Chapter 4 - Tax expenditures, AFM, GST and ordinary annual services
4.1
In this chapter the Committee considers sources of funding not dealt
with in Chapter 3 – tax expenditures, the Advance to the Finance Minister and the
Goods and Services Tax. It also examines the question of funds appropriated for
ordinary annual services.
Tax Expenditures
4.2
The Australian Treasury (Treasury) defines a tax expenditure as 'a tax
concession that provides a benefit to a specified activity or class of taxpayer
... A tax expenditure can be provided in many forms, including a tax exemption,
tax deduction, tax offset, concessional tax rate or deferral of a tax
liability'.[1]
4.3
Treasury produces an annual Tax Expenditures Statement (TES) in
December. The TES is tabled in the Senate, usually on the first sitting day of
the following calendar year and, under a Procedural Order of the Senate, is
referred to the legislative and general purpose committees for consideration by
the committees during their examination of the additional estimates.
4.4
Treasury has stated in the TES that:
Concessional
arrangements that give rise to tax expenditures often only receive
consideration from Parliament at the time they are introduced. Furthermore, the
cost of tax expenditures is generally not directly observable as it does not
arise from a direct transaction with government. The publication of information
on tax expenditures contributes to the review and assessment of tax
expenditures, especially whether their objectives are being met at a reasonable
cost and in the interest of the community in general.[2]
4.5
In the 2006 TES Treasury estimated that tax expenditures in 2006-2007
would amount to approximately $41 billion.[3]
4.6
Treasury considers that the publication of the TES is an integral
component of the government's budget reporting and that publication serves
three key functions:
- to allow tax expenditures to receive a similar degree
of scrutiny to direct expenditures;
- to allow for a more comprehensive assessment of
government activity; and
- to contribute to the design of the tax system, by
promoting and informing public debate on all elements of the tax system.[4]
4.7
Dr Mark Burton, Law School, University of Canberra, submitted that while
the TES may meet the OECD rules for reporting tax expenditures it does not
contain any critical commentary regarding the operation of the identified tax
expenditures.[5]
Dr Burton made a number of suggestions for greater transparency for reporting
tax expenditures. In brief, they are:
- A clear statement of the benchmark
taxation principles against which 'tax expenditures' might be ascertained and
quantified.
-
Identification of all tax
expenditures, including reporting on goods and services tax expenditures and
matters such as tax evasion, and Commissioner of Taxation lenience for classes
of taxpayers.
- Gathering sufficient 'raw' data as
to enable informed critical assessment of the operation of tax expenditure,
such as the number and characteristics of taxpayers who benefit; the deadweight
tax compliance associated with a particular measure; and the use to which the
benefit of the tax expenditure is put.
- Publication of a critical
appraisal of the merits of each case which explains why the particular tax
expenditure has been adopted and also why the tax expenditure has assumed the
legislated form.
- The
preparation of the tax expenditures report be undertaken by an independent
agency.[6]
4.8
Professor Bartos submitted that:
Inclusion of detailed
tax expenditure in the budget papers, preferably broken down by function in the
same way as other expenditure, would be a highly desirable step forward in
transparency.[7]
4.9
Treasury responded to the suggestion that detailed tax expenditures
should be included in the budget papers as follows:
... publication of the TES shortly after the publication of the MYEFO
[Mid Year Economic and Fiscal Outlook] means that it provides the Government
with more timely input regarding tax expenditures for use in formulating the
Budget. If the TES were to be published with the Budget papers it would not be
available in time to provide an input into the Budget planning, which commences
some months before the Budget is presented, and this would detract from its use
in policy formulation.[8]
4.10
Treasury also noted that the publication of a detailed TES is required
by the Charter of Honesty Act 1998 with the MYEFO and that any change
would require an amendment to the Act. The suggested change, if implemented, would
also have significant resource implications for Treasury.[9]
4.11
ANAO informed the Committee that its Planned Audit Work Plan 2006-2007
includes a potential performance audit examining the preparation of the TES.[10]
Committee's conclusions
4.12
Tax expenditures provide what is in effect a subsidy through income
foregone for certain activities or categories of persons. Subsidies generally are
provided by means of special appropriations and the Committee considers that
the reporting of tax expenditures should be no less transparent than the
reporting of special appropriations. The Committee supports the publication of
the TES; it is an essential accountability mechanism.
