Assumption: Businesses would not change their investment decisions.

Justification: Affected business would still need to invest in these assets.  There are a number of significant factors that affect investment decisions in these industries and for the specified assets.

Assumption: Boat arrivals would increase to levels in the 2012‑13 financial year (a maximum of around 25,000 asylum seekers).

Justification: Based on historical analysis from the Parliamentary Library (Boat arrivals and boat ‘turnbacks’ in Australia since 1976: a quick guide to the statistics) and consultation with experts.  The proposed policy is less deterrent-focussed than both the baseline policy settings and those which existed when the number of people seeking asylum peaked at around 25,000 in 2012-13.  While the abolition of both boat turnbacks and offshore detention may result in asylum seeker arrivals rising above this peak, the 2012-13 figure was considered to be the most reliable indicator of the potential response to this policy, noting that the actual response could vary widely depending on domestic and international circumstances, which are extremely difficult to predict and incorporate into a policy costing.

Assumption: There would be a price elasticity of -0.6 for the base tier (lowest income group), -0.3 for Tier 1, -0.15 for Tier 2, and -0.05 for Tier 3 (highest income group).

Justification: Lower-income earners are likely to be most sensitive to price changes.  The elasticities are based on the behavioural impacts of previous downgrades in private health insurance cover, informed by a 2011 research paper from the Melbourne Institute by Cheng (Working Paper No. 26/11).  The elasticities are larger than some of those estimated in the literature because the proposed premium changes would be much larger—the literature tends to consider only marginal changes.

Assumption: 7.5 per cent of capital expenditure would be brought forward over the costing period.

Justification: The increase in depreciation deductions available in the first year after purchasing a new asset would provide an incentive for businesses to bring forward investment.

Assumption: 2.5 per cent of capital expenditure that would have occurred in the two years prior to the start date would be delayed until after the start date.

Justification: Businesses would receive higher tax deductions in the first year after purchasing a new asset if these are purchased after the policy’s start date.

Assumption: Investment in eligible assets would increase by 0.5 per cent, substituted from ineligible assets.

Justification: Businesses would have an incentive to shift discretionary investment from ineligible assets to assets that would qualify for the relatively more generous depreciation deductions.

Assumption: Fixed trusts would restructure to avoid the proposal, reducing the total revenue impact by 70 per cent.

Justification: Fixed trusts with significant foreign beneficiaries can easily restructure to a company to avoid the withholding tax.

Assumption: Taxpayers and tax accountants would adjust their behaviour to reduce the impact of the policy proposal by an average of 30 per cent.

Justification: Setting a cap on a particular deduction may result in some individuals claiming the deduction under a different label, and individuals claiming large deductions are likely to be engaged in ways to minimise their taxes.  Setting a cap may also act as a signal to individuals and tax accountants as to an appropriate amount to spend on managing tax affairs, which may result in some individuals increasing their deductions up to the cap.  The magnitude of this behavioural response is informed by the taxable income elasticities that are applied to changes to marginal tax rates and thresholds.

Assumption: 30 per cent of income currently above the pay cap would not be affected by the cap.

Justification: Financial institutions would have a strong incentive to find ways to keep executive pay higher, without technically breaching the cap.  For instance, a proportion of salary could be deferred to later years, or executives may be able to split income with their family members.

Assumption: Executives would not have the ability to bring forward a portion of taxable income to before the implementation date.

Justification: Shareholders of the major banks rejected a number of executive remuneration packages in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and have been assessed to be unlikely to support a bring-forward in payments.

Assumption: Companies would continue to pay the same proportion of their after‑tax income as dividends.

Justification: Company decisions on dividend payout ratios are affected by a number of considerations and these vary significantly across companies.  There is little evidence that the company tax rate is a significant determinant of this.

Assumption: When a proposal to increase the highest marginal tax rate is announced in advance, affected individuals would bring forward 5 per cent of their income from the first year of the policy to before the policy implementation date.

