Chapter 2
Government revenue loss from tax expenditures and concessions
2.1
In its first interim report, the committee noted that the National
Commission of Audit (the commission) focused on cuts to government expenditure and
did not examine raising revenue.[1]
Given the substantial amount of revenue forgone through tax expenditures (amounting
to around $115 billion in 2012-13),[2]
and tax concessions, the committee has chosen to examine a number of tax
concessions where changes could raise government revenue and improve policy
outcomes, including:
- superannuation concessions;
-
the interaction between concessionary treatment of capital gains
and negative gearing of investment properties;
-
the Fuel Tax Credits Scheme;
-
private health insurance rebates; and
- elements of the Fringe Benefits Tax (FBT).
What are tax expenditures and concessions?
2.2
The Australian tax system has a range of concessions that can be used by
individuals and businesses to reduce the amount of tax they pay. While these concessions
benefit taxpayers and businesses, they represent a loss of potential income for
the Commonwealth.
2.3
Some of these concessions are classed as tax expenditures,[3]
while others are treated as spending programs in the budget or structural
features of the tax system.
2.4
Treasury defines a tax expenditure as:
...a provision of the tax law that provides a benefit to a
specified activity or class of taxpayer that is concessional when compared to
the ‘standard’ tax treatment that would apply....
Tax expenditures can be provided in many forms, including tax
exemptions, tax deductions, tax offsets, concessional tax rates or deferrals of
tax liability.[4]
2.5
Other tax concessions are treated as direct spending and included in the
Commonwealth Budget, such as the Fuel Tax Credits Scheme and rebates for
private health insurance. Negative gearing is regarded as a 'structural
feature' of the Australian tax system, so out of scope for both the Tax Expenditures
Statement (TES) and annual budget processes.[5]
2.6
The Parliamentary Library noted that:
Tax expenditures are intended to achieve policy objectives of
the Government. They are essentially the same as government spending programs.[6]
How much do tax expenditures and concessions cost the government?
2.7
The International Monetary Fund (IMF) recently found Australia has the
highest level of tax expenditure in the world.[7]
However, Treasury have urged caution about drawing conclusions from this
working paper about the size of tax expenditures in Australia relative to other
countries.[8]
2.8
In 2012-13 there were 363 tax expenditure measures estimated to total around
$115 billion, or 7.5 per cent of GDP. To put this in context, total government
spending in the same period was around 23.5 per cent of GDP.[9]
2.9
Some major components of tax expenditure are superannuation concessions ($31.8
billion)[10]
and capital gains tax discount for individuals and trusts ($4.3 billion in
2012-13).[11]
Professor John Hewson, Chair, Tax and Transfer Policy Institute, Australian
National University, appearing in a private capacity, told the committee total
Commonwealth tax expenditure is likely to increase to around $150 billion in
2016-17.[12]
2.10
The government also forgoes revenue from other tax concessions,
including: the Fuel Tax Credits Scheme ($5.5 billion annually);[13]
rebates for private health insurance ($4.7 billion annually);[14]
and the negative gearing of property ($2.4 billion annually).[15]
2.11
Given how much the tax concessions cost the Commonwealth, Dr Richard
Denniss, Executive Director, The Australia Institute, argued that reforming tax
concessions would lift revenue without lifting the tax rate, while also
improving policy outcomes. He said the Commonwealth should:
...focus on achieving a simple and efficient tax system by
removing the enormous and inequitable tax concessions and loopholes that
currently exist in the system. This will allow the collection of tens of
billions of dollars in additional revenue with no upward pressure on the rate
of tax at all.[16]
The need for greater transparency and review of tax expenditures
2.12
The committee was told that tax expenditures lack transparency and should
be more regularly reviewed to evaluate their cost and efficiency in delivering government
policy. For example, the Parliamentary Library noted:
A tax expenditure is the provision of a benefit by way of
preferential treatment in the tax system. It has a similar effect on the budget
to direct expenditure, but is subject to far less scrutiny. Transparency would
be increased in many cases if tax expenditures were replaced with direct
expenditure.[17]
2.13
The annual TES was introduced by the Charter of Budget Honesty Act
1998, to allow greater scrutiny of tax expenditures.[18]
However, in 2009, the Henry Tax Review noted there was still not enough
transparency and accountability in the system, despite the TES:
...despite their similarities, tax expenditures and spending
programs are not created, maintained, reviewed or reported in the same way.
