Chapter 4: Revenue gain estimates of tax expenditures

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4.1 Introduction

The revenue gain approach has often been proposed as 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 More recently, 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 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 349 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 several 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 2010;
  • apply prospectively to transactions entered into after that date; and
  • other specific assumptions concerning likely policy specifications for the removal of each concession as set out in the description.

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.

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)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
14,300 15,800 16,300 17,900 10,500 12,150 12,550 13,750
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 involving negative gearing. 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)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
12,200 13,600 15,200 17,900 10,550 10,650 10,850 11,150
Reason for difference It is assumed current preservation rules remain. In the accumulation phase voluntary concessional contribution 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.
H28: GST - Food - uncooked, not prepared, not for consumption on premises of sale and some beverages
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
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)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
2,950 3,200 3,500 3,800 2,900 3,150 3,450 3,750
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.
F20: Customs duty
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
-2,740 -3,020 -3,310 -3,540 -2,740 -3,020 -3,310 -3,540
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.
H16: GST - Education
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
2,600 2,800 3,000 3,250 2,350 2,550 2,700 2,950
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'.
B110: Small Business and General Business Tax Break
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
2,350 660 220 20 0 0 0 0
Reason for difference It is assumed that the repeal of the tax concession would not be retrospective. That is, taxpayers would still be entitled to claim the bonus deduction in respect of assets acquired prior to 31 December 2009 but only installed ready for use between 1 July 2010 and 31 December 2010. Accordingly, there would be no revenue impact from removing the Small Business and General Business Tax Break from 1 July 2010.
H2: GST - Financial supplies; input taxed treatment
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
2,200 2,350 2,550 2,750 2,200 2,350 2,550 2,750
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.
B16: Exemption from interest withholding tax on certain securities
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
2,040 2,310 2,610 2,940 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.
A45: Exemption of Family Tax Benefit, Parts A and B, including expense equivalent
Estimates Revenue forgone estimate ($m) Revenue gain estimate ($m)
2010-11 2011-12 2012-13 2013-14 2010-11 2011-12 2012-13 2013-14
1,950 2,010 2,080 2,170 1,950 2,010 2,080 2,170
Reason for difference Removing the exemption of Family Tax Benefit, Parts A and B, including expense equivalent would be expected to result in a negligible behavioural response, so there is no difference between the revenue forgone and revenue gain estimates.

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 Aud
it, 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.