4.13
In view of the arguments put by Treasury the Committee does not consider
that there is any compelling need for a change to the timing of the publication
of the TES. The Committee suggests that ANAO and Treasury examine Dr Burton's
submission (see paragraph 4.7 above) to ascertain in what respects the TES
could be further improved.
4.14
The Committee considers that Dr Burton's suggestions require further
consideration with greater attention to be given to what is expected to be
achieved from tax expenditures, processes for periodic review and exploration
of notional allocation of such expenditures to other budget expenditures that
fall within economic functions and sub functions.
Advance to the Finance Minister
4.15
The Advance to the Finance Minister (AFM) is an appropriation authorised
by the annual Appropriation Acts which is made available to the Minister for
Finance and Administration as a central contingency fund to provide urgent
funding to agencies, through the year, where the appropriated funds prove to be
insufficient or a new appropriation is required.
4.16
AFM funding should only be made available if agencies are able to meet
two essential tests:
- The need for funding must be urgent; and
- The need for funding was unforseen, or has arisen because of
erroneous omission or understatement.
4.17
All applications must satisfy both legislative criteria. An advance from
the AFM is only issued if it is the last available legal source of funding.
4.18
Provisions relating to the AFM are set out in Section 12 of Appropriation
Acts Nos. 1 and 3 and Section 13 of appropriation Acts 2 and 4. Under
Appropriation Acts Nos. 1 and 3, AFM has remained at $175 million for a number
of years and under Appropriation Acts Nos. 2 and 4, has remained at $215
million.
4.19
Since 1 January 2005, determinations made under these provisions are
registered on the Federal Register of Legislative Instruments and are tabled
monthly in Parliament together with explanatory statements relating to the
determinations. The determinations set down the purpose of the Advance, the
agency receiving the funds, and the amount and the outcome against which the
funding is appropriated. Additional information may be found in the explanatory
statement, including how the determination meets the tests outlined in the legislation.
4.20
Funds from the AFM may be advanced pending the passage of the Additional
Estimates or may remain as a Final Charge for the financial year. Funds
provided pending the Additional Estimates may be recovered from agencies when
the additional Appropriation Bills are passed. Determinations that are made as
a Final Charge are not recovered from agencies during the year. Those Issues
are documented in an annual report to Parliament, Advance to the Finance
Minister as a Final Charge.
4.21
That report discloses amounts issued from the AFM that remained as a
final charge to the AFM as at 30 June, including details of expenditure against
each item. The reports can be found on Finance's website.
4.22
The Advance to the Finance Minister as a Final Charge is referred
each year with the particulars of proposed expenditure to the relevant Senate
(estimates) Committee for inquiry and report. After the Senate votes on the
third reading of the additional appropriations bills, the Issues document is
considered in the Committee of the Whole. According to Australian Senate
Practice:
The Senate considers [statements of expenditure from advances]
in committee of the whole on a motion that the statements be approved. This
does not have the effect of authorising the expenditure, which is authorised in
the original appropriation. Rejection of such a motion would signify
dissatisfaction with a statement as an accountability document.[11]
4.23
Appropriations for the AMF have not increased for several years and are
now much less significant as a source of funds than in the past. This may be
because the additional financial flexibility provided to government agencies by
the outcomes/output framework and especially the ability of agencies to carry
over surpluses has alleviated their need to access the AFM.
Committee's conclusions
4.24
The Committee considers that the AFM provides a necessary level of
flexibility to enable a government to meet contingencies. It considers that the
means of accounting to Parliament for the use of the AFM are sufficient to enable
the Parliament to scrutinise expenditure from the Advance.