This means that there is often less transparency and accountability in the use
of tax expenditures.[19]
2.14
Professor John Hewson, suggested tax expenditures were such a
significant part of Commonwealth budget that they should be examined alongside spending
programs:
The main point I wanted to make today is obviously to focus
in on the need to look at tax expenditures pretty much as you look at normal
government expenditure...You have to look at the lot. If you look at the numbers,
assistance that is enshrined in the tax system is worth about $120 billion this
year, on the budget estimates, rising to about $150 billion in 2016-17. That is
approaching a third of aggregate government expenditure.[20]
2.15
This was also mentioned by the Business Council of Australia in their
submission to the commission:
All of the [tax] concessions should be treated in the same
way as direct budget expenditures for the purposes of program evaluation and
the merits of each concession should be periodically re-established.[21]
2.16
Professor John Quiggin, School of Economics, University of Queensland, appearing
in a private capacity, proposed the TES be incorporated into Budget Paper
No. 2 to ensure greater integration between tax and program
expenditure:
...because the tax expenditures are obscure both in their operation
and also in their presentation in the budget accounts they tend to be viewed
less critically...[a] more integrated treatment of the tax expenditure [that] is
promoted much higher up in the budget papers would be a helpful guide to the
actual impact of the budget, rather than the accounting measures we currently
use.[22]
Tax concessions and settings in need of review
2.17
The committee examined particular tax concessions in need of review
because they are not achieving their policy goals and represent significant
revenue losses to government. These are discussed in turn below.
Concessions for superannuation
contributions
2.18
The government currently offers a concessional rate of tax to encourage individuals
to make voluntary contributions to their superannuation savings. These contributions
are taxed at 15 per cent, which is less than the marginal tax rate most
contributors pay on their income.[23]
2.19
Superannuation concessions were designed to supplement retirement
incomes of individuals and reduce the number of Australians solely reliant on age
pensions.[24]
2.20
These concessions cost government $31.8 billion in 2012-13, and will
increase to around $45 billion in 2015-16.[25]
2.21
Witnesses told the committee that government tax expenditure on
superannuation concessions is costly for government, inequitable and does not
achieve good policy outcomes.
2.22
Mr Matt Cowgill, Economic Policy Officer, Australian Council of Trade
Unions, advised the committee superannuation concessions are a large and
growing area of expenditure predominantly benefitting high income earners:
We note [Treasury analysis] shows that the very
highest-income earners receive more government support for their retirement in
the form of superannuation tax concessions than low-income earners do in the
form of the aged pension. We say that is inequitable, it is unsustainable and
it has put a large and growing hole in the Commonwealth budget.[26]
2.23
Professor Hewson also referred to the disproportionate assistance given
to high-income groups who make voluntary superannuation contributions:
Treasury estimates, for example, that, from the combined
support of superannuation tax concessions and the age pension, most people—that
is a number around 80 per cent—receive around $270,000 of support over their
lifetime. In contrast, the top one per cent of male income earners receives
around $520,000 of support over their lifetime because of the significant
superannuation tax concessions to higher-income earners....There is a significant
inequity in that system, particularly against the background of the focus on
pension spending as a traditional government expenditure item.[27]
2.24
Dr Cassandra Goldie, CEO of the Australian Council of Social Service, noted
