The Commonwealth Treasury

Tax Expenditures Statement

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3.1 Defining benchmarks

What is a tax expenditure benchmark?

A basic requirement in any analysis of tax expenditures is to identify the regular taxation arrangements that apply to similar classes of taxpayers or types of activity. These arrangements - referred to as the benchmark - represent a reference point against which to establish the nature and extent of any concession. Tax expenditures are defined as deviations from the benchmark.

Establishing an appropriate benchmark for determining tax expenditures often involves an element of judgement: benchmarks may vary across countries and within countries over time. The principal criterion of benchmark design is that it should represent a consistent taxation treatment of similar activities or classes of taxpayers. That is, a benchmark taxation treatment should neither favour nor disadvantage similarly placed activities or classes of taxpayers.

For example, the allowance granted to Australian primary producers to average their yearly incomes over time is a tax benefit not available to all income taxpayers. In this case, the estimated benefit to primary producers is measured by comparing the income tax they pay against the income tax paid by other taxpayers with similar incomes that are ineligible to access this concession. The benchmark is the income tax rate structure that would generally apply to yearly income.

Since the vast majority of Australian taxes are imposed on 'income' (as opposed to consumption), the definition of income used is important in determining what constitutes a tax expenditure. In this Statement, the framework for defining income is the Schanz-Haig-Simons (SHS) definition, which is the increase in economic wealth between two points in time, plus consumption in that period. In this definition of income, 'consumption' includes all expenditures, except those incurred in the earning or the production of income.

The approach to benchmarking in this Statement

A practical approach to defining benchmarks has been adopted in this Statement since the adoption of an ideal benchmark based on the pure SHS definition of income would result in many additional tax expenditures of little policy relevance. In particular, provisions considered to be intrinsic to the operation of the tax system have been incorporated into the benchmarks, rather than being classified as tax expenditures themselves. However, where the inclusion of a feature of the tax system in the benchmark is questionable, that feature has generally been excluded from the benchmark and reported as a tax expenditure.

Some features of the tax system have been incorporated into the benchmark as a practical necessity. For example, taxing unrealised gains on a large range of assets and taxing the imputed rent from consumer durables would not be practical. Hence, these features form part of the benchmark.

For the purpose of providing a clear structure for the reporting of tax expenditures, five major components of the benchmark have been identified. These are: the personal income tax benchmark; the retirement benefits benchmark; the fringe benefits tax benchmark; the business tax benchmark; and the excise duty benchmark. Although the association of some tax expenditures with a particular benchmark may be arbitrary, it does not affect the measurement or existence of a tax expenditure.

3.2 General features of the taxation benchmark

The following features are universal to all major components of the benchmark:

3.3 The personal income tax benchmark

The following features are a part of the personal income tax benchmark (and therefore are not identified as tax expenditures):

3.4 The retirement benefits benchmark

The following features are a part of the benchmark for retirement and other employment termination benefits:

3.5 The fringe benefits tax benchmark

The following features are a part of the fringe benefits tax (FBT) benchmark:

FBT is applied to the tax inclusive value of the fringe benefits and is deductible to the employer. From 1 July 2000, a grossed-up rate, inclusive of GST, applies to the provision of benefits to an employee where those benefits would attract GST if acquired directly by the employee. A special rebate applies to non-government entities that are exempt from income tax but subject to FBT and this rebate is treated as a tax expenditure.

3.6 The business tax benchmark

The following features are a part of the business tax benchmark:

3.7 The excise duty benchmark

The following features are a part of the excise duty benchmark:

1 Personal cash transfers are cash payments from the Government to individuals not for services rendered.

2 Unlike an ordinary tax offset, a refundable tax offset is paid even if an individual does not have a tax liability. It is essentially a cash payment from the tax system. Examples include the Family Tax Benefit and the Private Health Insurance tax offset, which can be paid either as an expense or through the tax system.