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Chapter 2 - Overview of tax expenditure aggregates

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2.1 Introduction

Tax expenditure aggregates are reported and analysed in this chapter, with a breakdown of tax expenditures by both function and taxpayer affected. Care must be taken when interpreting these aggregates, particularly when making comparisons across time. There are several major considerations that need to be taken into account when analysing tax expenditure aggregates.

  • First, some of the identified tax expenditures are not costed because of a lack of suitable data. Hence, tax expenditure aggregates will tend to underestimate the total benefit provided by tax expenditures.
  • Second, the trend in aggregates over time reflects changes in the extent to which individual tax expenditures are accessed, changes to benchmark tax rates and changes in the coverage of tax expenditures being costed.
  • Third, changes over time in methodology and data used to calculate the cost of tax expenditures can result in quite large revisions to the tax expenditure estimates. Therefore, estimates that were provided in previous editions of the TES may not be strictly comparable to figures in this publication.
  • Finally, tax expenditure aggregates are net aggregates as they include the offsetting effects of negative tax expenditures.

2.2 Trends in tax expenditures

Total measured tax expenditures as a share of GDP are reported in Table 2.1.

Table 2.1: Total measured tax expenditures(a)

Table 2.1 Total measured tax expenditures (a)

(a) Total measured tax expenditures are derived by summing the individual tax expenditure estimates provided in Table 5.1, excluding items with estimates listed as being `less than' (eg. <1, <5), rounded to zero (..) or na.

Tax expenditures as a proportion of GDP are projected to fall from 4.5 per cent in 1997-98 to 3.9 per cent in 2004-05.

The decline in total measured tax expenditures as a share of GDP largely reflects the policy decision to remove accelerated depreciation for plant and equipment for businesses with an annual turnover of $1 million or more (tax expenditure reference code D70).

  • This item is estimated to decline from a large positive tax expenditure in 1997-98 to a large negative tax expenditure in 2004-05. It becomes a negative tax expenditure because accelerated depreciation merely brings forward tax deductions; hence deductions in coming years for investments made before accelerated depreciation was removed will be lower than they would have been under the benchmark.

2.3 Tax expenditures by function

Total measured tax expenditures by functional category are reported in Table 2.2 for the period 1998-99 to 2004-05. The inter-annual variations in functional aggregates are explained largely by policy decisions, particularly those related to The New Tax System. Significant inter-annual movements in functional categories are listed below. (Tax expenditure reference codes used in Chapter 5 and Appendix A are reported in parentheses.)

  • The increase in total defence tax expenditures in 1999-2000, relative to 1998-99, reflects the tax exemption of pay and allowances for troops deployed in East Timor (A16).
  • The increase in total health tax expenditures in 1999-2000 follows the introduction of the 30 per cent rebate for expenditure on private health insurance (A31).
    • There is a further significant increase in total health tax expenditures in 2000-01, reflecting the first full year impact of the private health insurance rebate for those claiming their entitlement as a rebate, and again in 2001-02, reflecting the impact of increased take-up of private health cover in 2000-01.
  • The slight fall in total social security and welfare tax expenditures in 2000-01 reflects the effects of reduced personal income tax rates under The New Tax System on the value of the concessional treatment of superannuation (B1). The increase in total social security and welfare tax expenditures in 2001-02 reflects the first full year impact of the Family Tax Benefit for those claiming their entitlement as a rebate (A45), while the increases in 2002-03 and beyond largely reflect the growing value of superannuation assets and continued growth in superannuation contributions (B1), partly due to the Superannuation Guarantee schedule.
  • The increase in total housing and community amenities tax expenditures in 2000-01 reflects the extension of an FBT exemption for remote area housing benefits to all employers (C16).

Table 2.2: Aggregate tax expenditures by function(a)

Table 2.2 Aggregate tax expenditures by function (a)

(a) Total tax expenditures by functional category are derived by summing the individual tax expenditure estimates provided in Table 5.1, excluding items with estimates listed as being less than X million dollars (eg. <1, <5), rounded to zero (..) or not available (na).

(b) Items may not sum due to rounding.

  • The increase in total recreation and culture tax expenditures in 2003-04 reflects the introduction in 2001 of a tax offset for large scale film production (D51).
  • The growth in total fuel and energy tax expenditures between 1998-99 and 2004-05 largely reflects rapid growth in the value of the excise exemption for alternative fuels (E3).
  • The significant fall in the cost of mining, manufacturing and construction tax expenditures results from the removal of accelerated depreciation for businesses with an annual turnover of $1 million or more on 21 September 1999 (D70).
  • The increase in total tax expenditures for other economic affairs in 2000-01 reflects:
    • the introduction of the capital gains tax (CGT) discount for individuals (D44); and
    • transitional arrangements for prepayments (D86), which is estimated to cost $750 million in 2000-01 before becoming a negative tax expenditure from 2001-02.
  • The higher estimates of total measured tax expenditures that are `not allocated to function', in all years from 1999-2000 relative to 1998-99, is attributable to a number of factors:
    • in 1999-2000 and 2000-01, it largely reflects the impact of the savings rebate (B9), the immediate deductibility of Y2K related upgrades (D83) and the immediate deductibility of GST related plant and software (D84); and
    • from 2001-02, it largely reflects the introduction of the excise concession for draught beer (E9).

Significant changes in functional aggregates relative to the 2000 Tax Expenditures Statement include a reclassification of the research and development tax concession (D79) from the mining, manufacturing and construction functional category to other economic affairs, not elsewhere classified.