Goods and Services Tax
4.25
The Government does not classify the GST as a Commonwealth Government
tax, and receipts and expenditure from the GST therefore are not reported in
the Commonwealth's accounts. For the same reason, as discussed earlier, tax
expenditures relating to the GST are not reported in the Tax Expenditure
Statement.
4.26
The Government's policy regarding the treatment of the GST in its
accounts may be found in the Finance Minister's Statement of Compliance
to the CFS.
... Australian Accounting Standard AAS31 and other relevant
accounting standards would suggest the gross amount of GST and associated
payments to the States and Territories be included in the Australian
Government's consolidated financial statements. However, the clear policy
intent of the Intergovernmental Agreement on the Reform of
Commonwealth-State financial Relations is that the GST is a State tax
collected by the Australian Government in an agency capacity. Therefore,
accrued GST revenues and associated payments to the States and Territories have
not been brought to account in these statements. Full disclosure of the GST
collected for the States and Territories is provided in Note 46 of these
statements ... [12]
4.27
ANAO does not agree with the Government's treatment of the GST and has
qualified its audit of the CFS on a number of occasions. [13]
ALP and Australian Democrats members of the Committee agree with the ANAO that
the GST is a Commonwealth tax and should be counted as such.
Committee's conclusions
4.28
The Government publishes the gross amounts of revenue and expenses,
assets and liabilities relating to the GST in a note to the CFS. Additionally,
the Government, in view of the fact that all GST revenue goes to the States and
is the subject of an intergovernmental agreement, provides details of the GST
in Budget Paper No. 3 (Federal Financial Relations). In view of the
Government's rationale for its accounting of the GST the Committee agrees that
Budget Paper No.3 is the appropriate reporting vehicle for additional detail in
relation to the GST.
4.29
The Committee does not consider that there is adequate detail in the
data published in Budget Paper No. 3 in relation to the expenditures and
purposes to which the States and Territories put the GST. The Committee
considers that the level of reporting would be greatly enhanced if the States
and Territories were to provide to the Commonwealth comprehensive statements of
the purposes and expenditure of GST revenue that could be included in the budget
documents.
Recommendation 7
4.30
The Committee recommends that the State and Territory jurisdictions provide
to the Commonwealth comprehensive annual statements of the purposes and
expenditures of GST revenues to enable their incorporation into Budget Paper
No. 3.
Recoverable GST
4.31
Section 30A of the FMA Act provides that agencies' appropriations are
increased to the extent of the recoverable GST they pay on acquisitions and
importations. Finance informed the Committee that:
Annual appropriation Acts do not include allowance for GST. This
approach is in line with the accepted accounting practice for GST, which
specifies that revenues, expenses and assets are to be recognised net of the
amount of recoverable GST.[14]
4.32
Finance also submitted that because agencies can only recover the amount
of the payment as an input credit under the GST law, the net impact on the CRF
of the GST supplement is zero, once the recoverable GST paid by agencies has
been refunded by the Australian Taxation Office.[15]
4.33
Agencies are required to disclose in the notes to their financial
statements the amount each appropriation was increased by Section 30A during
the relevant reporting period.[16]
4.34
ANAO submitted that Section 30A of the FMA Act is a 'recycling'
provision, that is, it does not provide an effective net increase in the
appropriation otherwise available for expenditure on approved outcomes.[17]
However, ANAO emphasised that agencies should report clearly and accurately on
the exercise of this and other authorities under the FMA Act, because:
Inaccuracies in reporting can provide the Government and the
Parliament with a misleading impression of the extent to which an agency has
actually generated additional appropriation authority through its transactions
with other entities.[18]
4.35
The Committee considers that the treatment of recoverable GST is
reasonable and that disclosure in an agency's financial statements probably
provides sufficient transparency and accountability.
Funds appropriated for ordinary annual services
4.36
Any consideration of how funds intended for the ordinary annual services
of the government are appropriated must begin with the relevant Constitutional
provisions – Sections 53 and 54.
