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Tax Expenditures Statement - 2007

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Chapter 2: Trends in tax expenditure estimates

This chapter provides details on the trends in tax expenditure estimates. The changes in the overall level of tax expenditures since the 2006 Tax Expenditures Statement largely stem from revisions to the estimates of existing tax expenditures, particularly the superannuation tax expenditures. The changes to the superannuation estimates are mainly due to:

2.1 Interpretation of trends and aggregates

Care must be taken when interpreting tax expenditure aggregates, particularly when making comparisons across time and against direct expenditures. There are several major considerations that need to be taken into account when analysing tax expenditure aggregates.

Further details on how to interpret tax expenditure estimates are provided in Chapter 3: Measuring Tax Expenditures.

2.2 Trends in tax expenditures

Total measured tax expenditures are reported in Table 2.1. Measured tax expenditures as a proportion of GDP are projected to fall from 4.8 per cent in 2006-07 to 4.6 per cent in 2007-08 and 4.4 per cent in 2008-09 mainly as a result of the impact of personal income tax cuts.

Table 2.1: Total measured tax expenditures(a)

Year

Superannuation(b)
$m

Other tax
expenditures
$m

Total
$m

Tax expenditure
as a proportion
of GDP (%)

2003-04 (est)

13,833

16,991

30,824

3.7

2004-05 (est)

17,353

20,718

38,071

4.2

2005-06 (est)

23,065

23,376

46,441

4.8

2006-07 (est)

24,985

25,135

50,120

4.8

2007-08 (proj)

26,845

24,565

51,410

4.6

2008-09 (proj)

27,466

25,036

52,502

4.4

2009-10 (proj)

29,391

27,498

56,889

4.6

2010-11 (proj)

31,807

29,945

61,752

4.8

  1. Total measured tax expenditures are derived by summing the individual tax expenditure estimates, excluding estimates that are rounded to zero (..) or unquantifiable (*).
  2. Includes the sum of tax expenditures C4-C14 and C19.

Table 2.2 presents measured tax expenditures by the benchmark against which they are estimated for the period 2003-04 to 2010-11. The retirement savings benchmark, containing the superannuation tax expenditures, is the largest benchmark classification. This is followed by the personal income benchmark. For all reported years, the total measured tax expenditures representing the commodity taxes benchmark give rise to a negative estimate, largely reflecting customs duty (F22) and the higher rate of excise levied on cigarettes (F7).

Table 2.2: Measured tax expenditures by benchmark ($m)(a)

Benchmark

2003-04 (est)

2004-05 (est)

2005-06 (est)

2006-07 (est)

2007-08 (proj)

2008-09 (proj)

2009-10 (proj)

2010-11 (proj)

Income Tax

               

Personal income

10,274

10,558

11,286

11,704

12,037

11,731

12,018

12,341

Business income

3,095

3,191

2,983

3,771

3,615

4,300

5,337

6,328

Retirement savings

15,423

19,098

25,345

27,000

28,780

29,196

31,036

33,357

Fringe Benefits Tax

2,976

3,544

3,452

3,177

3,179

3,326

3,755

3,900

Capital Gains Tax

3,314

5,549

6,607

8,034

7,518

7,833

8,108

8,531

Consumption

               

Commodity taxes

-4,408

-4,199

-3,482

-3,886

-4,039

-4,204

-3,685

-3,025

Natural resource taxes

150

330

250

320

320

320

320

320

  1. Measured tax expenditures by benchmark are derived by summing the individual tax expenditure estimates, excluding estimates that are rounded to zero (..) or unquantifiable (*).

2.3 Large tax expenditures

Table 2.3 provides a list of the largest measured tax expenditures for 2007-08. The largest tax expenditure is the concessional taxation of superannuation entity earnings (C6) which is estimated to provide a benefit to taxpayers of around $13.6 billion in 2007-08. The next largest measured tax expenditures for 2007-08 are the concessional taxation of employer contributions (C5) and the capital gains tax discount for individuals and trusts (E9). These tax expenditures are estimated to provide benefits to taxpayers in 2007-08 of around $10.2 billion and $6.9 billion respectively.

The largest negative tax expenditures in 2007-08 are customs duty (F22) and the higher rate of excise levied on cigarettes (F7). These tax expenditures are estimated to be around -$3.7 billion and -$1.4 billion respectively.

Table 2.3: Large measured tax expenditures in 2007-08

Tax expenditure

Estimate
$m

Large positive tax expenditures

C6

Superannuation - concessional taxation of superannuation entity earnings

13,600

C5

Superannuation - concessional taxation of employer contributions

10,150

E9

Capital gains tax discount for individuals and trusts

6,870

A43

Exemption of Family Tax Benefit, Parts A and B, including expense equivalent

2,480

C4

Superannuation - capital gains tax discount for funds

1,550

D26

Application of statutory formula to value car benefits

1,490

C3

Concessional taxation of non-superannuation termination benefits

1,400

A33

Tax offset for recipients of certain social security benefits, pensions or allowances

1,200

B12

Exemption from interest withholding tax on widely held debentures

1,030

A31

Senior Australians' Tax Offset

1,010

A39

Exemption of certain income support benefits, pensions or allowances

1,000

A22

Exemption of 30 per cent private health insurance refund, including expense equivalent

1,000

F3

Concessional rate of excise levied on aviation gasoline and aviation turbine fuel

905

A66

Deduction for gifts to approved donees

870

C8

Superannuation - deduction and concessional taxation of certain personal contributions

780

B104

Income tax exemption for municipal authorities and other local governing bodies

770

F6

Exemption from excise for 'alternative fuels'

750

A21

Exemption from the Medicare levy for residents with a taxable income below a threshold

670

Large negative tax expenditures

F22

Customs duty

-3,682

F7

Higher rate of excise levied on cigarettes with less than 0.8 grams of tobacco

-1,375

B75

Accelerated depreciation allowance for plant and equipment

-800

 

There are a number of tax expenditures for which an estimate is not available but which have been assigned an order of magnitude classification (for details refer to Chapter 6: Tax Expenditures). The largest such tax expenditures are as follows:

2.4 Trends in tax expenditures by function

Total measured tax expenditures by functional category are reported in Table 2.4 for the period 2004-05 to 2010-11. Significant changes underlying movements in functional categories are listed below.

