Department of the Treasury

TAX EXPENDITURES
STATEMENT
1996–97

December 1997

 Commonwealth of Australia 1997
ISBN 0 642 26130 X
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Contents
Introduction	1
Estimates and Forward Projections	1
Trends in Tax Expenditures	5
Tax Expenditures 1996‑97	5
Forward Projections	7
Comparison with Direct Outlays	9
Tax Expenditure Tables	12
The Tax Expenditures Reference Tables	12
Deleted Tax Expenditures	13
New Tax Expenditures	13
Tax Expenditures by Taxpayer Affected	56
Appendix A:  Conceptual Issues	58
Income Tax Benchmark	59
Retirement and Other Employment Termination Benefits	64
Fringe Benefits Tax Benchmark	65
Wholesale Sales Tax Benchmark	66
Excise Duty Benchmark	66
Appendix B:  Retirement and Other Employment
 Termination Benefits	67
Interpretation	69
Estimates		70
Appendix C:  Cost Measurement Issues	71
Aggregation of Cost Estimates	71
Tax Expenditures Involving Deferral	72

List of Tables
Table 1	Aggregate Tax Expenditures by Function 
1995‑96 to 2000‑01	8
Table 2	Aggregate Tax Expenditures and Direct Outlays
1993‑94 to 2000‑01	10
Table 3	Aggregate Tax Expenditures and Direct Outlays by
Function 1996‑97	11
Table 4	Tax Expenditures Reference Table 	16
Table 5	Tax Expenditures Involving Deferral	52
Table 6	Tax Expenditures  Wholesale Sales Tax	54
Table 7	Tax Expenditures Classified by Taxpayer Affected	57
Table B1	Estimated Tax Expenditure through Retirement
and Other Employment Termination Tax Concessions
1993-94 to 2000-01	68
Table C1	Accelerated Depreciation Tax Expenditures	74