Justification: High-income earners usually have some discretion over the timing in which income is realised, particularly for capital gains.  This is supported by research by HM Revenue & Customs in 2012 (The Exchequer effect of the 50 per cent additional rate of income tax) and the Canadian PBO in 2016 (The fiscal and distributional impact of changes to the Federal personal income tax regime).

Assumption: There would be a taxable income elasticity of 0.2 for all taxable income above the threshold for the highest marginal tax rate (currently $180,000), and a taxable income elasticity of zero for all taxable income below this threshold.

Justification: The wider empirical literature estimates a range of taxable income elasticities, but the average estimate is close to 0.2, with lower elasticities for lower-income earners (see 2018 research by the International Monetary Fund, Are elasticities of taxable income rising?).

Assumption: Where high-income earners are unable to save as much in superannuation they would save this amount outside superannuation (before tax) rather than increase consumption.

Justification: Most affected superannuation savings are voluntary and affect high-income earners.  A 2015 Grattan Institute report by Daley and Coates (Super tax targeting) suggests that increasing tax rates on discretionary savings changes the composition of savings, but has little impact on total savings for high-income earners.

Assumption: Oil and gas production would not fall significantly over the costing period as a result of the proposal.

Justification: Oil and gas production is often driven by long-term contracts and there is limited scope for affected businesses to alter production from existing projects.

Assumption: 20 per cent of first home buyers with taxable incomes over $37,000 would have participated in the scheme.

Justification: Projected take-up of the First Home Super Saver Scheme is below the take-up that was projected for the former First Home Saver Account scheme, but greater than the actual take‑up of the former scheme (see the Parliamentary Library 2014 article, First Home Saver Accounts scheme closure).  At this point, there is little data available on those who have made voluntary contributions with the intention of withdrawing these for the purchase of a first home. 

Assumption: Expenditure on collaborative R&D activities would increase by 25 per cent, substituted from non-collaborative R&D expenditure.

Justification: Australia has one of the lowest rates of collaboration in the OECD, suggesting that there is significant room to increase business spending on collaborative R&D.  However, this increase would be somewhat limited by non‐financial factors, such as lack of time or expertise (see Australian Bureau of Statistics Cat. No. 8158.0, 2016‑17).

Assumption: Businesses would not reduce travel.

Justification: There are several reasons for business travel, most of which are not dependent on the overall costs of it.

Assumption: Some companies would change their royalty structures to avoid the impact of the proposal, reducing the total revenue impact by 70 per cent.

Justification: There are a number of potential strategies and restructuring that businesses could pursue in order to avoid the proposal.  For example, subsidiaries in Australia could enter into service agreements or loans instead of paying royalties.

Assumption: Individuals would be more likely to self-report breaches when penalties are higher.

Justification: Self-reported breaches attract a much smaller penalty than those arising from compliance activity.  As such, doubling both penalties would increase the incentive for individuals to self-report.

Assumption: The Government fleet average leasing period would extend from three years to five years.

Justification: Vehicles are currently leased for an average period of three years but given the additional infrastructure requirements and lower maintenance costs, electric vehicles are likely to be leased for a longer period.

Assumption: Take-up of the expanded scheme would be 65 per cent of the eligible cohort.

Justification: Based on current dental attendance rates for the Australian population and data for the Child Dental Benefits Schedule.

Assumption: Around 40 per cent of contractors would not comply with the taxable payments reporting system.

Justification: Based on the historic experience of similar industries that are already in the taxable payments reporting system.

Assumption: The number of newly purchased electric vehicles being salary sacrificed would double.

Justification: The proposal makes salary sacrificing arrangements for electric vehicles more attractive.  Given the relatively low level of salary sacrifice (around 8 per cent of vehicle purchases in 2017‑18), and the potential for high growth in electric vehicle sales in coming years, a doubling in novated leases for electric vehicles would not be unreasonable.

Assumption: The number of opioid-dependence treatment patients would increase by around one‑third relative to the baseline.