Constitutional provisions
4.37
Sections 53 and 54 of the Constitution read as follows:
53. Proposed laws appropriating revenue or moneys, or
imposing taxation, shall not originate in the Senate. But a proposed law shall
not be taken to appropriate revenue or moneys, or to impose taxation, by reason
only of its containing provisions for the imposition or appropriation of fines
or other pecuniary penalties, or for the demand or payment or appropriation of
fees for licences, or fees for services under the proposed law.
The Senate may not amend proposed laws imposing taxation, or
proposed laws appropriating revenue or moneys for the ordinary annual services
of the Government.
The Senate may not amend any proposed law so as to increase any
proposed charge or burden on the people.
The Senate may at any stage return to the House of Representatives
any proposed law which the Senate may not amend, requesting, by message, the
omission or amendment of any items or provisions therein. And the House of
Representatives may, if it thinks fit, make any of such omissions or
amendments, with or without modifications.
Except as provided in this section, the Senate shall have equal
power with the House of Representatives in respect of all proposed laws.
54. The proposed law which appropriates revenue or moneys
for the ordinary annual services of the Government shall deal only with such
appropriation.
4.38
The Clerk submitted that, while the purpose of the distinction in
section 54 is to identify bills that the Senate may amend directly under
section 53 of the Constitution and those to which it must request amendments,
the distinction is a useful tool for parliamentary scrutiny and control of
expenditure in that it separates normal ongoing expenditure from other
projects.[19]
Ordinary annual services
4.39
Professor Bartos described ordinary annual services in his publication, Public
Sector Governance Australia, as follows:
But just what are ordinary annual services? What sorts of
proposed spending can the Senate amend and what does it have to leave alone?
This was the subject of much debate and disagreement for the first half of the
twentieth century. The matter was finally resolved in what is known as the
"Compact of 1965", an agreement between the Senate and the Executive
that saw some items such as new buildings, grants to the States and new
policies put into their own appropriation bill (Bill 2) that the Senate had
power to amend. An amendment to the Compact was agreed with the introduction of
accrual budgeting in 1999, whereby appropriations for depreciation (to allow
replacement of capital equipment) were classed as "ordinary annual
services".[20]
New policies
4.40
The Clerk informed the Committee that new policies are regarded as not
part of the ordinary annual services under the Compact and submitted that this
part of the Compact has been violated in recent times. He submitted that:
Taking advantage of the nebulous nature of departmental
outcomes, departments have been able to start up new policies by using ordinary
annual services money.[21]
4.41
As an example, the Clerk reported that funds provided by
the Government for the relief of victims of the 2004 Asian Tsunami had come
from agencies' appropriations for ordinary annual services. Providing relief
for this natural disaster, in the Clerk's words, could 'not possibly be an
ordinary annual service of the government'.[22]
Continuing activities
4.42
The Clerk's submission is based on the premise that the Senate and the
executive have different views regarding whether 'continuing activities for
which appropriations have been made in the past' should be classified as
ordinary annual services. The Clerk submitted that the Senate's agreement with
the executive on this matter:
... seems to have been taken to mean that anything falling within
the statements of outcomes is an ordinary annual service, an assumption quite
contrary to section 54 of the Constitution and the Compact of 1965.[23]
4.43
Finance submitted that:
Under the Compact, Bill 1 contains appropriations for
departmental items and outcomes that have previously been the subject of
appropriations approved by the Parliament, excluding payments to other
Australian governments and major replacement and new capital items. Bill 2
incorporates items not classified to Bill 1, including payments to other
Australian governments, administered appropriations for new outcomes and
replacement and new capital, including construction or acquisition of land,
public works and buildings and major plant and equipment.[24]
(Committee's italics)
4.44
The Clerk informed the Committee, however, that:
What the Appropriations and Staffing Committee agreed to, and
what the Senate agreed to, was 'continuing activities'. The department of
finance, as I understand it, is saying that what was really agreed to was
'existing outcomes', which is something quite different. 'Continuing
activities' is considerably more objective and more in keeping with the
original Compact of 1965 than 'existing outcomes'.[25]
4.45
With regard to Finance's interpretation that the Compact applies only to
administered items the Clerk stated that:
... regardless of whether things are administered expenses or
departmental expenses, the principle which the senate and its committees set
down in earlier decisions was that all appropriations for new policies would be
in bill No. 2.[26]
Suggested remedy
4.46
Professor Bartos submitted that a diminution in the number of
appropriation items for non-annual services has been underway for many years.