these concessions were often used as tax minimisation strategies in the present
rather than reducing reliance on the pension system in the future:
When you look at the mix of where tax expenditures are
benefiting different groups through superannuation you see that 50 per cent of
the tax expenditure is benefiting people in the top 20 per cent....[This] is not
delivering on the core outcome, because we have tax expenditure going towards
benefiting people who are probably going to be able to secure their own
retirement future, whether they use a superannuation investment vehicle or some
other form of investment strategy.[28]
2.25
Dr Denniss argued the government needs to focus on the balance between
the costs of the pension and superannuation concessions to see where current
policy is failing:
If you believe that superannuation tax concessions take
pressure off the age pension, the Commission of Audit should recommend that
there be a cap on the combined cost of the two. If one is taking pressure off
the other, then the sum of them should not grow. The sum of them is going
through the roof because the tax concessions for superannuation are going
disproportionately to people who are not even eligible for the age pension.[29]
Concessions for capital gains tax
and negative gearing
2.26
Capital gains tax concessions and the negative gearing of property are
often combined by investors to minimise their tax bill.[30]
2.27
The government offers a capital gains exemption of 50 per cent of any
capital gain made by a resident individual or trust, where the asset being sold
has been owned for at least 12 months.[31]
This was introduced in 1999 to stimulate capital investment made by individuals
and trusts – both from Australia and overseas.[32]
It is most frequently used in property investment, although it was originally
designed to stimulate entrepreneurial activity, particularly in web-based
businesses.[33]
2.28
Negative gearing is a strategy by which investors can
reduce their taxable income by deducting losses incurred on particular
investments from their main income.[34]
Negative gearing was introduced with the aim of increasing the availability of
rental properties.
2.29
Taken together, capital gains tax concessions and negative gearing cost
the government around $6.7 billion in lost revenues each year. The 2013 TES
states the concessional treatment for capital gains tax cost $4.3 billion in
2013-14, rising to $7.6 billion in 2016-17.[35]
Negative gearing of property costs government around $2.4 billion a year.[36]
2.30
Mr Sam Crosby, Executive Director of the McKell Institute explained to
the committee that these two features of the tax system are used in combination
by investors to minimise their tax liabilities:
Negative gearing is really two things when people talk about
it. The first is that it allows investors to deduct their losses made on rental
properties from their other income and thereby lowering their overall tax
burden. What is commonly looked at also incorporates their capital gains tax....That
reduced the rate of capital gains to about 50 per cent. When you are looking at
what the biggest impact on the budget is from negative gearing, we are not just
talking about negative gearing. We are talking about capital gains.[37]
2.31
Dr John Daley, CEO of the Grattan Institute, appearing in a private
capacity, saw good opportunities to improve government policy and revenue in
these areas:
The tax treatment of assets, including negative gearing and
the capital gains discount, are pretty good places to start for tax reform.
These tax exemptions primarily benefit older, richer Australians, and they
significantly reduce housing affordability for younger generations.[38]
2.32
Supporters of negative gearing argue that it encourages investment in
rental housing and acts to keep rents low, as well as stimulating the building
and construction industry. However, the committee heard evidence that the
intersection between negative gearing and concessional taxation of capital
gains results in a significant loss for government revenues and acts as a
significant distortion on the housing market.