Justification: Consistent with recent peer‐reviewed research by Chalmers and Ritter in 2012 (Subsidising patient dispensing fees: the cost of injecting equity into the opioid pharmacotherapy maintenance system).  Also accounts for both an increase in average treatment duration and an increase in the number of patients commencing opioid-dependence treatment each year as a result of the lower out‐of‐pocket costs.

Assumption: There would be a 5 per cent increase in Technical and Further Education (TAFE) and Vocational Education and Training (VET) students, and a 1 per cent increase in undergraduate students under free tuition.

Justification: Based on consultation with experts.  A review of Australian research also indicated that the response to price is limited in general, but certain groups of potential students would be modestly influenced by price (for example, see a submission by Chapman to the Higher Education and Research Reform Bill 2014).

Assumption: Banks would absorb the cost of the levy, not passing it on to consumers or reducing dividends.

Justification: Given the relatively small size of the levy, banks have been assessed as unlikely to pass on any of the cost to consumers or shareholders.

Assumption: Voluntary compliance by taxpayers would increase.  The additional revenue from voluntary compliance would be between 5 per cent and 12 per cent higher, depending on the level of specified compliance funding.

Justification: The increased likelihood of being caught in an audit or other compliance process would increase the incentive for taxpayers to voluntarily comply with the tax system.

Assumption: There would be a price elasticity of -0.13 for the decision to use child care, and a price elasticity of -0.25 for the decision to change the hours of formal child care use.

Justification: Based on a published paper by Breunig, Weiss, Yamauchi, Gong and Mercante from 2011 (Child care availability, quality and affordability: are local problems related to labour supply?).  The elasticities in the paper have been applied in conjunction with consideration of Australian Bureau of Statistics data (Cat. No. 4240.0, 2018) relating to preschool education.

Assumption: There would be no material behavioural response.

Justification: Buyers of luxury vehicles are not as price sensitive as buyers of cheaper vehicles.

Assumption: Approximately 75 per cent of the increased levy amount would be passed on to bank customers.

Justification: The explanatory memorandum of the Major Bank Levy Bill 2017 provides some information on international studies that suggest that some of the bank levy would be passed on to consumers.

Assumption: There would be no material reduction in the level of illegal dumping activity.

Justification: There is limited information on cases completed since July 2013 when the anti‑circumvention provisions were introduced.

Assumption: There would be no material change in the aggregate number of projected early childhood educators.

Justification: Paying early childhood educators more would not be expected to result in a material change in demand for early childhood education.  In relation to this specific policy, there was uncertainty around which educators would be affected, making it difficult to quantify any behavioural response.

Assumption: Around 80 per cent of eligible companies (by GST debt value) with a debit GST balance, and all companies currently in a net refund position, would remain registered for GST.

Justification: There are other benefits associated with GST registration, such as being able to claim input tax credits and the ease of conducting business.

Assumption: Some income support recipients would switch between transfer payment types for large increases in a particular payment.

Justification: For recipients that are eligible for more than one payment, there would be an incentive to switch payment types if one payment significantly exceeds another

Assumption: Businesses would not replace temporary foreign workers with local workers.

Justification: Evidenced by the strict labour-market-testing requirements in place as part of the visa application process, and based on a 2016 academic paper by Breunig, Deutscher and To (The relationship between immigration to Australia and the labour market outcomes of Australian workers), which showed no material change in labour market outcomes for Australians as a result of the skilled migrant intake.

Assumption: There would be a labour demand elasticity of -0.5 for subclass 482 visas and -0.4 for subclass 186 and subclass 187 visas.

Justification: Based on 2008 research commissioned by the Australian Fair Pay Commission (Research Report No. 9/09).

Assumption: The increase in visa application charges would cause employers to switch to sponsoring a cheaper visa (subclass 400) for 20 per cent of applications.