Introduction
This Tax Expenditures Statement (TES) provides details on the financial benefits that individuals and businesses derive from taxation concessions of various kinds. These concessions are usually delivered by tax exemptions, tax deductions, tax rebates or reduced tax rates. They lower the tax burden by either reducing or delaying the collection of taxation revenue. 
The benefits provided by the tax concessions could equally be delivered in the form of direct expenditures (outlays). The Government can use taxation concessions to allocate resources to different activities in much the same way that it can use direct expenditure programmes. For this reason, and noting their direct impact on the underlying budget deficit, these concessions are generally called ‘tax expenditures’.
To allow for a more transparent and complete assessment of public funding, information is presented in this Statement about the magnitude of public assistance that is provided via concessional taxation treatment, and the sectors to which the assistance is provided. These figures provide information on the cost of tax expenditures and hence on the level of tax assistance provided to various groups. Details are also provided on the trends in tax expenditures, a comparison with direct outlays assistance, and the level of tax expenditure by taxpayer affected. Additional detail on methodological issues, including a detailed discussion of the retirement income tax expenditures is presented in Appendices.
Estimates and Forward Projections
It is generally easier for governments to estimate the cost of spending programmes than it is to estimate the revenue forgone as a result of concessional tax treatment. This has meant that many tax expenditures typically go uncosted, because the estimates are likely to be quite imprecise and only indicate broad orders of magnitude. Nonetheless, tax policy decisions are better served by broad indications of the cost of a tax expenditure than none at all. Where an estimate is not available, policy decisions are made more difficult. In some cases, the cost to revenue of expenditures can be estimated using tax return data, otherwise the cost can be estimated using census data or other official statistics. 
This Statement continues the practice initiated in the 1990 TES of providing estimates of identified tax expenditures for the year in which the impact on revenue occurs. In Statements prior to 1990, most tax expenditures for income tax were costed on the basis of the income year in which use of the provision was made. This may differ from the year of impact on revenue because of lags in collection. 
Historical data on the cost of tax expenditures has been provided for the years 1993‑94 to 1996‑97.
Forward projections of the cost of individual tax expenditures are included for the years 1997‑98 to 2000‑01. They have been provided to enable broad comparison with estimates for outlays over the next four years. The inclusion of forward projections is consistent with the requirements of the Charter of Budget Honesty.
The qualifications and caveats associated with costing tax expenditures (see Appendix C) assume greater importance in relation to the production of forward projections. For example, it is likely that the measured cost of aggregate tax expenditures is likely to be an underestimate of the actual cost of concessions in the tax system.  Nevertheless, if these cautions are borne in mind, it is considered that fiscal analysis is aided by the publication of these forward projections. 
The nature of tax expenditures is such that it is not possible to accurately forecast their cost (in many cases it is not even possible to provide reliable historical estimates). The forward projections presented in the TES are generally derived by extrapolating historical trends or applying broad growth factors (for example changes in the projected Consumer Price Index); in others, such as the superannuation concessions, by more detailed modelling. 
The forward projections include the effect on particular tax expenditures of measures announced in the 1997‑98 Budget or subsequently (whether legislated or not at the time of writing this Statement).
Fringe Benefits Tax Estimates
In interpreting the fringe benefits tax (FBT) estimates, it should be borne in mind that from 1 April 1994, FBT has been levied on the tax‑inclusive value of fringe benefits; that is, subject to grossing up. As part of these arrangements, an income tax deduction is allowed for employers for FBT paid from 1 April 1994. However, this deduction generally impacts on employers in the following financial year. The estimates of FBT concessions for 1994‑95 for taxable employers are therefore higher than the on‑going level for these tax expenditures. The estimates for 1995‑96 and 1996‑97 and forward projections to 2000‑2001 provide a better indication of the ongoing value of FBT concessions.
•	Some categories of non‑government, income tax exempt bodies are eligible for a rebate of FBT. Some other employers are exempt from FBT. Where tax expenditure items refer to FBT exemptions for particular categories of employers, the estimates are based on the gross cost of the exemption, not allowing for any rebate that might otherwise have been claimable.
Revised Estimates and Projections
Some estimates or projections of the revenue forgone for certain tax expenditures provided in Table 4 or 5 of this Statement represent significant revisions to estimates or projections published in the 1995‑96 TES. These are listed below. There are more significant revisions to the forward projections than to historical estimates, reflecting the more significant caveats applying to them, as discussed earlier. Index references refer to listings in Table 4 or Table 5 of this Statement. These indices are the same as used in the 1995‑96 TES.
Unless otherwise noted, the revisions relate to improvements in the method used to estimate the cost of the tax expenditure and the availability of more recent tax return data or other information since last year’s TES.
•	H6  FBT exemption for employees of a State or Territory health authority who work at a public hospital.
This has been revised upward by $50 million for each of the years 1995‑96 to 1999‑2000 after receipt of more detailed data from the health sector on fringe benefits provision. 
•	SS4‑SS6  Dependent rebates.
The projections have been revised upward by $50 million for 1996‑97, $45 million for 1997‑98,  $42 million for 1998‑99 and $45 million for 1999‑2000. 
•	
SS13  Superannuation and termination payment concessions.
The estimate for 1995‑96 has been revised upwards by $2,025 million and forward projections have been revised upwards in subsequent years by $2,450 million, $2,040 million and $1,735 million. This reflects higher than estimated taxable income, particularly fund earnings, for 1995‑96 and 1996-97, which increases the base used for calculating the forward projections. The estimates for superannuation are discussed in more detail in Appendix B.
•	SS21  FBT exemption for benefits provided by public benevolent institutions.
The forward projections have been revised upward by $75 million for 1996‑97 and 1997‑98, $80 million in 1998‑99 and $85 million for 1999‑2000 after receipt of more detailed information and discussions with the sector.
•	AFF5 — Primary producer income averaging.
The preliminary 1995‑96 estimate has been revised upward by $57 million and the forward projections revised upward by $47 million for 1996‑97 and 1997‑98, $42 million for 1998‑99 and $72 million for 1999‑2000. The revisions reflect larger than anticipated growth in the average rebate for the 1995‑96 income year.
•	NAF14  Certain interest withholding tax (IWT) concessions.
The preliminary 1995‑96 estimate has been revised downward by $73 million to $680 million. The projections for the outyears have been revised downward by $46 million to $116 million. This tax expenditure’s series is normally fairly volatile due to the volatility of its underlying components. The revisions in this year’s TES primarily reflect the fall in interest rates in 1996‑97 which is assumed to continue into subsequent years. 
•	OEA14  Statutory formula method for calculating the FBT taxable value of cars.
The 1966‑97 and subsequent year projections have been revised downwards by $60‑$90 million reflecting the fall in interest rates in 1996‑97 which is assumed to continue into subsequent years. 
•	AD10  Depreciation for income‑producing residential buildings.
The series have been revised upward by between $180 million to $325 million a year over the period 1994-95 to 1999-2000.
Trends in Tax Expenditures
Table 1 provides the estimated cost of functional category aggregates, and the total annual aggregates, for the fiscal years 1995‑96 to 1996‑97, and projections for the outyears 1997‑98 to 2000‑01. Care must be taken when interpreting these aggregates, particularly when making comparisons across time. There are several major considerations in analysing tax expenditure aggregates. 
•	First, many of the identified expenditures are not costed because of a lack of suitable data. In addition, those associated with the wholesale sales tax system were not able to be costed for this year’s TES. It is hoped to be able to include such estimates in future years.
•	Second, estimates have not been consistently provided over time. Some tax expenditures have been costed for only a few of the fiscal years that they have actually been part of the tax system. For example, the 1995‑1996 TES included for the first time estimates relating to the excise exemption applying to ‘alternative’ transport fuels which had been in place for some years. Changes in aggregates over time will therefore reflect both changes in the cost of individual tax expenditures, and changes in the coverage of the tax expenditures being costed. 
•	Third, changes over time in methodology and available data used for calculating the cost of particular expenditures means that there can be quite large revisions to tax expenditure estimates. Therefore numbers provided in previous TESs may not be strictly comparable to figures in more recent publications. This may affect the usefulness of comparing costs over a longer period of time than covered in any single TES.
•	Fourth, the introduction of forward projections for the outyears adds an additional element of uncertainty when trying to draw strong conclusions on longer‑term trends.
Tax Expenditures 1996‑97 
Table 1 shows that the net cost of aggregate tax expenditures which provide a permanent benefit or penalty to taxpayers, has risen from around $18.3 billion in 1995–96 to $19.5 billion in 1996–97. Excluding superannuation concessions, the aggregate cost of tax expenditures rose from about $10 billion to $10.8 billion.
•	When account is also taken of so‑called ‘timing’ tax expenditures, which merely defer tax collections to a later date, the Budget impact is around $21.1 billion in 1996‑97, compared to $19.7 billion in 1995‑96. This increase mainly reflects the growth in the cost of one accelerated depreciation allowance (AD8). 
The 1996‑97 aggregates for the functional categories social security and welfare, mining and mineral resources, manufacturing and construction, health, and other economic affairs, not elsewhere classified, have shown significant increases over the 1995‑96 aggregates. The remaining functional categories remained fairly flat between 1995‑96 and 1996‑97. 
•	The rise in social security and welfare tax expenditures reflects mainly the growth in superannuation tax concessions (SS13) and the introduction of family tax assistance (SS29) from 1 January 1997. Growth in various pensioner and beneficiary rebates and the FBT exemption for public benevolent institutions (excluding public hospitals) have also contributed to some extent. The rise in the later reflects better information on the use of fringe benefits in the sector. These increases are offset to some degree by the full year effect of the replacement of the Dependent Spouse Rebate by the Parenting Allowance for eligible recipients, which is delivered through the outlays system. This was discussed in more detail in the 1995‑96 TES.
•	The cost of the Development Allowance is estimated to peak in 1996‑97 (at an estimated $525 million) and underpins a 27 per cent rise in the cost of mining and mineral resources, manufacturing and construction tax expenditures. A smaller contribution was from growth in the research and development tax concession (MM14) and infrastructure borrowings concession (MM11).
•	The major increase in the health category was due to the $55 million increase in the medical expenses rebate (H1). However, this was offset by a reduction in the cost of the exemption for health benefit fund income (H5).
•	The FBT undervaluation of car benefits under the statutory formula method was the major contributor to the increase in the cost of tax expenditures in the Other Economic Affairs category.
•	The excise exemption for alternative transport fuels (FE1) is estimated to have grown by 7 per cent to $610 million in 1996‑97 due to continued growth in the use of alternative fuels, particularly liquefied petroleum gas, for transport.
Forward Projections
It is projected that the cost of tax expenditures (excluding timing measures) will rise from $19.5 billion in 1996–97 to $24.4 billion in 2000–01.
The main functional category projected to grow significantly in the outyears is social security and welfare. This reflects growth in the cost of superannuation and termination tax concessions, other concessions for recipients of various pensions and benefits, and family tax assistance.
Assistance to mining and mineral resources, manufacturing and construction is projected to fall after 1996‑97 primarily reflecting a tightening in the research and development (R&D) tax concession and a winding down in the Development Allowance, which peaks in 1996‑97 as eligible projects must have commenced before 1 July 1996. 
The health category is also projected to rise significantly in future years, largely as a result of increases in the cost of the Medical Expenses Rebate and the operation of private health initiatives announced in the 1996-97 Budget.  
The projected rise in the not allocated to function category primarily reflects the introduction of the tax rebate for private savings announced in the 1997-98 Budget.
Table 1: Aggregate Tax Expenditures by Function 1995‑96 to 2000‑01(a)