2.33
Mr Andrew Mihno, Executive Director, International and Capital Markets
Division, Property Council of Australia, suggested negative gearing and
concessions for capital gains were positive measures that boosted supply of
rental properties and acted as a brake on rising rent prices.[39]
2.34
However, Mr David Hetherington of Per Capita, thought negative gearing had
'singularly failed to stimulate new housing stock', and had exacerbated problems
with housing supply and affordability. He told the committee:
It is now the case that, on a low-skilled or semiskilled
income in any of our major cities, the notion that you can save over a working
life for a deposit for a home in the inner or middle suburbs is no longer
realistic. I would argue that housing affordability remains a chronic public
policy challenge and that the existing settings on negative gearing have not
significantly contributed to addressing that challenge.[40]
2.35
Mr Crosby supported this, saying negative gearing had not eased supply
pressures by stimulating new build housing, as '95 per cent of investors are buying
established dwellings'. He suggested the way forward might involve a cap, over
the longer term, either on the number of properties or the value of the
properties.[41]
2.36
Professor Quiggin emphasised the treatment of capital gains is the main issue:
The problem is that in the case of housing everybody engaged
understands that the idea is that you accumulate these losses during the period
you own the property, you recoup them all and more when you sell the property,
getting a capital gain which can be taken at a time of your own choosing to
ensure that you have a low marginal tax rate, and it is then further downgraded
by 50 per cent. So that is really the big problem in housing.[42]
2.37
However, witnesses urged caution in reforming tax concessions related to
the housing market, given the rates of home ownership in Australia are so high
and not limited to high income groups. For example, Mr Mihno told the committee
most negatively geared property was owned by investors with reasonably modest
incomes:
You might find it interesting to note that about 72 per
cent of all negatively geared properties are actually owned by middle
Australia—that is, people earning $80,000 or less. It costs government, on the
estimates that we have, an average of $33 to $40 per week per investor, which
is not particularly high.[43]
The Fuel Tax Credits Scheme
2.38
The Fuel Tax Credits Scheme (the Scheme) was introduced in 2006 for fuel
used in off-road heavy vehicles and other business uses.[44]
It was expanded in 2008 to include fuel for power plants and machinery and again
in 2012 to include the carbon price. [45]
2.39
The Scheme was designed to lower business costs for primary producers,
particularly in agriculture and mining, and to reduce transport costs for regional
and rural Australia. The Fuel Tax Credits Scheme cost the government $5.5 billion
in 2012-13 and this is projected to rise to around $6.4 billion in 2016-17.[46]
2.40
The Minerals Council of Australia stated the mining sector received $2.3
billion in fuel tax credits for 2011-12.[47]
However, it was argued that this is not a subsidy for the mining industry:
This is a road user charge designed for the use of diesel
used on roads. We do not use the diesel on roads, and nor do many of the other
sectors that take advantage of this scheme.[48]
2.41
Mr Hetherington considered it odd that fuel tax credits were so costly
for government and yet not subject to much public or parliamentary debate –
especially in light of recent cuts to industry assistance programs:
...I think it is striking that we have a public debate that
views some subsidies as hugely damaging—so we can look at the automotive
industry and say, 'Gee, it is terrible that we are propping up employment there
with use of public funds,'—but the scale of fossil fuel subsidies is
significant. It is very large in comparison to the subsidies in these other
parts of the economy but generates very little attention or challenge in the
public debate.[49]
2.42
Professor Hewson commented that all government industry assistance
measures, including the Fuel Tax Credits Scheme, should be comprehensively
reviewed together as part of a 'mature debate' on government expenditure:
You do need to have a review in this process somewhere to
say, 'This is how much the mining sector gets overall, this is how much the
agricultural sector gets and this is how much other aspects of industry get
like superannuation' and then have a mature review about that.[50]
Private health insurance rebates
2.43
The government provides a contribution to the costs of taking out
private health insurance premiums of up to 30 per cent. This applies to
policies covering private hospital treatment, as well as policies covering
ancillary health needs, such as dental care and physiotherapy.
2.44
Rebates are claimed as part of an individual's yearly tax return or paid
directly to health insurers.[51]
From 1 July 2012, rebates were means tested by individual or family income.[52]
2.45
In 2011-12, private health insurance rebates cost the government $5.5 billion,
including $800 million for rebates on Medical Expenses. This is estimated to
rise to $5.9 billion in 2016-17.[53]
This has risen faster than any other component of government health spending,
from $1.4 billion in 1999-2000[54]
and is the second largest tax expenditure after superannuation.[55]
2.46
The original policy was designed to make private health insurance more
affordable and accessible and to take pressure off the public system.[56]
However, the committee was told private health insurance rebates for hospital
and ancillary cover are not achieving intended policy outcomes.