Justification: The primary consideration for visa applications is likely to be the financial cost.  Raising the visa application charge and salary threshold for the Temporary Skilled Migration visas (subclass 482) would create an incentive for short-stay visa applicants to move to cheaper subclass 400 visas.

Assumption: There would be no change in the total volume of penalty units.

Justification: Compliance enforcement arrangements by government agencies are assumed to be the primary determinant of behaviour.

Assumption: Behavioural responses to a broadening of the tax base and increases in tax on high‑wealth individuals are broadly offsetting.

Justification: A broader tax base may lead to fewer opportunities for those affected to reduce the tax they pay.  Conversely, a higher overall tax burden provides a stronger incentive for those affected to make greater use of alternative avoidance and evasion strategies.  The effects are assessed as being broadly offsetting for the particular set of proposed changes.

Assumption: Carbon emissions would decrease by approximately 1.3 per cent per year.

Justification: Based on a 2013 modelling report provided to the Climate Change and Energy Authority (Climate change mitigation scenarios).

Assumption: There would be no material change to the timing of non-electric vehicle purchases in response to the limited duration of the proposal.

Justification: There is likely to be high growth in electric vehicle purchases over time in the baseline, and the proposed changes are projected to occur in the high-priced vehicle segments where consumers are less likely to be price sensitive and therefore would not alter their spending patterns to avoid paying additional tax.

Assumption: There would be no behavioural response to the introduction of road-user charging.

Justification: There is limited information available about the effects of applying a flat road-user charge per kilometre driven, with studies more focused on the effects of road-user charges applied at specific times of the day, such as peak travel times.  In an analysis conducted for the Fuel Indexation (Road Funding) Bill 2014, the demand for transport fuel was found to be relatively inelastic with regards to price.  By extension, the number of kilometres travelled would also be relatively inelastic with regards to price. 

Assumption: The proportion of three-year-old children accessing preschool programs in long day care or formal early childhood education settings would rise from 60 per cent to 90 per cent after three years.

Justification: Based on the behavioural response of families with four-year-old children when the free preschool program was introduced nationally, although the response is somewhat smaller to reflect developments in the broader early childhood education sector.  Information on the take-up of previous funding arrangements by state is available at the Council on Federal Financial Relations.

Assumption: There would be an increase in bulk billing rates for particular services.  For instance, oncology specialists would increase bulk billing rates to 100 per cent (for item 105), surgeons to 85 per cent (for item 105) and consultant physicians to 80 per cent (for item 116).

Justification: This is based on an analysis of detailed Medicare billing data.

Assumption: The number of bulk-billed professional attendances would increase by 5 per cent of the total baseline services. 

Justification: Removing out-of-pocket costs (some of which are significant) would be expected to increase demand for services or lead to providers implementing an alternative schedule of care. 

Assumption: There would be a 15 per cent increase in demand for cannabis products in the first year, and demand would then grow in line with population growth.

Justification: Based on assessments from examining the evidence on consumption rates from the Canadian legalisation experience (Statistics Canada, National Cannabis Survey).

Assumption: There would be a taxable income elasticity of 0.2 for affected individuals.

Justification: Consistent with the wider empirical literature across advanced economies (eg International Monetary Fund, Are elasticities of taxable income rising?).

Assumption: 5 per cent of dividends that would have been paid in the first year of the policy would be brought forward to before the policy implementation date.

Justification: Given this policy was announced ahead of the 2019 election, a number of firms announced the early payment of dividends in anticipation of a change of government, including Westpac.  As a result, we assumed that more firms would have brought forward their dividends to the financial year before the policy would have started.

Assumption: There would be no material budget impact from individuals drawing down on their assets in order to qualify for the age pension.

Justification: While the proposal may increase the incentives for some affected individuals to qualify for the age pension, it would have little impact on these incentives for most individuals affected (noting that these incentives are already strong for some individuals).  The budget impact of a small number of individuals choosing to reduce their assets and qualify for the age pension would be immaterial relative to the overall budget impact of the proposal.

