The Commonwealth Treasury


Tax Expenditures Statement 2003

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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 2002 Tax Expenditures Statement largely reflect the availability of estimates for items that were previously unquantifiable and the availability of new data that allowed existing estimates to be revised.

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. Tax expenditures as a proportion of GDP are estimated to fall from around 4.5 per cent in 1999-2000 to around 3.6 per cent in 2006-07.

Table 2.1: Total measured tax expenditures(a)

Table 2.1: Total measured tax expenditures(a)

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

The projected decline largely reflects the impact of the policy decision to remove accelerated depreciation for plant and equipment (B52)1 with effect from 2001-02. The accelerated depreciation for plant and equipment is estimated to decline from a large positive tax expenditure in 1999-2000 to a large negative tax expenditure in 2006-07. It becomes a negative tax expenditure because accelerated depreciation merely brings forward tax deductions; hence deductions in coming years for investments made before accelerated depreciation was removed will be lower than they would have been under the benchmark.

2.3 Large tax expenditures

Table 2.2 provides a list of the largest measured tax expenditures, in terms of their absolute magnitude, for 2003-04. The twelve largest positive tax expenditures account for around 78 per cent of the aggregate value of tax expenditures in 2003-04.

The largest tax expenditure is the concessional treatment of funded superannuation (C1) which is estimated to provide a benefit to taxpayers of around $10.5 billion in 2003-04. The next largest measured tax expenditures for 2003-04 are the income tax exemption of the Family Tax Benefit, Parts A and B (A36) and the capital gains tax discount for individuals and trusts (E15). These tax expenditures are estimated to provide a benefit to taxpayers in 2003-04 of around $2.6 billion and $2.4 billion respectively.

The largest negative tax expenditures in 2003-04 are the higher rate of excise levied on cigarettes (F1) and the reduced deductions allowed under the accelerated depreciation regime for plant and equipment (B52). These tax expenditures are estimated to be around -$1.3 billion and -$0.7 billion respectively.

Table 2.2: Large measured tax expenditures in 2003-04

Table 2.2: Large measured tax expenditures in 2003-04

2.4 Trends in tax expenditures by function

Total measured tax expenditures by functional category are reported in Table 2.3 for the period 2000-01 to 2006-07. Significant movements in functional categories are listed below.

Table 2.3: Aggregate tax expenditures by function(a)

Table 2.3: Aggregate tax expenditures by function(a)

  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. ‘nec’ means not elsewhere classified.
  3. Totals may not sum due to rounding.

2.5 Comparison with direct expenditure

The tax expenditure estimates for 2002-03 by functional category are presented alongside direct government expenditure in Table 2.4. The list of direct expenditures by function is reproduced from Table 3 of the 2002-03 Final Budget Outcome.

Table 2.4: Aggregate tax expenditures and direct expenditures
by function in 2002-03

Table 2.4: Aggregate tax expenditures and direct expenditures by function in 2002-03

  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. ‘nec’ means not elsewhere classified.
  3. 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 (A35) the direct expenditure column includes the full cost to government of the program; however there is also an associated tax expenditure for the value of the income tax exemption to the recipient.

As reported in Table 2.4, total measured tax expenditures in 2002-03 are valued at around $30 billion. Social security and welfare tax expenditures comprise around 64 per cent of total measured tax expenditures, which largely reflects the concessional taxation of funded superannuation (C1) and the income tax exemption of the Family Tax Benefit, Parts A and B (A36).

When compared to the sum of both total measured tax expenditures and total direct expenditure, total government assistance provided through tax expenditures is expected to remain at around 14-16 per cent. Table 2.5 shows that this ratio has been fairly steady at around this level over recent years.

Table 2.5: Trends in tax expenditures versus direct expenditures

Table 2.5: Trends in tax expenditures versus direct expenditures

  1. Source: Statement 13, Budget Paper Number 1, 2003-04 Budget.
  2. Tax expenditures as a proportion of direct expenditures plus tax expenditures.

1 Throughout the remainder of this document, where a reference to a particular tax expenditure is made, the tax expenditure reference code used in Chapter 6 is reported in parentheses.