nec Denotes not elsewhere classified. 
(a)	Aggregate cost of tax expenditures in functional categories is derived by summing the individual tax expenditure costings provided in Table 4, excluding items listed as costed at <1 or <5, etc. 
(b)	Timing measures involve deferral of revenue and are described and costed in Table 5. 
Comparison with Direct Outlays
Estimates and forward projections for aggregate tax expenditures and Commonwealth outlays for the period 1993‑94 to 2000‑01 are provided in Table 2. In Table 3, the costs of identified tax expenditures in 1996‑97 are compared with direct outlays by functional category consistent with the presentation in Budget Statement 4 of the 1997‑98 Budget Paper No. 1. 
The comparisons between tax expenditures and direct outlays shown in Tables 2 and 3 are informative in broad terms, however the costings are not strictly comparable. While most tax expenditures could, in principle, be replaced by a direct outlay, the tax expenditure estimates refer to revenue forgone, which is not necessarily the size of a direct outlay equivalent. For example, where a direct outlay is taxable, the amount of the gross direct outlay required to provide net assistance to a beneficiary equivalent to that provided by a tax expenditure would have to exceed the tax expenditure by the amount of the tax liability arising on the direct outlay.
From a public policy perspective, the size of the estimated tax expenditures relative to outlays is of interest, especially as the measured aggregate is likely to be an underestimate of the actual cost of concessions in the tax system. As noted by the National Commission of Audit, tax expenditures are not normally subject to the same annual scrutiny as are outlays. They can, however, have similar economic effects as outlays, and this should be taken into consideration when formulating government policy.
Table 2 shows that the budgetary cost of total measured tax expenditures has increased by around 23 per cent between 1993‑94 and 1996‑97, compared to a 15 per cent increase in Commonwealth budget outlays over the same period.  (The outlays in Table 2 are shown on an underlying basis. A definition of underlying outlays can be found in the 1997-98 Budget Paper No. 1, page 1-3. )
•	They are projected to increase a further 25 per cent between 1996‑97 and 2000‑01, although these forward projections are subject to significant uncertainty.
The aggregate level of tax expenditures, presented in Table 2, differs quite significantly from the same table published in Appendix C of Budget Statement 2 in the 1997‑98 Budget Paper No. 1. For example, the 1996‑97 aggregate is around $2.6 billion higher than previously published, of which most relates to a revised estimate for superannuation. This difference ranges from about $2.1 to $2.5 billion in later years.
•	The differences are a result of updated data, changed costing methodologies, revised economic parameters, and the identification and costing of more tax expenditures in the 1996‑97 TES.
Table 2: Aggregate Tax Expenditures and Direct Outlays 1993‑94 to 2000‑01

(a)	This aggregate does not include timing measures. 
(b)	As a result of classification changes introduced since the 1997-98 Budget, underlying outlays estimates are not strictly comparable with those previously published.
(p)	Projection
(est)	Estimate
The estimates presented in Table 3 indicate that revenue forgone through measured tax expenditures was much less than the cost of direct outlays for most functional classifications but significant in absolute terms. In aggregate, net measured tax expenditures are valued at about $19.5 billion or around 14 per cent of Commonwealth Budget underlying outlays in 1996-97. 
Table 3 shows that most tax expenditures are classified as being related to social security and welfare (this category includes the superannuation tax concessions). 
•	Around 21 per cent of total assistance to this area (tax expenditures plus outlays) is provided through tax expenditures.
It also highlights significant assistance in the form of tax relief provided to the two business and industry categories of mining etc, and other economic affairs. Many tax expenditures could not be classified as belonging to any of the functional categories and are aggregated in the not allocated to function category. 
Table 3: Aggregate Tax Expenditures and Direct Outlays by Function 1996‑97

nec Denotes not elsewhere classified.
(a)	Aggregate cost of tax expenditures in functional categories is derived by summing the individual tax expenditure costings provided in Table 4, excluding items listed as costed at <1 or <5, etc. Deferral expenditures are not included.
(b)	Items may not sum to totals due to rounding.

Tax Expenditure Tables
Information on tax expenditures including estimates of the cost to revenue for the fiscal years 1993‑94 to 2000‑01  is presented as follows: 
Table 4: Tax Expenditures Reference Table
Table 5: Tax Expenditures Involving Deferral
Table 6: Tax Expenditures  Wholesale Sales Tax
Table 7: Tax Expenditures Classified by Taxpayer Affected
The Tax Expenditures Reference Tables
Tables 4 and 5 provide information about each identified expenditure. This information includes: the year in which each measure was introduced; a description of each expenditure; and its estimated revenue cost (where available). Revenue estimates are not yet available for expenditures associated with the wholesale sales tax system listed in Table 6. It is hoped to be able to include such estimates in future years.
The columns and their function are described below. 
•	The ‘Index’ column associates each expenditure with an identifier for easy reference, and cross referencing to Table 7. 
•	The ‘Date’ column provides the year that the legislation was given Royal Assent, which may be different from the year that the expenditure would first impact on taxpayers’ tax liabilities. 
•	The ‘Description’ column describes each expenditure and, where possible, provides a legislative reference. The following abbreviations have been used in the descriptions column: capital gains tax (CGT); fringe benefits tax (FBT); dividend withholding tax (DWT); and interest withholding tax (IWT). All expenditures relate to the personal or corporate income tax system unless otherwise identified in the description (eg by CGT, FBT, IWT, DWT, or Excise duty). Legislative references for all income tax, CGT, IWT and DWT expenditures relate to the Income Tax Assessment Act 1936 unless otherwise stated. Legislative references for FBT expenditures relate to the Fringe Benefits Tax Assessment Act 1986. Other Acts of Parliament are included in the descriptions where necessary. 

Deleted Tax Expenditures 
Tax expenditures which were included in the 1995‑96 TES but which are not identified in the 1996‑97 TES are listed below categorised by reason for deletion. A short description of the expenditure is followed, in parentheses, by its index reference from last year’s TES. 
Deleted because the measure has been abolished and/or its effect on revenue has ceased:
•	Immediate deduction for payments to an approved research institute for scientific research (GR1);
•	Exemption of pay earned by Australian Federal Police serving in Cambodia with the United Nations Transitional Authority (D7); and
•	Various accelerated depreciation provisions (AD1 to AD6, AD14).
It should be noted that the tax expenditures identified as MM2 and MM3 in the 1995‑96 TES have been included in the tax expenditure MM1 in this year’s Statement.
New Tax Expenditures
Tax expenditures identified for the first time in the 1996‑97 TES are listed below with a short description followed, in parentheses, by its index reference from this year’s TES.
Added because the measure has recently been identified as a tax expenditure:
•	Deductibility for election expenses of candidates for Federal, State, Territory and local governments (LEA2, LEA3);
•	Exemption for remuneration to a non‑resident for expert advice to Government or as a member of a Royal Commission (FA14);
•	Exemption of Australian income earned by foreign government representatives or their staff visiting Australia (FA15);
•	Exemption for foreign press reporting on matters listed under Section 23(c)(i)‑(iv) of the Income Tax Assessment Act (FA16);
•	Exemption of Disturbance Allowance for Defence Force members(D14);
•	Exemption of Scholarship Allowance for Defence Force members (D15);
•	Exemption for pensions derived by a Papua New Guinea resident and exemption of certain payments to persons formerly employed in Papua New Guinea (SS30);
•	Rollover relief for balancing adjustments for exploration, mining and quarrying (MM16); 
•	FBT exemption for employee taxi travel (TC2); and
•	Inclusion in the CGT cost base of certain non‑capital costs of owning a personal use asset (NAF33).
Added because the tax expenditure is a measure proposed (and in some cases legislated) since the 1995‑96 TES:
•	Deduction for investments in the Film Licensed Investment Company (CR10);
•	Farm Management Bonds (AFF16);
•	New tax rebate scheme for interest from infrastructure investments (MM17); 
•	FBT exemption for record keeping for small businesses (OEA22);
•	FBT exemption for some car parking by small businesses (OEA23);
•	Exemption of US collective fund investments from Foreign Investment Fund regime (OEA24); and
•	Tax rebate for savings (NAF34). 