Assumption: Affected self-managed superannuation funds would adjust their investments to reduce the revenue impact of the proposal by 20 per cent.

Justification: Affected self-managed superannuation funds could roll assets into an Australian Prudential Regulation Authority fund and maintain access to franking credits, suggesting that the response is likely to be relatively large.  This behavioural response is equivalent to self-managed superannuation funds moving around a quarter of their listed Australian equities to Australian Prudential Regulation Authority funds.  RiceWarner’s analysis for the Coalition of self‑funded retirees in 2018 (Removing the refundability of franking credits) also assumed a behavioural response leading to a 20 per cent revenue offset.

Assumption: Total subscriptions from individuals would increase by 10 per cent.

Justification: A tax deduction reduces the effective price of media subscriptions, which would make them more attractive.

Assumption: Affected individuals and trustees would find ways to reduce the impact of the proposal by 25 per cent.

Justification: Individuals face strong incentives to minimise the effect of this policy and there are alternative income-splitting strategies that are available (eg paying wages to family members, using a company instead of a trust and paying dividends, or simply finding other tax-effective investments), which suggest a large behavioural response.  However the overall response may be limited by a number of factors, including transaction costs, existing compliance measures (such as the Australian Taxation Office Trust Taskforce), less flexibility in the alternatives, and that people hold discretionary trusts for reasons other than income splitting.

Assumption: Affected individuals would find ways to reduce the impact of the proposal by around 30 per cent.

Justification: A large behavioural response is consistent with that assumed in 2012 by the Joint Committee on Taxation in the US to the proposed Buffett Rule.  It reflects that high-income individuals typically have a degree of control around the realisation of income, particularly capital gains and investment income.

Assumption: Five per cent of affected asset sales in the first year, 2.5 per cent in the second year, and 1.25 per cent in the third year following implementation would be brought forward by 12 months to maximise the capital gains tax discount.

Justification: The proposed capital gains tax rate applied in the phase-in period would depend upon the point of sale.  Given that sellers would have some discretion around when they sell assets, they would look to sell them at a point that maximises their after-tax capital gain.

Assumption: Some self-managed superannuation funds would reduce their borrowings in response to the 2017-18 Budget measure Superannuation – integrity of limited recourse borrowing arrangements, and some would utilise alternative investment strategies under the proposal.  These behavioural responses would reduce the revenue impact of the policy proposal by 40 per cent.

Justification: The Australian Taxation Office's December 2018 Self-managed super fund quarterly statistical report shows that the growth of Limited Recourse Borrowing Arrangement assets slowed dramatically since the 2017-18 Budget measure.

Assumption: Behavioural responses would not have a material budget impact.

Justification: Some individuals may choose to remain within their default fund as a result of the proposal, whereas they would have chosen a different fund otherwise.  The proportion of individuals exercising choice of fund is already low, so this response is unlikely to have a material impact.

Assumption: All prospective applicants for contributory parent visas would apply for much cheaper parent visas.

Justification: Contributory visas are more expensive, but have shorter processing times—reducing the processing time for the cheaper visa removes the incentive to pay for the expensive visa.

Assumption: Individuals with income between the current and proposed threshold would reduce their voluntary concessional contributions by 10 per cent.

Justification: Increasing the tax rate on some superannuation contributions reduces the incentive for individuals to make voluntary contributions.  The Division 293 threshold was reduced from $300,000 to $250,000 in 2017‑18—future research comparing voluntary contributions in 2016‑17 and 2017‑18 may lead to an empirical estimate of the size of this behavioural response.

Assumption: Businesses would not reduce fuel usage.

Justification: In analysis conducted for the Fuel Indexation (Road Funding) Bill 2014, the demand for transport fuel was found to be relatively inelastic.

Assumption: Importation of vehicles over 40 years of age would increase by approximately 5 per cent as a result of the removal of luxury car tax under the proposal.