2.4 Comparison with direct expenditure

The tax expenditure estimates for 2000-01 by functional category are presented alongside direct government expenditure in Table 2.3. The list of direct expenditures by function is reproduced from Table 3 of the 2000-01 Final Budget Outcome.

Comparisons between tax expenditures and direct expenditures are informative in broad terms, although the costings are not strictly comparable for the following reasons:

  • A tax expenditure tends to provide a higher benefit than a direct expenditure of the same magnitude. This is because direct expenditures are often taxable, whereas tax expenditures are not. Therefore, a direct expenditure will, in some circumstances, have a smaller net budgetary impact than a tax expenditure of equivalent nominal value.
  • The removal of a tax expenditure or a direct expenditure of the same magnitude may have different effects on the
    underlying fiscal balance for reasons discussed in chapter 1.4.

Table 2.3: Aggregate tax expenditures and direct expenditures
by function in 2000-01

Table 2.3 Aggregate tax expenditures and direct expenditures by function in 2000-01

(a) Total tax expenditures by functional category are derived by summing the individual tax expenditure estimates provided in Table 5.1, excluding items with estimates listed as being less than X million dollars (eg. <1, <5), rounded to zero (..) or not available (na).

(b) Items may not sum due to rounding.

  • For tax exempt and rebated personal cash transfers, the addition of tax expenditures and direct expenditures will tend to overstate the impact on the fiscal balance. For example, in the case of A40 (exemption of certain social security and repatriation payments), the direct expenditure column includes the full cost to government of the programme; however there is also an associated tax expenditure for the value of the income tax exemption to the recipient. Other examples include A31 and A41 to A48. (An equivalent point applies to the addition of refundable rebates and the value of the tax exemption in Table 2.2 for tax expenditures A31 and A45.)

As reported in Table 2.3, total measured tax expenditures in 2000-01 are valued at $29.6 billion. Social security and welfare tax expenditures comprise 60 per cent of total measured tax expenditures.

When compared to the sum of both total measured tax expenditures and total direct expenditure, 16 per cent of total government assistance is provided through tax expenditures.

The proportion of government assistance delivered through tax expenditures, however, varies greatly by functional category. In most cases, the assistance provided by direct expenditure significantly exceeds the benefit provided by tax expenditures. The exceptions are:

  • mining, manufacturing and construction, although this category includes the accelerated depreciation tax expenditures which have been removed from 21 September 1999 for businesses with an annual turnover of $1 million or more (D70-D71); and
  • other economic affairs, due to a number of large tax expenditures in this category including the concessional rate of fringe benefits tax on motor vehicles (C32), the CGT discount for individuals (D44) and the transitional arrangements for prepayments (D86).

2.5 Tax expenditures by taxpayer affected

While many tax expenditures may be accessed by more than one group of taxpayers, this section provides a broad indication of the main taxpayer group that benefit from each tax expenditure. The purpose of this analysis is to provide an overall picture of the direction of tax expenditures despite the difficulties in determining the final beneficiary of the assistance.

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 which the tax is levied. In contrast, the economic incidence of a tax relates to the taxpayer (or taxpayers) that bear the cost of a tax, or benefit from a tax expenditure. Economic incidence will differ from legal incidence if the group bearing the legal incidence is able to pass on some or all of the cost or benefit of the tax, and thus have it feed through into prices (including factor prices, such as wages and the return on capital).

  • 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.

Total measured tax expenditures by taxpayer affected are reported in Table 2.4, including deferral expenditures. Major influences behind changes in taxpayer-affected aggregates are generally the same as those listed in chapter 2.3. (For example, the increase in personal income tax expenditures in 2000-01 reflects the introduction of both the CGT discount for individuals (D44) and the Family Tax Benefit (A45).)

Table 2.4: Aggregate tax expenditures by taxpayer affected(a)

Table 2.4 Aggregate tax expenditures by taxpayer affected (a)

(a) Total tax expenditures by taxpayer affected are derived by summing the individual tax expenditure estimates provided in Table 5.1, excluding items with estimates listed as being less than X million dollars (eg. <1, <5), rounded to zero (..) or not available (na).

(b) Expenditures included in the `Miscellaneous' category are those for which the `taxpayer affected' does not belong to any of the other identified categories.

(c) Items may not sum due to rounding.

The following provides, for measured tax expenditures, a list of tax expenditure reference codes that correspond to each category of taxpayer affected.

Businesses

B5, D18, D25, D41, D60, D62, D65, D70, D72-D80, D82-D84, D86, D100, D104, E1, E3-E5, E7-E9

Defence force personnel, including veterans and their families

A10, A11, A16, A19, A21, A48, C3

Donors to approved organisations

A63

Employees

B2-B4

Employers

C16, C20, C23, C32, C33, C42, D21

Financial institutions

D22, D26, D29, D105

Government

D31

Hospitals and State and Territory authorities

C8

Superannuation funds and beneficiaries, termination payment recipients

B1

Non-profit organisations

C13, C35, C37, D1, D6, D9, D20

Personal income taxpayers

A9, A27-A34, A36, A39, A41, A43-A46, A53, A67, A68, B9, D16, D37, D38, D44, D47, D49, D89, D91

Retirees and allowees

A35, A40, A42, A47, A52

Primary producers

D10, D13, D15, D52, D54, D56-D59, D93, D94, E6

Students

A23

Non-residents

A6, D51, D110

Miscellaneous

A2, A54, A65, C22, D27, D28