Tax Expenditure

Tables

Table 4: Tax Expenditures Reference Table(a)

Table 4: Tax Expenditures Reference Table

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued) 

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Table 4: Tax Expenditures Reference Table (continued)

Notes
-	Nil
nec	Denotes not elsewhere classified. 
<X	Denotes revenue cost is less than X million dollars (eg <1 denotes that the estimate is less than $1 million). 
na	Denotes estimate of revenue cost is not available.
(a)	1996-97 figures are preliminary only and are subject to revision on receipt of tax data for 1996-97. Figures for 1997-98 to 2000-2001 are projections based on currently available information.
(b)	The date of effect of this tax expenditure depends on the date on which the double tax agreement takes effect.
(c)	Norfolk Island is basically self-supporting. The only contributions by the Commonwealth are of a one-off nature eg a dollar-for-dollar grant for a water and sewerage scheme. 
(d)	In the case of living-away-from-home allowances and living allowances paid to Defence Force personnel, the benchmark is defined to be compensation for the actual additional costs faced by employees in living away from their homes. On this view, the tax expenditure relates solely to any excess over such a component.
(e)	Denotes item referring to Australian-source income of non-residents.
(f)	Includes invalid relative rebate, parent or parent-in-law rebate and superannuation pension or annuity rebate.
(g)	Includes invalid relative rebate and parent or parent-in-law rebate. 
(h)	The Medicare levy in 1996-97 was raised from 1.5 to 1.7 per cent to fund the costs associated with the gun buyback scheme (the gun levy).   It is assumed the revenue impact of exemption from the gun levy is experienced in 1997-98. 
(i)	Recent measure, yet to be legislated.
(j)	The tax expenditure element here refers to the exemption of income not related to the application of the mutuality principle; ie, from trading with non-members and investment income.
(k)	Based on estimates and projections of fuel use published by ABARE in Australian Energy Consumption and Production (1997).  Calculated on equivalent unit of energy basis.  The estimates and projections exclude the effect of the recent Commonwealth safety net arrangements for petrol on the benchmark following the invalidation of State business franchise fees by the High Court.
(l)	The tax expenditure element relates to the difference between the standard specified values and market value.
(m)	Equal to annual average value of the tax expenditure for the period 1994-95 to 1996-97
(n)	The IED scheme allows primary producers to make deposits that are tax-deductible upon deposit but assessable on withdrawal. A negative expenditure may thus occur in a year when farmers make a net withdrawal from the scheme. The main effect of this scheme is to allow a tax deferral, but tax will be reduced to the extent that deposits are made in high income, high marginal tax rate years but withdrawn in years of low income and low marginal tax rates. In the long run, the real value of the concession for farmers will be the sum of each year’s estimate.
 (o)	The general (that is, non-syndicated) R&D tax concession provides both immediate deductibility of capital expenditure and premium deductions over 100 per cent for eligible expenditures.  The tax expenditure estimates provided relate only to the revenue cost of  premium deductions for R&D under the general concession.  No estimate is made of the cost of the bring forward of capital deductions.  As a result, the estimates  provide a lower limit to the revenue cost of the tax expenditure on R&D against a benchmark of amortisation of eligible expenditures over time.
(p)	This exemption was removed from the beginning of the 1994-95 income year for credit unions with gross balance sheet assets of $30 million or more and for other credit unions from the 1995-96 income year. Taxation will be at the concessional rate of 20 per cent until the beginning of the 1997-98 income year at which time the full corporate rate will apply. Concessional rates of taxation will be provided for credit unions with low levels of notional taxable income.
(q)	The term 'declared rate' (also referred to elsewhere as the 'benchmark rate') is used to refer to the rate declared by the Commissioner of Taxation for the purpose of determining FBT liability for loan benefits.
(r)	This estimate is derived from donations claimed on individuals’ returns only. Donations made by companies, partnerships and trusts are not included. This estimate will therefore significantly understate the true cost to revenue of the concession. 

Sources:  Unless otherwise specified, Australilan Taxation Office, Australian Customs Service, or the Treasury.

Table 5: Tax Expenditures Involving Deferral(a)

Notes
na	Denotes estimate of revenue cost is not available. 
(a)	1996-97 figures are preliminary only and are subject to revision on receipt of tax data for 1996-97. Figures for 1997-98 to 2000-01 are projections based on currently available information.
(b)	The revenue impact does not include any clawback from reducing the cost base for CGT purposes by the amount of the concession claimed.

Table 5: Tax Expenditures Involving Deferral

Table 6: Tax Expenditures  Wholesale Sales Tax
Index	Description(a)	
WST1	Goods ordinarily used as raw materials in the construction or repair of buildings, fixtures or structures or other works that are attached to land, other similar materials and electrical fittings (Items 39‑49).	
WST2	Piping, tubing, channelling and guttering for use by a person mainly for the purposes of irrigation, water supply, drainage or sewerage, other associated materials and water tanks (Items 50‑54). 	
WST3	Hydraulic power and electric current, goods for purifying or compressing natural gas, and goods for generating or storing gas or electricity in residential premises (Items 56, 57A and 58). 	
WST4	Certain transportation related items including ships, aircraft, public railways, passenger buses and public transport authorities as specified (Items 59‑64).	
WST5	Primary products derived directly from prescribed activities in Australia that have not been subject to any process or treatment resulting in an alteration of their form, nature or condition (Items 65‑67).	
WST6	Food and drink for human consumption or as ingredients of such food, including tea, coffee and milk products (Items 68‑74).	
WST7	Clothing and footwear for human wear including fastners and materials for repair of such goods (Items 75‑77).	
WST8	Goods related to human health and hygiene. These include, drugs and medicines, surgical and dental instruments, ambulances, spectacles, cotton wool, bandages, toothbrushes, contraceptives, sunscreens, sanitary pads, nappies and goods for the use of disabled persons (Items 78‑99).	
WST9	Books, printed matter and paper, including pamphlets, leaflets periodicals, magazines, newspapers, manuscripts, stamps and goods made from recycled paper (Items 100‑108). 	
WST10	Scientific and educational goods for use by a school, university or associated bodies (Items 109‑114). 	
WST11	Works of art, museum exhibits, and imported collector pieces, paintings, sculptures and antiques (Items 115‑119).	
WST12	Public monuments and memorials, defence service honour boards, tombstones, imported trophies, and miniatures of specific awards (Items 120‑124).	
WST13	Goods for use by Commonwealth, State, Territory and local Governments, including authorities completely controlled by them. Imported goods used for official purposes by the Governor‑General, State Governors and their families. Goods for the use of State libraries, museums, art galleries and grain storage authorities (Items 125‑130).	
WST14	Goods for the use of foreign governments (excluding goods for the use of diplomatic missions, consular posts and trade commissioners). Goods produced by a foreign tourist promotion agency. Certain goods used by armed forces serving in Australia (Items 131‑139).	

