participation; however, the size of the effect is uncertain and has not been quantified. As a result there is no difference between the revenue forgone and revenue gain estimates.

F11: Higher rate of excise levied on cigarettes not exceeding 0.8 grams of tobacco

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  -1,760 -1,790 -1,845 -1,890 -1,360 -1,385 -1,425 -1,495
Reason for difference Removing the higher rate of excise on cigarettes would be expected to increase consumption due to the lower price without the tax. However, the increased consumption would not be enough to prevent a fall in revenue.

B16: Exemption from interest withholding tax on certain securities

Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2011-12 2012-13 2013-14 2014-15 2011-12 2012-13 2013-14 2014-15
  1,440 1,540 1,630 1,740 1,390 1,480 1,660 1,880
Reason for difference Removing the exemption from interest withholding tax on certain securities would be expected to result in some borrowers switching to other forms of exempt borrowings, resulting in no revenue gain. In addition, some interest payments may be increased to cover the tax, leading to increased income tax deductions.

1 Australian National Audit Office, Performance Audit Report No. 32 2007-08 - Preparation of the Tax Expenditures Statement. Recommendation 5, p 22.

2 Australian Parliament, Joint Committee of Public Accounts and Audit, Review of Auditor-General's Reports tabled between August 2007 and August 2008, Chapter 4. Recommendation 7.

3 Ranked according to their revenue forgone estimates.

Next: Appendix A: Tax expenditure benchmarks and methodologies
Previous: Chapter 3: Tax Expenditures
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