Australia's Future Tax System

Architecture of Australia's tax and transfer system

2.6 Tax expenditures

The tax‑transfer system also includes a set of tax concessions called 'tax expenditures'. Tax expenditures typically provide a benefit to a specified activity or class of taxpayer relative to a benchmark taxation treatment. Tax expenditures can be provided in many forms, including exemptions from tax, tax deductions, tax offsets, concessional rates of tax or a change in the timing of a deduction or the deferral of a tax liability. A negative tax expenditure can arise where arrangements impose a higher tax burden than the benchmark.

Governments may choose to implement policy through the tax system for a range of reasons. In some cases, this may be an efficient way to deliver government assistance or other programs. Issues surrounding the measurement and aggregation of tax expenditures are discussed in Box 2.7.

Box 2.7: Tax expenditures

Australia uses the revenue forgone approach to measure tax expenditures. This approach measures the difference in tax paid by taxpayers who receive a particular concession, relative to similar taxpayers who do not receive the concession. It compares the current or prospective treatment to the 'benchmark' treatment, assuming taxpayer behaviour is unchanged. The setting of the benchmark against which tax expenditures are measured involves an element of judgment. Hence, the benchmark can vary across jurisdictions.

Two guiding principles in setting the benchmark are that a standard tax treatment should apply across similar taxpayers or transactions and that the benchmark may incorporate structural elements of the tax system, such as the progressive personal income tax rate structure and our nominal income tax approach. The estimated tax expenditures would differ considerably if measured against a real income tax benchmark or an expenditure tax benchmark.

Tax expenditure estimates may differ from budget estimates. Tax expenditure estimates reflect the amount of revenue forgone as a result of a tax expenditure, assuming the existing level of activity or use is unchanged. Budget costings measure the revenue impact of changing the existing treatment and take into account timing effects and the behavioural responses of taxpayers to the policy change. Estimates of tax expenditures are therefore not necessarily reliable indicators of the budget impact of certain tax arrangements.

Aggregate estimates of tax expenditures, such as those presented in Table 2.6, are not necessarily reliable indicators of the revenue cost of tax expenditures, because different tax expenditures may overlap and there may be interactions between the behavioural responses to the removal of different expenditures. Tax expenditure estimates cannot be readily compared across different jurisdictions, due to differences in tax rates and tax benchmarks.

Australian government tax expenditures

Approximately 300 tax expenditures are identified in the 2007 Tax Expenditures Statement (Australian Government 2007a), excluding those associated with the GST. Around 100 new tax expenditures have been added to the Australian government tax system (excluding GST) over the past 10 years and many more identified. Less than 30 have been deleted and only a few of these reflect policy decisions taken during that time. These include the removal of two tax expenditures in the 2008‑09 Budget, along with the reduction in the concessionality of a further eight. The value of tax expenditures has more than doubled in the past 12 years or so, rising from an estimated $23.5 billion in 1996‑97 to an estimated $50 billion in 2006‑07 (Chart 2.9). However, aggregations of individual tax expenditure estimates need to be treated with caution (see Box 2.7).

Chart 2.9: Total measured Australian government tax expenditures

1996‑97 to 2006‑07

Chart 2.9: Total measured Australian government tax expenditures 1996-97 to 2006-07

Source: Australian Government, Tax Expenditures Statement, various years.

The largest measured tax expenditures are found in the social security and welfare functions of government (see Table 2.6). Included in this function are superannuation concessions, estimated at around $25 billion in 2006‑07. Also included are the exemption from income tax of Family Tax Benefit (around $2.5 billion) and the senior Australians tax offset (around $1 billion). Significant tax expenditures not included in the social security and welfare function include the capital gains tax discount for individuals and trusts (estimated at $6.9 billion) and the application of the statutory formula to car fringe benefits (around $1.5 billion).

Table 2.6: Measured tax expenditures 2006‑07

Social security and welfare 34,833
Other economic affairs 14,018
Fuel and energy 1,390
Health 876
Other purposes 700
Housing and community amenities 605
Agriculture, forestry and fishing 524
General public services 508
Transport and communication 295
Defence 202
Recreation and culture 183
Education 6
Public order and safety 0
Mining, manufacturing and construction -4,020
Total 50,120

Source: Australian Government (2007a).

State tax expenditures

Table 2.7 sets out tax expenditures provided across the main state taxes as well as in relation to local government rates. These estimates of tax expenditures are calculated by each State using benchmarks defined by that State. Differences between benchmarks can be significant, hence it is not possible to make a direct comparison of tax expenditures between jurisdictions.

Table 2.7: Tax expenditures for main state taxes in 2006‑07 ($million)(a)

Payroll tax
Exemptions/concessions Yes Yes Yes Yes Yes Yes Yes Yes
Value 819 2,424  1,514 861 567 7 5.5 99
Land tax
Exemptions/concessions Yes Yes Yes Yes Yes Yes Yes Tax not levied 
Value 536 1,491  556 302 613 84 5  
Stamp duty on conveyances
Exemptions/concessions Yes Yes Yes Yes Yes Yes Yes Yes
Value 757 134  597 95 25 11 36 26
Motor vehicle taxes
Exemptions/concessions Yes Yes Yes Yes Yes Yes Yes Yes
Value  293 65  na 105 9.3 4.6 na 0.8
Gambling taxes
Exemptions/concessions Yes Yes Yes No Yes No No No
Value 489 73 120 19
Insurance taxes
Exemptions/concessions Yes No Yes Yes Yes No Yes Yes
Value 659 —  263 201  18 na 14
Local government rates
Exemptions/concessions Yes Yes Yes Yes Yes Yes Yes Yes
Value(c) 72 na na 56 31 16 6 na
  1. The estimates are reported value. Many tax expenditure statements acknowledge that some expenditures are unable to be costed or are not included due to their low value.
  2. Estimates from the 2007‑08 Victorian Budget Update — except for land tax and payroll tax where threshold related expenditures documented in the 2007‑08 Victorian Budget were added to the non‑threshold related expenditures documented in the 2007‑08 Budget Update.
  3. These estimates are problematic due to the difficulties of obtaining a benchmark for the large number of local governments in Australia.

na: not available.

Source: State treasuries.

Some States consider the payroll tax exemption for businesses whose payroll is beneath the threshold to be a tax expenditure, while other States do not. This can have a significant effect on the size of the estimated tax concession. In its 2008‑09 Budget, Victoria estimates its payroll tax expenditure (excluding the payroll tax threshold) to be $740 million in 2007‑08, while if the threshold is considered a tax concession, the tax expenditure would increase to $2,613 million (that is, the threshold concession is estimated at $1,873 million). Conversely, the 2008‑09 Western Australian Budget reports a tax expenditure in relation to payroll tax of $959 million in 2007‑08, which would reduce to $25.2 million if the threshold were not considered a tax expenditure.

The size of the tax expenditure will also vary according to the rate at which the tax is levied. Even if the amount of activity exempted is the same in two States, the cost of a tax expenditure would be larger in a State with a higher tax rate.