Document Index Budget Paper 1 Budget Statement 6

Appendix B: Tax Expenditures

• Overview
• Aggregate Tax Expenditures
• Tax Expenditures by Functional Categories

Overview

This appendix discusses the effect on revenue of concessional taxation treatment of specific groups and/or activities. Consistent with data published in previous Tax Expenditures Statements (TES), all the data contained in this appendix have been compiled on a cash basis.

Individuals and businesses derive financial benefits from various tax concessions. These concessions are usually delivered by tax exemptions, deductions, rebates or reduced rates. They can either reduce or delay the collection of tax revenue. 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 fiscal balance, these tax concessions are generally called `tax expenditures'.

Following a review of existing tax expenditures, first announced in the 1996-97 Budget, the Government has decided to undertake periodic monitoring and evaluation of all tax expenditures through normal budget processes to ensure they deliver Government assistance in an effective manner.

Aggregate Tax Expenditures

Table B1 shows estimates for the period 1995-96 to 2002-03 of aggregate tax expenditures. The availability of new information, and decisions taken since the 1996-97 TES was published, has led to a re-estimation of actual costs and forward projections for aggregate tax expenditures. The 1997-98 TES will be published shortly.

The document A New Tax System outlined significant reforms to both expenses and revenues -- some of which will impact on the costings of tax expenditures. The treatment of A New Tax System in the figures in Table B1 is as follows.

• Those measures that do not fundamentally alter the way in which a tax is assessed, and therefore do not affect the benchmarks against which a tax expenditure is costed (see Attachment A of the 1996-97 TES), include the impact of A New Tax System in their estimates/projections. For example, any tax expenditures relating to personal income will take into account the new personal income tax rates which, under A New Tax System, come into effect from July 2000.
• The impact of A New Tax System measures that fundamentally alter the way in which a tax is assessed, and which therefore require an alteration to the benchmark, such as changes to the taxation regime applying to trusts, have not been included in the tax expenditure costings below.

The treatment reflects the difficulty of defining a benchmark prior to legislation being passed by the Parliament. Further, substantial elements of the package will not be decided until the Review of Business Taxation (which is currently examining many of these tax expenditures in consultation with business) has completed its work.

Table B1: Aggregate Tax Expenditures 1995-96 to 2002-03

1. These aggregates do not include measures allowing delayed payments of tax.

In analysing the data presented in Table B1, there are a number of considerations that must be kept in mind.

• These figures will understate the total cost to revenue of tax expenditures. The TES does not provide a comprehensive listing of all tax expenditures, and some of those that are identified have not been costed due to a lack of data.
• Tax expenditures in the form of delayed tax payments (such as depreciation allowances, which merely defer tax revenue collections to a later date), have been excluded from the estimates of aggregate tax expenditures.
• 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 particular tax expenditure estimates may not be strictly comparable from year to year.
• Forward projections for the outyears can be subject to considerable uncertainty. Caution should be exercised when trying to draw strong conclusions on longer-term trends.

Tax Expenditures by Functional Categories

Table B2 compares the costs of identified tax expenditures for which a cost has been estimated in 1997-98 with underlying outlays by functional category.

The aggregates for a number of tax expenditure categories are only approximations, as some tax expenditures do not lend themselves to easy categorisation. For example, it may not be possible to determine precisely which industry sectors have accessed tax concessions that are available to all industries. Tax expenditures that cannot be classified as belonging to a particular functional category are aggregated in the `Not Allocated to Function' category.

Table B2 indicates there is considerable variation in the importance of tax expenditures to particular sectors of the economy. For example, while a relatively small level of assistance was provided through tax expenditures to the Education sector, over 91 per cent of the total Government assistance to the Fuel and Energy sector was provided in the form of tax expenditures.

The most significant category of tax expenditures was Social Security and Welfare, accounting for $14.2 billion, or about 73 per cent of total tax expenditures. This compares with the next largest category (Mining and Mineral Resources other than fuels, Manufacturing and Construction) at almost $1 billion, or about 5 per cent of total tax expenditures.

Table B2: Aggregate Tax Expenditures and Direct Outlays by
Functional Category, 1997-98

1. These aggregates do not include measures allowing delayed payments of tax.
   
2. Outlays are reported on an underlying basis.