He submitted that:
One of the problems for the scrutiny of the budget by the Senate
is that adherence by the executive to the 1965 Compact is difficult to monitor.
It depends on a number of factors including:
Knowledge by departments/agencies of
the significance of the distinction between ordinary annual services and
non-annual services
Willingness of the executive to
ensure that they comply (including through promulgation of regulations or
Finance department orders)
Senate committees themselves being
aware of the significance of the issue and raising it in their estimates
hearings at budget time.[27]
4.47
Professor Bartos elaborated on these factors as follows:
The high rate of staff turnover, especially in budgeting/finance
areas of government agencies, gives rise to the possibility that awareness is
low...The second question, Department of Finance and Administration monitoring
and enforcement of the split, is an area the committee should probably explore
with that department in due course.
4.48
He suggested that:
Audit coverage of the budget documents would be one way of
strengthening monitoring of not only this but many other aspects of the
accuracy and reliability of budget reporting, but it would have huge resource
implications for the ANAO and in any case is unlikely to be adopted by the
executive government.[28]
4.49
ANAO referred to the differing views in relation to the Compact and
quoted from a submission made to the High Court in Combet v Commonwealth of Australia
which was to the effect that the Compact is a political agreement and that it
is non-justiciable. ANAO concluded that:
In this light, and consistent with long-standing practice, the
Compact, and its interpretation, are properly matters for the Parliament to
resolve.[29]
4.50
The Senate Standing Committee on Appropriations and Staffing has been
considering this matter for some time, since late 2005,[30]
but apparently agreement has not been reached with the Government because a
report has not been presented to the Senate.
4.51
A member of the Committee queried whether, in view of the tension
between the Senate and Finance, the Senate and the government and the Senate
and the House of Representatives with respect to money bills, a statement by
the President should not accompany appropriation bills which would declare how
the Senate views the bills:
I am very sympathetic to the idea that ordinary annual services
bills should be swept through ... But the real issue is new programs and changes
to programs and it tends to be very grey in [those] areas. That is another one
[recommendation] we could suggest which would sharpen the focus for the
consideration of appropriation bills.[31]
4.52
Professor Lindell suggested that the Senate might wish to consider
whether the wording of the Compact of 1965 should be altered to strengthen the
restriction which seeks to ensure that capital expenditure and expenditure for
new services are not dealt with in the Appropriation Acts No. 1.[32]
Committee's conclusions
4.53
The suggestions that have been discussed above are worthy of
consideration. However, given the potential for disagreement (or
misunderstanding) that exists in relation to this issue, the Committee suggests
that the Senate continue to work to clarify those matters that should be
included in the annual appropriation bills.
Recommendation 8
4.54
The Committee recommends that the Senate continue to seek clarification
from the Government as to which items the Government believes should be
included in the different appropriation bills. The Senate should then form a
view as to the appropriateness of the split. When any differences are resolved
to the satisfaction of the Senate, the Department of Finance and Administration
should be required to monitor and enforce the split.
Recommendation 9
4.55
The Committee recommends that the Standing Committee on Appropriations
and Staffing should report expeditiously on its negotiations with Government in
relation to the appropriate split of items of expenditure in the different appropriation
bills so that the issue may be considered by the Senate.
Recommendation 10
4.56
The Committee recommends that the Clerk advise the President of the
Senate with respect to concerns about the matters included in periodic
Appropriation bills and that the President table a statement accompanying the
bills or return the bills to the House of Representatives or to the minister
for clarification, elucidation or adjustment.
Navigation: Previous Page | Contents | Next Page