Table 2.4: Aggregate tax expenditures by function(a)

 

Estimates ($m)

Projections ($m)

 

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

General public services

             

A. Legislative and executive affairs

2

2

2

2

2

3

3

B. Financial and fiscal affairs

2

0

0

0

0

0

0

C. Foreign affairs and economic aid

428

459

499

510

531

551

581

D. General research

0

0

0

0

0

0

0

E. General services

8

8

7

7

7

7

8

F. Government superannuation benefits

0

0

0

0

0

0

0

Defence

156

180

202

213

217

216

219

Public order and safety

0

0

0

0

0

0

0

Education

1

2

6

8

8

7

7

Health

365

585

876

925

995

1,090

1,210

Social security and welfare

26,951

33,211

34,833

36,495

36,927

39,181

41,521

Housing and community amenities

525

530

605

615

615

620

620

Recreation and culture

202

198

183

197

211

208

224

Fuel and energy

1,660

1,590

1,390

1,490

1,550

1,630

1,745

Agriculture, forestry and fishing

559

524

524

404

267

263

285

Mining, manufacturing and construction

-4,313

-3,787

-4,020

-4,277

-4,524

-4,069

-3,489

Transport and communication

205

240

295

375

450

485

510

Other economic affairs

             

A. Tourism and area promotion

15

16

14

14

18

17

17

B. Total labour and employment affairs

542

1,000

1,055

1,028

1,057

1,009

1,003

C. Other economic affairs, nec(b)

10,223

11,053

12,949

12,634

13,311

14,721

16,228

Other purposes

             

A. Public debt interest

0

0

0

0

0

0

0

B. Nominal superannuation interest

0

0

0

0

0

0

0

C. General purpose inter-governmental transactions

540

630

700

770

860

950

1,060

D. Natural disaster relief

0

0

0

0

0

0

0

E. Contingency reserve

0

0

0

0

0

0

0

Total(c)

38,071

46,441

50,120

51,410

52,502

56,889

61,752

  1. Measured tax expenditures by benchmark are derived by summing the individual tax expenditure estimates, excluding estimates that are rounded to zero (..) or unquantifiable (*). Total measured tax expenditures by functional category are derived by summing individual tax expenditure estimates, excluding estimates that are rounded to zero (..) or unquantifiable (*).
  2. ‘nec’ means not elsewhere classified.
  3. Totals may not sum due to rounding.

2.5 Comparison with direct expenditure

The tax expenditure estimates for 2006-07 by functional category are presented alongside direct government expenditure in Table 2.5. The list of direct expenditures by function is reproduced from Table 3 of the 2006-07 Final Budget Outcome.

Table 2.5: Aggregate tax expenditures and direct expenditures by function in 2006-07

 

Tax expenditures(a)
($m)

Direct expenditures(b)
($m)

General public services

   

A. Legislative and executive affairs

2

870

B. Financial and fiscal affairs

0

4,641

C. Foreign affairs and economic aid

499

3,282

D. General research

0

2,476

E. General services

7

667

F. Government superannuation benefits

0

2,679

Defence

202

16,854

Public order and safety

0

3,318

Education

6

16,898

Health

876

39,948

Social security and welfare

34,833

92,075

Housing and community amenities

605

2,909

Recreation and culture

183

2,561

Fuel and energy

1,390

4,635

Agriculture, forestry and fishing

524

2,831

Mining, manufacturing and construction

-4,020

1,920

Transport and communication

295

3,296

Other economic affairs

   

A. Tourism and area promotion

14

196

B. Total labour and employment affairs

1,055

4,035

C. Other economic affairs, nec(c)

12,949

934

Other purposes

   

A. Public debt interest

0

3,592

B. Nominal superannuation interest

0

5,470

C. General purpose inter-governmental transactions

700

2,573

D. Natural disaster relief

0

115

E. Contingency reserve

0

589

Total(d)

50,120

219,362

  1. Total measured tax expenditures by functional category are derived by summing individual tax expenditure estimates, excluding estimates that are rounded to zero (..) or unquantifiable (*).
  2. Direct expenses by function, as reported in the 2006-07 Final Budget Outcome.
  3. ‘nec’ means not elsewhere classified.
  4. Totals may not sum due to rounding.

Comparisons between tax expenditures and direct expenditures are informative in broad terms, although the costings are not strictly comparable. For example:

The addition of tax expenditures and direct expenditures will also tend to overstate the impact on the fiscal balance. For example, in the case of the exemption of certain income support benefits, pensions or allowances (A39) the direct expenditure includes the full cost of the program to government but there is also an associated tax expenditure for the value of the income tax exemption to the recipient.

Total measured tax expenditures in 2006-07 are estimated at around $50 billion. Social security and welfare tax expenditures comprise around 69 per cent of total measured tax expenditures, which largely reflects the superannuation tax expenditures (C4-C14 and C19) and the income tax exemption of the Family Tax Benefit, Parts A and B (A43).

 

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