Table 6: Tax Expenditures  Wholesale Sales Tax (Continued)
Index	Description(a)	
WST15	Goods for use by a public or non‑profit hospital, a public benevolent institution or a public body established and maintained principally for the relief of unemployed persons including associated fund raising bodies. Goods for the use of medical research bodies, accident prevention bodies, exempt child care bodies, zoos and armed forces support bodies (Items 140‑147).	
WST16	A wide range of miscellaneous goods as specified in the Act, including wedding rings, prams, coffins, coth on the roll, leather, fertilisers, solar energy equipment, water, ice, national flags, goods for donation and loan to an always‑exempt person or a foreign government (Items 148‑184, 186‑187, and 189‑195).	
(a)	Item references refer to Schedule 1 of the Sales Tax (Exemptions and Classification) Act 1992. 

Tax Expenditures by Taxpayer Affected
This section provides a broad indication of the recipients of assistance through tax expenditures. Despite the difficulties in determining the final beneficiary of the assistance, the purpose of this analysis is to provide an overall picture of the direction of tax expenditures. 
For the purpose of this analysis the classification of ‘taxpayer affected’ is by the legal incidence of the tax. Legal incidence should not be confused with the economic incidence of a tax measure. Legal incidence refers to the taxpayer upon whom the tax is levied. In contrast, the economic incidence of a tax relates to the taxpayer who bears the economic impact of the tax, that is, whose behaviour is changed by the imposition of the tax or concession. Economic incidence will differ from legal incidence if the group bearing the legal incidence transfers the tax expenditure to someone else. 
•	For instance, the legal incidence of a tax expenditure may be on the manufacturer of a product. However, the economic incidence may actually fall on consumers of the product via a change in price. 
The taxpayer aggregates in Table 7 consist of the expenditures listed below, covering those items for which costings are available (excluding deferral expenditures). Descriptions and costings of each expenditure are provided in Table 4. 
Businesses (CR2‑CR3, AFF12, OEA1, OEA8, OEA19, OEA21, MM1, MM4‑MM6, MM12, MM14, FE1,H8);
Defence force personnel, including veterans and their families (D1‑D2, D6, D10, SS8);
Donors to approved organisations (NAF11); 
Employees (SS24‑SS25); 
Employers (HC5, LE3, TC1, TAP1, AFF15, OEA14, OEA22-OEA23, NAF22); 
Financial institutions (OEA3‑OEA5); 
Government (NAF9); 
Hospitals and State and Territory Authorities (H6); 	
Superannuation funds and beneficiaries, termination payment recipients (SS13, SS26, SS27); 
Non‑profit organisations (H5, CR6, LE1, NAF6, NAF15, NAF17, SS21); 
Personal income taxpayers (GS1, H1‑H3, H10, SS1‑SS2, SS4-SS7, SS9, SS14‑SS15, SS29; HC1, NAF34); 
Retirees and allowees (SS3, SS28)
Property owners (MM9); 
Primary producers (AFF1, AFF3‑AFF5, AFF8‑AFF9, AFF11, AFF14, AFF16); 
Students (E1); 
Non-residents (FA8, NAF13-NAF14, OEA15, OEA24); and
Miscellaneous (H9, MM11, MM17).
Table 7: Tax Expenditures Classified by Taxpayer Affected

(a)	Expenditures included in the ‘Miscellaneous’ category are those for which the ‘Taxpayer Affected’ does not belong to any of the other identified categories.
(b)	Totals do not include any contribution from items which were costed as being ‘less than’ in Table 4 (eg <1, <5). 

