
3.5 Guide to tax expenditure descriptions
The descriptions of tax expenditures included in this chapter present a range of information about each identified tax expenditure item. The following example illustrates the information included for a given tax expenditure.
The reference information provides details of:
- the type of expenditure, for instance a tax exemption, deduction or tax offset;
- the year a tax expenditure commenced;
- the year a tax expenditure will cease to operate (if applicable);
- where to find the provisions implementing the tax expenditure in the legislation;
- the 2009 Tax Expenditures Statement reference code for a tax expenditure that is not new;
- an assessment of the reliability of estimates for a tax expenditure where estimates are available; and
- a category classification for a tax expenditure for which estimates are not available, indicating an order of magnitude range for the likely size of the tax expenditure.
Tax expenditures by functional categories are summarised in Table 1.5. The functional categories are based on an international standard classification of functions of government that is incorporated into the Government Finance Statistics framework.
The 'tax expenditure type' in the reference information classifies tax expenditures according to the way in which they are delivered, for instance, by way of a tax exemption, tax deduction, tax offset, concessional tax rate or deferral of a tax liability.
In the case of fringe benefits tax, tax expenditures may also be delivered through a reduction in taxable value, discounted valuation or record keeping exemption. A reduction in taxable value is a tax expenditure that arises where the taxable value of the fringe benefit is reduced by some factor. A discounted valuation describes provisions where a valuation other than the actual value of the benefit is used as a basis for calculating the tax. Record keeping exemptions arise where an employer is not obliged to maintain current records of benefits to calculate the tax.
Certain tax expenditures relating to depreciation allow for the accelerated write-off of depreciable assets and these tax expenditures are identified as accelerated write-off. In the early years of an asset's life, accelerated write-offs allow larger deductions than the benchmark depreciation treatment. In the later years of an asset's life when the accelerated write-off is complete, deductions that would be allowed under the benchmark are no longer available. Thus, accelerated write-offs act like tax deferrals.
The presentation of capital gains tax expenditures
In general, the discount components of capital gains tax concessions are reported as part of the tax expenditure Capital gains tax discount for individuals and trusts (E14) in order to provide a clearer indication of the value of CGT concessions to taxpayers and avoid double counting. The estimate shown for each individual tax expenditure, except for E14, is the estimate of the concession in excess of the discount.
The same approach is taken for the CGT main residence exemption (E4) but, due to the significant value of the discount component of this item, the value of the CGT discount component is reported as a separate item (E5).
Order of Magnitude Range
In many cases, estimates for tax expenditures are not available because of data limitations or because of the nature of the tax expenditure itself. In such cases, the various modelling techniques used to estimate the value of tax expenditures, which are discussed in detail in Appendix A, are unable to be utilised fully to produce reliable estimates.
The following categories are used to provide an indication of the size of the expenditure for those tax expenditures for which an estimate is not available. The category assigned to an unquantifiable tax expenditure refers to the year the tax expenditure is considered to be most significant.
| Order of magnitude range | |
|---|---|
| Category | Expected tax expenditure ($m) |
| 0 | 0 on average |
| 1 | 0 - 10 |
| 2 | 10 - 100 |
| 3 | 100 - 1,000 |
| 4 | 1,000+ |
| na | not available |
The category classifications are provided as a broad guide only and have been estimated without the benefit of detailed data. They are based on assumptions and judgment and as such they should be treated with caution. Tax expenditures that are categorised in this way are not included in the aggregate measured tax expenditures reported in Chapter 1.
The category classification also indicates whether a tax expenditure is positive or negative. A positive sign denotes a positive tax expenditure, while a negative sign denotes a negative tax expenditure. For example, reliable estimates for an exemption from fringe benefits tax that applies to benefits provided by certain international organisations (D4) are not available. As such, category 1+ has been allocated to this tax expenditure to indicate the broad range of the size of the tax expenditure. It indicates that this tax expenditure is considered to be up to $10 million in the year the tax expenditure is most significant.
Where a tax expenditure for which an estimate is not available is small and is expected to average zero over the reporting period, it is classified as category 0. Where a tax expenditure could be either positive or negative, a +/- order of magnitude is assigned. For example, the deferral or spreading of income from the forced disposal or death or livestock (B40) is expected to be between -$100 million and $100 million in any given year. Accordingly, a classification of 2+/- has been assigned. For a tax expenditure where neither an estimate, nor an order of magnitude could be assigned, an 'na' classification has been adopted.
Reliability of estimates
Tax expenditure estimates in this statement aim to represent the best estimates that can be made given the available data. The estimates vary in their reliability, depending upon the quality and detail of the underlying data that is used in the estimates, the frequency of that data, the extent to which calculations are based on assumptions, the sensitivity of the results to those assumptions and whether future taxpayer behaviour is reasonably predictable. Future taxpayer behaviour is a factor in determining the reliability of tax expenditure projections, where taxpayer behaviour affects the future level of use of tax concessions. In many cases, there is insufficient data to produce a reliable estimate for a tax expenditure item, in which case the estimate will be shown as being unquantifiable.
The reliability of quantified tax expenditures is shown in Table 3.1. The table shows that of the 349 tax expenditures identified, estimates are available for 221. Of the quantified tax expenditures, 51 per cent are rated as having medium or higher reliability, accounting for 37 per cent of the total identified value of tax expenditures in 2010-11.
Table 3.1: Reliability of quantified tax expenditures
| Reliability rating | Indicators for rating at this level | Number | Aggregate estimates in 2010‑11 ($m) |
|---|---|---|---|
| High |
|
8 | 8 |
| Medium - High |
|
22 | 77 |
| Medium |
|
82 | 43,395 |
| Medium - Low |
|
40 | 49,031 |
| Low |
|
60 | 24,314 |
| Very low |
|
8 | 42 |