The Commonwealth Treasury

Tax Expenditures Statement 2000

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Tax reform and other changes

4.1 Introduction

The Australian tax system has undergone substantial reform over the past two years, most significantly as a result of the introduction of The New Tax System and The New Business Tax System. This chapter provides an outline of the impact of these reforms on tax expenditures, as well as other changes that have occurred since the 1997-98 Tax Expenditures Statement.

4.2 The effects of tax reform on tax expenditures

Income tax and fringe benefits tax

The new personal income tax scales, introduced from 1 July 2000 as part of The New Tax System, affect the costings of some personal income tax expenditures. Changes to the personal income tax scales include:

The New Tax System includes significant increases in assistance for families, low-income earners and senior Australians. These changes create new tax expenditures from 2000-01, remove some previous tax expenditures and impact on the costing of some existing tax expenditures.

Two measures under The New Tax System were introduced from 1999-2000:

The cessation of the Savings Rebate was announced in A New Tax System.

Business tax

The Government has announced a broad range of business tax reform measures as part of The New Business Tax System since the release of the Ralph Committee report on business taxation, A Tax System Redesigned. These measures include a range of entity-related reforms, including:

With a few exceptions, these changes have generally been incorporated as part of the tax expenditure benchmark and, hence, have not affected the range of tax expenditures identified in this Statement. (The only exception to this is the transitional measures for the taxation of life insurers' management fees.)

A consistent theme underlying the business income tax reforms is achieving a closer alignment between commercial and tax outcomes. Key business tax reforms that have influenced the benchmark for business income are changes to the taxation of capital gains and the tightening of the 13-month rule for prepayments. The removal of accelerated depreciation reinforces the use of an effective life benchmark when evaluating measures affecting the treatment of depreciable assets.

Under The New Business Tax System, CGT discounts for individuals and superannuation funds have replaced CGT indexation for all taxpayers and averaging for individuals. The discounts for individuals and superannuation funds are set at different rates while companies are excluded. The differential treatment of these taxpayers highlights the concessional nature of the CGT discounts. Consequently, the capital gains benchmark in this Statement reflects a position of full taxation of capital gains, with the CGT discounts for individuals and superannuation funds being identified as tax expenditures. This differs from the previous approach where indexation and averaging were included as part of the benchmark for capital gains.

Other recently announced CGT measures that result in new tax expenditures under this benchmark include the small business CGT concessions, scrip-for-scrip rollover relief and the venture capital concessions.

The announced tightening of the 13-month rule for prepaid expenditure is consistent with the accounting treatment, which requires apportionment of the expenditure over the period in which the benefits are received. Consistent with this approach, deviations from apportionment have been highlighted as tax expenditures in this Statement. The announced transitional arrangement for the tightening of the 13-month rule, and the continuation of immediate deductibility of short-term prepayments for some taxpayers, are identified as tax expenditures.

4.3 Changes in tax expenditures since 1997-98

A number of new tax expenditures have been introduced, and changes to existing ones have been made, since the 1997-98 Tax Expenditures Statement, including those mentioned above related to tax reform measures.

New tax expenditures

Tax expenditures arising from measures that have been legislated since the 1997-98 Tax Expenditures Statement are as follows (tax expenditure reference codes, used in Chapter 5 and Appendix A, are reported in parentheses):

Measures that were not previously reported, but which have been recently identified as tax expenditures, are as follows (tax expenditure reference codes are reported in parentheses):

Modified tax expenditures

The following tax expenditures have been modified1 since they were last reported in the 1997-98 Tax Expenditures Statement (the respective tax expenditure reference codes from this Statement and the 1997-98 Tax Expenditures Statement are reported in parentheses):

Deleted tax expenditures2

A number of tax expenditures identified in the 1997-98 Tax Expenditures Statement have been deleted (parentheses refer to the tax expenditure reference codes from the 1997-98 Tax Expenditures Statement):

1 Items that have been modified as a result of a change to the applicable tax rate are not listed.

2 Deleted tax expenditures refer to those that were reported in the 1997-98 Tax Expenditures Statement but are not reported in this Statement. They do not include tax expenditures that have been abolished but are still listed in Table 5.1.