2.47
Professor Jim Butler, Australian Centre for Economic Research on Health,
appearing in a private capacity, told the committee there was some evidence the
introduction of hospital cover had eased some pressure on the public system if
measured in terms of public hospital queues and waiting lists:
There was certainly an increase in private hospital
admissions following the introduction of the private health insurance rebate....it
is a complicated area to look at, but I think there is probably some prima
facie evidence that it did reduce pressure in the sense that it probably
resulted in a number of patients being cleared from the queue for public
hospital treatment.[57]
2.48
However, Dr Stephen Duckett, Health Program Director, Grattan Institute,
appearing in a private capacity, argued this rebate had not changed public hospital
patterns of use:
Even though 43 or 47 per cent
of the population has general insurance, the subsidy there does not have any
impact on public hospital utilisation of any kind whatsoever. It simply
improves the access for people with insurance.[58]
2.49
Dr Cassandra Goldie, CEO for the Australian Council of Social Service,
told the committee that the rebate for ancillaries was inefficient and should
be removed:
The 30 per cent to 50 per cent private health insurance
rebate for ancillaries cover, we believe, should go. The main justification for
that rebate was to reduce public expenditure on hospitals. There is not a
direct link between ancillary benefits and those expenditures.[59]
2.50
Dr Anne-marie Boxall, the Deeble Institute, also commented on the
inadequate definition between Australia's public and private health systems,
which would not be redressed by private health insurance rebates:
The problem has always been that we have had two competing
systems, but the private health insurance does not necessarily add function as
a top-up, an optional extra. In some ways it duplicates what Medicare does and
in other ways it is a top-up. So the structure of the system is problematic
compared with most other countries. That is really the reason for why rebates
and tax subsidies are needed—because, on its own, many people do not take
private health insurance out. Just focusing only on tax subsidies as the remedy
for our problems in health insurance is not going to solve the problem.[60]
2.51
Professor Butler thought that there is insufficient clarity between
public and private systems and the services they provide, which leads to the
duplication of expenditure, both for government and individuals:
[The current system] is leading people to have duplicate or
two health insurance policies, so you are pouring a lot of money into insurance
products that might otherwise be more usefully devoted to service provision.[61]
Other measures
2.52
The committee also heard evidence regarding other tax expenditures that are
both costly for government and not achieving policy goals.
2.53
Professor Hewson argued there is also a need to review costly and
inefficient FBT concessions, including:
- uncapped meal and entertainment concessions for not-for-profit
entities, including doctors and other professions ($600 million in 2016-17);
- concessions for motor vehicles ($800 million a year), now
redundant given the cessation of government automotive industry assistance; and
- a concession for employers giving out safety award benefits of up
to $200 per employee (estimated somewhere between $1 million-$10 million a
year).[62]
2.54
Professor Quiggin agreed FBT concessions for vehicles should be
rescinded since government had removed other assistance for the automotive
industry.[63]
2.55
The committee discussed other concessions benefitting the mining sector
that should be reviewed, especially in light of recent cuts to assistance for
other industries. These include: the exploration and prospecting deduction ($550
million in 2012-13),[64]
and research and development concessions (around $370 million in 2010-11).[65]
Committee view
2.56
The committee notes that there is a history of calling for tax
expenditures to be more transparent and regularly reviewed to ensure they
achieve the stated policy outcomes. The committee agrees that given the current
and projected amounts of revenue forgone by government, as well as questions
raised about whether the stated policy outcomes are being achieved, tax
expenditures should be more regularly reviewed to ensure they remain effective.
To facilitate this greater scrutiny, the committee agrees with the suggestion to
consider tax expenditures alongside direct spending measures in the Budget.
Recommendation 1
2.57
The committee recommends greater transparency and scrutiny be given to
tax expenditure by including the Tax Expenditure Statement alongside
direct expenditure measures in Budget Paper 2.
2.58
In the committee's view, there is also a need for a full-scale review of
government tax expenditures and concessions as part of the government's
forthcoming white paper on tax reform.
Recommendation 2
2.59
The committee recommends the government white paper on tax reform
include a review of all government tax expenditures and concessions.
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