Justification: This is based on an average price change in imported vehicles of 2.2 per cent multiplied by a price elasticity of -2.05.  The elasticity assumption is based on a 2010 research paper on car price elasticities by Mabit and Fosgerau (Demand for alternative-fuel vehicles when registration taxes are high).

Assumption: There would be a taxable income elasticity of 0.2 for individuals affected by negative gearing changes, and a capital income elasticity of 0.3 for individuals affected by capital gains tax changes.

Justification: Consistent with wider empirical literature across advanced economies (eg International Monetary Fund, Are elasticities of taxable income rising?), noting that higher elasticities are estimated for capital income.

Assumption: Twenty per cent of affected asset purchases in the first year and 10 per cent in the second year following implementation would be brought forward prior to the implementation date in order to take advantage of grandfathering.

Justification: Consistent with research by the Office for Budget Responsibility’s in 2016 (Working paper No. 10).  In addition, the introduction of the GST in 2000 had a bring‑forward effect on new housing purchases (about 10 per cent in year one and 5 per cent in year two).  A bigger response is assumed for the removal of negative gearing because it would be expected to have a larger impact on investment housing costs than the introduction of the GST had on new housing costs.

Assumption: The proportion of negatively geared investment in new dwellings would increase from 22 per cent before the policy is implemented to 30 per cent by 2029-30.

Justification: Australian Bureau of Statistics data (Cat. No. 5609.0, November 2018) was used to estimate the proportion of investment in new dwellings for owner‑occupiers.  This was used as a proxy for the proportion of negatively geared investment in new dwellings.  The estimated proportion is consistent with unpublished Reserve Bank of Australia data and an investor survey from Mortgage Choice (see Established dwellings preferred investment choice, 27 July 2017).  We expect the proportion of investment in new dwellings to increase over time due to the exemption.
There is little reliable data on the proportion of negatively geared investment in new dwellings.  While there are surveys that estimate the proportion of properties purchased by investors that are new dwellings, estimating the impact of the exemption for new dwellings requires an estimate of the proportion of negatively geared investment in dollar terms. Differences in rental yields between new and established properties may mean that this proportion is very different to the proportion of new properties. 

Assumption: Affected policy holders with incomes above the Medicare levy surcharge threshold would switch to a different policy.

Justification: Most affected individuals would benefit more from paying for a better private health insurance policy than paying the Medicare levy surcharge.  Those affected that are earning below the Medicare levy surcharge threshold may choose to cease holding private health insurance, but this would have no impact on the revenue collected from the Medicare levy surcharge.

Assumption: Some companies would alter their behaviour in order to avoid the impact of the proposal, reducing the revenue impact by 10 per cent after the first year and by 2 per cent in subsequent years.

Justification: Based on the company response to previous changes to thin capitalisation rules.  This response could include changes to future worldwide financing arrangements to raise worldwide gearing levels.

Assumption: Companies would revalue their asset bases or alter their behaviour in other ways to avoid the increase in debt deductions denied, reducing the revenue impact by a further 50 per cent.

Justification: Based on the company response to previous changes to thin capitalisation rules.

Assumption: Applications for the proposed Long Stay Parent visa would increase in proportion to the difference between the costs of the current and proposed visas.

Justification: The primary consideration for visa applicants is likely to be the financial cost.

Assumption: Affected companies would not make material changes to the number of workers they employ and would not increase salary and wage rates.

Justification: The additional deduction is small in magnitude and would be unlikely to factor significantly in employment decisions.  In addition, it would not be possible to carry the deduction forward, limiting the ability of companies not in a taxable position to fully utilise the deduction.  The financial impact of the proposal is largely from current employment and any change to employment is likely to be at the margin.

Assumption: The number of new employees meeting the eligibility criteria of the proposal would increase by 10 per cent relative to current levels.

Justification: Employers would have an incentive to employ individuals meeting the eligibility requirements rather than those not meeting the requirements.  Job seekers would also have an incentive to try to meet the eligibility requirements.