Appendix A
Conceptual Issues 
Tax expenditures are those provisions of the Australian taxation law which effectively tax certain classes of taxpayers or particular types of activity differently from the chosen benchmark. A positive tax expenditure arises where an activity or class of taxpayer is taxed preferentially with respect to the chosen benchmark. A negative tax expenditure arises where taxation is at a higher rate than implied by the chosen benchmark structure. Virtually all tax expenditures identified in this Statement are positive.
The decision as to the appropriate benchmark for determining tax expenditures is a matter for judgement: benchmarks may vary across countries and within countries over time. The principal criterion of benchmark design is that it should represent the neutral taxation treatment of similarly placed activities or classes of taxpayer (that is, neutral taxation treatment neither favours nor disadvantages similarly placed activities or classes of taxpayer). 
This typically implies a taxation system with a comprehensive base. Because the tax bases relevant to the vast majority of Australian taxes are based on a definition of income which refers to an accretion in economic wealth (rather than, say, a consumption derivative) the Schanz‑Haig‑Simons definition of income is used as a starting point for the ideal benchmark. This essentially defines income as the increase in net economic wealth between two points of time plus consumption during that period, where consumption includes all expenditures except those incurred as a cost in the earning or production of income.
In Australia we also adopt the individual as the tax unit for income tax and this feature is adopted as part of the benchmark.
Departures from the ideal benchmark would be a practical necessity under any operational income tax system. Such departures involve taxing income derived from particular activities in a manner which departs from the conceptual ideal (such as the taxation of realised as opposed to accrued capital gains) or excluding certain types of income from the income tax base altogether (for example, the non‑taxation of imputed rent from consumer durables and the non‑deductibility of expenses incurred in earning that income) because it would not be feasible administratively to tax them. In addition, certain provisions relating to the taxation of foreign source income (such as the quarantining of foreign losses) are necessary to prevent the erosion of the domestic tax base and to protect the integrity of the Australian tax system. Accordingly, provisions which are intrinsic to the operation of the tax system but which nevertheless may depart from the ideal income tax benchmark have been incorporated into the benchmark for this Statement.
In some instances adherence to the ideal benchmark may be ruled out on pragmatic grounds and a comprehensive and achievable alternative to the existing taxation system may not be available. In such cases an interim benchmark which accepts the existing system and identifies deviations from it as tax expenditures has been adopted. For example, prior to 1987‑88 when the classical system of company taxation operated, no tax expenditures were identified in relation to the treatment of distributed and undistributed income even though it departed significantly from the ideal benchmark. With the introduction of the imputation system of company taxation from 1 July 1987, imputation was incorporated into the benchmark from the 1987‑88 income year.
It follows that benchmarks may change over time. This approach recognises that the treatment of ideal tax benchmarks needs to be tempered to ensure that the analysis of tax expenditures remains relevant.
Practical difficulties inevitably attach to the definition of a benchmark tax structure. It is difficult to ascertain whether some tax provisions should be part of the benchmark structure or listed as tax expenditures. This Statement generally lists as tax expenditures items for which such a categorisation is judged to be marginal. 
Although the above discussion focuses upon the income tax benchmark, the broad issues of benchmark design identified are equally relevant for the other heads of Commonwealth taxation such as wholesale sales tax, fringe benefits tax and excise duty.
Income Tax Benchmark
The benchmark adopted has the following characteristics:
•	The legislated progressive personal income tax rate scale, including the tax‑free threshold is part of the benchmark. 
•	The individual is the tax unit under the income tax system and this feature is adopted as part of the benchmark. Tax expenditures are thus deemed to arise where taxpayers’ liabilities are modified according to their dependant‑care responsibilities.
•	A single tax year is adopted as the accounting period under the benchmark structure. Accordingly, averaging provisions available only to selected classes of taxpayer are regarded as tax expenditures. However, carry‑forward loss provisions are considered to fall within the benchmark.
•	Consistent with practice in Australia, a nominal income benchmark is adopted in this Statement with some ad hoc adjustments for inflation. (Adoption of a real income benchmark would require the identification — as (generally negative) tax expenditures — of all aspects of the tax system which do not adjust the measurement of income for inflation.)
•	An exception to this is in relation to capital gains tax, where the taxation of real gains on assets held for more than 12 months is an intrinsic feature of the capital gains tax system and is therefore included in the benchmark. The following intrinsic features are also included in the benchmark:
•	CGT exemption for gains on the disposal of motor vehicles, and on each other personal‑use asset with disposal value of less than $10,000;
•	CGT exemption for gains on assets acquired prior to 20 September, 1985;
•	CGT exemption for gains received by way of compensation or damages for any wrong or injury suffered by a taxpayer;
•	CGT exemption of gains or winnings from gambling;
•	CGT rollover reliefs on the death of a taxpayer, the involuntary disposal of an asset, or the transfer of assets between spouses upon breakdown of marriage; and
•	CGT averaging of tax liabilities.
•	Although assessment of income on an accruals basis is the general benchmark, those provisions where income is assessed on a realisation basis (eg under the capital gains provisions of the income tax) are considered to be essential features of the tax system and hence are incorporated into the benchmark.
•	Under the benchmark adopted, expenses incurred in earning assessable income are deductible: 
•	the substantiation rules, which apply to employment‑related expenses incurred on or after 1 July 1986, generally conform to this benchmark. However, tax expenditures are deemed to arise where taxpayers are allowed to claim on the basis of statutory formulae which yield a larger deduction than the actual cost incurred;
•	deductions for depreciation are identified as tax expenditures if they provide more generous treatment than effective life depreciation; and
•	provisions which defer deductions are identified as negative tax expenditures. The restrictions on the deductibility of interest on borrowings used to finance rental property investments acquired after 17 July 1985 (the restriction being repealed from 1 July 1987) gave rise to a negative tax expenditure.
•	For the 1987‑88 income year and beyond, the imputation system of company taxation is the benchmark for identifying tax expenditures arising under the provisions of the income tax law relating to company income. It replaces the classical company tax system. The imputation system of company taxation  which has applied since 1 July 1987 allows resident shareholders credit for company tax paid. This effectively frees company dividends from the double taxation which existed under the classical system where tax was imposed at both the company and shareholder level, reducing the effective tax rate on distributed profits derived by Australian residents through business entities covered by imputation.
•	Under imputation, the value of concessions is offset to some degree since such concessions reduce company tax paid. The subsequent taxation, in the hands of shareholders, of dividends paid out of tax‑preferred income (as also occurred under the classical system) is not costed in this Statement because of the practical difficulties in doing so. This needs to be considered in relation to the cost to revenue of company tax expenditures. While this subsequent taxation may reduce the value of the concessions to shareholders, the shareholders can still benefit through the tax‑preferred income being retained in the company for long periods before being distributed.
•	The taxation rules applying to sole traders, partnerships and trusts, which are not separate taxable entities, are regarded as design features of the tax system and are included in the benchmark. The taxation treatment of co‑operative companies departs from the taxation of companies under the imputation system. Tax expenditures arise where the income and distributions of co‑operative companies receive concessional treatment.
•	The separate income tax rates scale applicable to non‑residents (in the case of individual taxpayers) is taken as part of the benchmark structure, as are design features such as dividend withholding tax and interest withholding tax which apply to non‑residents generally. The allocation of taxing rights in Australia’s double tax agreements is included in the benchmark. 
•	As part of a Government policy to encourage multinationals to establish regional‑headquarters in Australia, certain foreign source dividends paid on or after 1 July 1994 by a resident company to non‑resident shareholders will be exempt from withholding tax. As this particular exemption reflects the view that Australia does not have a strong claim for taxing that income, on either a residence or source basis, it is not considered to be a tax expenditure. For the same reason, the exemption from interest withholding tax for interest paid to non‑residents by an offshore banking unit is now considered to be part of the benchmark.
•	The benchmark for foreign source income is taken to be assessment on a world‑wide basis, with a limit on foreign tax credits, on a source‑by‑source basis, to the amount of Australian tax payable in respect of the foreign income. Under the benchmark passive income such as interest, royalties and dividends, and highly mobile forms of active income are assessed on an accruals basis while most active foreign source income is assessed on a repatriation basis with a credit for any foreign tax paid (ie the foreign tax credit system (FTCS) is applied).
•	An exemption from the operation of the FTCS is provided for branch income and certain non‑portfolio dividends derived in a listed country (sections 23AH and AJ). It was intended that this list of countries should only include those that consistently impose tax on a comparable basis to Australia. To the extent that the total foreign company tax plus dividend withholding tax is less than the Australian tax payable, there is a tax expenditure, but this has not been costed.
•	Most passive income and highly mobile active income derived by controlled foreign companies (CFCs) and transferor trusts in listed countries is exempt from accruals taxation on the presumption that it has been comparably taxed. To the extent that foreign company tax paid on a current basis is less than would have been payable in Australia, there is a tax expenditure, but this has also not been costed.
•	The measures for taxing Australian residents’ interests in foreign investment funds (FIFs) are taken to be consistent with the benchmark.
•	Foreign employment income is exempt from Australian tax where it is derived by a taxpayer during a period of continuous service of 91 days or more, other than in certain cases where the income is exempt from tax in the source country. The income may otherwise be exempt if derived from continuous service of 91 days or more on an ‘approved overseas project’. Both circumstances constitute a tax expenditure, the magnitude of which is likely to be small.
•	The untaxed imputed rent from owner‑occupied housing (and the non‑deductibility of expenses incurred in earning that income) and the income received from an inheritance would both fall within the Schanz‑Haig‑Simons definition of income, but the non‑taxation of these items is considered part of the benchmark for the purposes of this statement.
•	Many types of capital receipts not representing a return to investors of their initial capital have not been taxed in Australia in the past (eg some capital gains realised on the sale of property; payments received by professional sportspersons in consideration for giving up a permanent asset such as their amateur status; and receipts in consideration of a restrictive covenant whereby the recipient undertakes not to use specified assets or to trade only with the other party to the covenant). Policy has moved over recent years, however, to bring many classes of capital receipts into the income tax base, particularly with the introduction in 1985 of the capital gains tax provisions in the income tax law. This Statement identifies as tax expenditures capital receipts which are specifically exempt under the capital gains tax provisions.
•	Certain receipts of organisations such as non‑profit associations and societies are exempt from Australian income tax on the basis of the ‘mutuality principle’, which asserts that a person cannot derive income from dealings with himself or herself and is applied notwithstanding that the club or society with which persons are associated may be incorporated. Such organisations are generally assessed only on their investment income and on income from trading with non‑members. The application of the mutuality principle is not considered to involve a tax expenditure. The global income tax exemptions for the income of specified non‑profit organisations (eg trade unions, cultural and sporting societies), which extend, for example, to investment income and income from business activities in competition with taxable entities, are treated as tax expenditures.
•	The income tax benchmark includes sovereign immunity exemptions and international taxation right exemptions. This practice is justified by the fact that these exemptions reflect standard international practices of long‑standing inter‑governmental taxation agreements, and thus lack the element of policy discretion usually attributed to tax expenditures.
•	The income tax rebate for low income earners has been excluded from the benchmark, and therefore identified as a tax expenditure, on the grounds that it provides assistance to a distinct class of taxpayer and could be replaced by a direct outlay (a criterion used to identify expenditures in other OECD countries). 
•	For 1996‑97 only, the Medicare levy was increased from 1.5 per cent to 1.7 per cent to fund the costs associated with the gun buyback scheme. This temporary levy increase is treated as part of the benchmark.
Retirement and Other Employment Termination Benefits
The benchmark for retirement and other employment termination benefits is the general taxation treatment of remuneration and savings. This benchmark has the following features:
•	Remuneration in respect of employment is deductible to taxable employers and fully taxed to the employee.
•	Savings are normally financed out of after‑tax income.
•	Investment income on savings is normally taxed in the income year it is derived.
•	Dissaving of amounts (including interest) accumulated and already taxed is not taxed again.
Fringe Benefits Tax (FBT) Benchmark
The benchmark adopted has the following characteristics:
•	The role of the FBT in supplementing the personal income tax structure is the starting point in determining the benchmark. Accordingly, under the benchmark FBT would apply to all benefits provided to all employees or associates (except where their wage or salary income is exempt from personal income tax) and hence all employers providing such benefits would be liable for FBT.
•	Reflecting the role of the FBT in supplementing the personal income tax structure, it is accepted as part of the benchmark that the FBT is levied at the maximum personal tax rate, including the Medicare levy. Negative tax expenditures arise where employees who receive fringe benefits face marginal personal tax rates below the maximum because the FBT paid by the employer is higher than the tax which employees would pay if the benefit were assessable in their hands. However, as the effective administration of the FBT requires that it be levied at a single rate, this feature is accepted as part of the benchmark.
•	The benchmark value of a fringe benefit to an employee is taken to be its market value less any consideration paid by the employee. In some cases statutory formulae are available to calculate the benefit derived. As for the substantiation rules, tax expenditures are deemed to arise where the formulae provide a concession to taxpayers.
•	The non‑deductibility for income tax purposes of FBT on fringe benefits provided up to 31 March 1994 reduced the tax advantage of receiving remuneration in the form of fringe benefits and, accordingly, is treated as part of the benchmark.
•	These characteristics were altered from 1 April 1994 when FBT was applied to the tax inclusive value of the fringe benefits and FBT became income tax deductible for employers. A special rebate applies to non‑government entities that are exempt from income tax but subject to FBT and this rebate is treated as a tax expenditure.
Wholesale Sales Tax Benchmark
The benchmark adopted has the following characteristics:
•	Tax is levied at the final wholesale transaction on goods that enter domestic consumption. 
•	The tax is a single stage tax. Cases where goods are taxed more than once would give rise to a negative tax expenditure.
•	Services are not taxed directly. However, services are input taxed. Business input exemptions for service providers would give rise to tax expenditures.
•	The existence of multiple rates of tax is considered an essential part of the design of the existing system and is part of the benchmark. The exception to this is certain exempt items contained in Schedule 1 of the Sales Tax (Exemptions and Classifications) Act 1992. These items provide preferential treatment to activities or classes of taxpayers and so give rise to tax expenditures.
•	Business input exemptions for goods producers contained in Schedule 1 of the Act are part of the benchmark. This reflects the design feature of the system that it is a single stage tax.
Excise Duty Benchmark
The benchmark for the excise taxes has the following characteristics:
•	The benchmark includes excises for alcohol, tobacco and fuels.
•	The benchmark has no exemptions for classes of taxpayers or activities.
•	The benchmark rate for alcohol is the excise rate on beer. Beer is the highest selling alcoholic product in Australia. To allow for the different alcohol contents of beverages the excise rate is expressed as an excise per unit of alcohol.
•	The benchmark rate for fuels is the excise on unleaded petrol (which is also the rate for diesel). To allow for differences in the energy output of different fuels the rate is expressed as an excise per unit of energy. The tax on leaded petrol is a negative tax expenditure. 
•	The benchmark rate for tobacco is the current excise rate on tobacco. Treasury is unaware of any tax expenditures for tobacco. 
Appendix B
Retirement and Other Employment Termination Benefits
This Appendix sets out the estimated tax expenditures on retirement and other employment termination benefits for 1993‑94 to 1996‑97 and forward projections for the following four years. It also briefly examines some conceptual issues relating to the interpretation of these estimates. The estimates are presented in Table B1 according to the forms of departure from the benchmark taxation treatment of these benefits. 
A brief discussion of the savings benchmark is included in Appendix A. A discussion of how the actual taxation of retirement and other employment termination benefits depart from this benchmark is provided in Appendix B of the 1994 Tax Expenditures Statement. The 1994 Statement also outlines the difference between these estimates and estimates of the longer-term budgetary impact of superannuation concessions provided by the Retirement Income Modelling Unit (RIM) models.
The method of estimating superannuation and other termination payment concessions is the same as that used for last year’s Statement. This method:
•	uses RIMGROUP projections of contributions in their entirety and has regard to RIMGROUP projections of earnings (RIMGROUP is the population model used by RIM to project superannuation fund contributions, earnings and payouts as well as related retirement income, social security and taxation aggregates);
•	removes the assumed year delay in the collection of tax from superannuation funds, reflecting changes in the collection timetable (this produces a more stable series); and
•	incorporates a revised approach to estimating earnings, which leads to a higher estimated earnings figure.

Table B1: Estimated Tax Expenditures Through Retirement and Other Employment Termination Tax Concessions 1993-94 to 2000-01

(a)	Includes the revenue impact of the surcharge on superannuation contributions for high income earners.
(b)	Indeterminate but unlikely to be significant.

Source: Australian Taxation Office.

Interpretation
The cost estimate for the tax expenditure measures the amount by which tax revenue is reduced by the provisions for taxing retirement and other employment termination benefits in a particular year. The estimate of the tax expenditure in the forward projections is not necessarily indicative of the cost of the superannuation concessions in future years:
•	the taxes on superannuation pensions and lump sums could be expected to provide a greater offset to the cost of the under‑taxation of contributions in future years when there are larger numbers of taxpayers drawing down their superannuation savings relative to the numbers in the accumulation phase; and
•	the current superannuation tax concessions will have an (intended) impact on certain direct budgetary outlays in future years. In particular, consideration of the ongoing cost of the superannuation concessions would need to take account of the offsetting effect on future age pension outlays.
Even aside from these factors, the estimates in Table B1 cannot be interpreted as a time series of the ongoing revenue savings that could be obtained if the superannuation concessions were eliminated. This is because the increase in tax arising from the elimination of the tax expenditures with respect to a particular year would cause the superannuation tax base to be smaller for the next year. For example, if contributions and fund earnings in 1996‑97 were taxed according to the savings benchmark, superannuation fund assets, and hence fund earnings, would be lower in 1997‑98 than if the concessional tax treatment had applied the previous year. The cost of taxing fund earnings concessionally in 1997‑98 will, in these circumstances, be lower than if the superannuation concessions had applied in 1996‑97.
In addition, the estimated cost of the tax expenditure on retirement and other employment termination benefits assumes no behavioural change; so the level of superannuation savings would not be affected by the removal of the concessions. To the extent that this is an unrealistic assumption the cost of the concessions will be overestimated.
Notwithstanding these caveats, the methodology used to cost tax expenditures in this Statement is considered to provide the best measure of the budgetary impact in any given year of removing existing tax concessions in that year.
Estimates
The estimated and projected cost of the superannuation/termination tax concessions has been revised substantially upwards for 1995‑96 and succeeding years compared to the estimates and projections in last year’s TES. This reflects the taxable income of funds in 1995‑96 and 1996‑97 substantially exceeding the estimates in the previous year’s TES. The main upward revision has been to fund earnings but there has also been a significant revision to fund contributions. As noted in the 1995‑1996 TES, Appendix B, the earnings of superannuation funds are not readily predictable. The major reason is that it is a matter for the discretion of a fund manager when the accrued capital gains of a fund are to be realised. In addition, the earnings series is intrinsically volatile, reflecting the fluctuation in interest rates and yields that contribute to it.
The higher estimated taxable income of funds in 1995‑96 has flowed through to the estimates for 1996‑97 and forward projections. It has been assumed that fund earnings return to more normal levels in 1997-98. As with the projections in the 1995‑1996 TES, fund earnings have been ‘smoothed out’ for the forward projections as this is considered to provide a better indication of the cost of the tax expenditure over time.
Appendix C
Cost Measurement Issues
The cost estimates provided in this Statement for positive tax expenditures measure the amount by which tax revenue is reduced in a particular year, by the tax provision in question relative to the benchmark. Estimates are costed on the basis of the year of impact on revenue rather than the income year in which use of the provision was made. 
Aggregation of Cost Estimates 
For a number of reasons the aggregation of costings for individual tax expenditure items presented in the TES will not provide an accurate estimate of the total level of assistance which is provided through tax expenditures. 
These considerations suggest that although the concept of revenue forgone may overstate the revenue which might accrue from removal of individual tax expenditures, in aggregate the costings understate the total level of preference provided through tax expenditures.
•	The listing of tax expenditures while much broader, with the inclusion of those associated with the wholesales sales tax, may not be exhaustive.
•	Because of the unavailability of data, estimates are not available for many items which are listed. Further, considerable conceptual and data difficulties surround the costing of many tax expenditures. For retirement and other employment termination benefits this problem is particularly acute.
•	Under a progressive income tax the removal of a positive tax expenditure may push the taxable income of some taxpayers into a higher marginal tax rate bracket and thereby increase the estimated revenue forgone by virtue of remaining tax expenditures, with the reverse true for negative tax expenditures.
•	The costings assume, often unrealistically, that taxpayers would not alter their behaviour following the removal of a tax expenditure. However, the removal of one tax expenditure may induce greater usage of another. This caveat also applies to direct budgetary expenditures.
Tax Expenditures Involving Deferral
In this publication information on timing (or deferral) expenditures has been placed in a separate table. Such a separation allows readers to decide if they wish to include these estimates when assessing tax expenditures. This will depend on why they are interested in analysing tax expenditures; to determine the revenue impact in a particular year or to consider the level of assistance provided through the tax system. 
This section provides more information on these deferral expenditures and provides a practical example of the operation of an accelerated depreciation provision.
The accelerated depreciation provisions of the income tax law permit tax to be deferred by allowing deductions to be brought forward. The taxpayer pays less tax in early years but more tax later. This does not mean that the aggregate revenue losses in the early years will be made up later. Accelerated depreciation provisions usually result in revenue losses over a number of years, but the losses are not offset by revenue gains in future years unless the provisions are removed. The size of the revenue effects can differ markedly from year to year, particularly during the transitional period following the introduction or removal of the concession. Thus the ongoing revenue implications of such provisions cannot be adequately summarised by ‘first’ or ‘full’ year costs to revenue. Nevertheless, reflecting the ‘annual cost to the Budget’ basis of tax expenditure estimates, these tax expenditures are costed in terms of their impact on revenue in individual years.
A positive tax expenditure arises in the years in which capital is being depreciated rapidly, followed by revenue gains in the years in which no deductions, or comparatively smaller deductions, can be claimed because the capital has already been written down relative to an effective life depreciation schedule, which is the benchmark. The removal of the 5/3 accelerated depreciation provisions, announced in the May 1988 Economic Statement, resulted in a revenue gain in both the 1993‑94 and 1994‑95 income years.
Table C1 presents calculations demonstrating how a negative tax expenditure may arise over time as a consequence of a change from an effective life regime to an accelerated depreciation regime. 
The calculations are based on the following assumptions:
•	A firm purchases $10 billion of depreciable equipment midway through year 1. The equipment has an effective life of nine years, and is scrapped in year 10 for no residual value.
•	Under (non-accelerated) effective life depreciation, the firm would be able to depreciate the equipment at 16.67 per cent per annum using the diminishing value method (i.e. 150 per cent divided by the effective life of nine years).
•	Under the current accelerated depreciation provisions, the firm can depreciate equipment at 30 per cent per annum using the diminishing value method.
•	The current company tax rate of 36 per cent applies to the firm.
•	Factors such as past and current year losses are ignored.
Columns (2) to (4) of the table present the calculations for depreciation under effective life and the associated tax saving. Columns (5) to (7) contain the same information for accelerated depreciation. The ‘Tax Saving’ is the value of the depreciation deduction to the taxpayer.
Column (8) gives the year‑by‑year cost to revenue of accelerated write‑off, assuming a zero discount rate. Positive tax expenditures occur in the earlier years but are offset in later years by negative tax expenditures. With the assumption of a zero discount rate, cumulative tax expenditures are zero. However, in the real world case where the discount rate is positive, cumulative tax expenditures would also be positive, thus conferring an accumulated benefit to investors and an accumulated loss to government.
Table C1: Accelerated Depreciation Tax Expenditures