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Tuesday, 19 August 1980
Page: 304

APPENDIX II TO STATEMENT No. 4 TAXATION EXPENDITURES

Individuals and businesses derive financial benefits from taxation concessions of various kinds which reduce the tax liabilities of particular groups of taxpayers. The concessions reduce, or delay, collections of taxation revenue, and are as much a call on the Budget as are direct outlays. They are comparable with direct outlays in other ways and are often referred to as 'taxation expenditures'.

This Appendix provides information on some major categories of taxation expenditures.

Assistance to Individuals

Concessional income tax rebates or deductions provide assistance to particular groups of individuals.

The principal rebates are those for maintenance of dependants, for sole parents and housekeepers, zone rebates allowed to taxpayers residing in remote areas, and rebates for certain types of allowable expenditures.

In 1975-76 rebates were allowed for the maintenance of dependent children in addition to the categories of dependants for which rebates are now allowed. In 1976-77 the system of direct outlays by way of family allowances was introduced; it took over the role previously performed by rebates for dependent children, and those rebates ceased to apply. (A component of the zone rebates, however, is still calculated as a percentage of a base which may include a notional rebate for dependent children.)

The inclusion of the cost of dependant rebates in this section does not indicate that they are considered a departure from an equitable tax distribution. Rather, it implies no more than that they confer a benefit on recipients and could conceivably be regarded as alternatives to direct expenditures in the same way that family allowances replaced dependent child rebates in 1976.

Zone rebates are allowed to taxpayers who live in remote areas. Residents in Zone A receive a rebate equal to $216 plus 25 per cent of rebates for dependants, sole parents and housekeepers (including notional rebates in respect of dependent children). Residents of Zone B receive a rebate of $36 plus 4 per cent of the rebates for dependants, etc.

A rebate, at the standard rate of tax, is allowed on the excess of a taxpayer's aggregate expenditure on certain concessional items above a prescribed figure, currently $1590. Eligible expenditure includes certain expenditure in respect of the taxpayer and his dependants on medical and hospital services net of recoupments, funeral expenses up to $100, adoption of children, life insurance premiums and superannuation contributions up to a total of $1200, educational services in respect of the taxpayer, his children or dependants, up to $250 per person, and rates and land taxes up to $300 in respect of the taxpayer's sole or principal residence. Prior to 1 October 1976, contributions to a registered health insurance fund were also included in this category of rebatable expenditure. On the basis of income tax statistics for 1978-79, about 7 per cent of taxpayers had concessional expenditures in excess of SI 590.

Deductionsfrom assessable income of taxpayers are allowed for gifts of $2 or more to organisations covered by section 78(1) (a) of the Income Tax Assessment Act. Between 1 July 1974 and 31 October 1978, interest paid on home loans was deductible, subject to an income test and certain other conditions.

Details of tax revenue forgone under the aforementioned taxation provisions in respect of income years 1975-76 to 1978-79 are shown in the following table.

Provision

Dependant rebates:

Spouse/housekeeper/daughter-housekeeper

Sole parent.....

Dependent children ....

Other dependants ....

Total

Zone rebates......

Other concessional rebates(o) . Deductions:

Gift provisions.....

Interest on home loans

Total

TOTAL

Estimated Revenue Forgone for Income Years 1975-76 1976-77 1977-78 1978-79

(a)   Excludes cost of general concessional rebate which was absorbed into zero rate step of rate schedule with introduction of standard rate system in 1977-78.

Industry Assistance

Industry also has received considerable assistance over the years through various taxation concessions. The main concessions available in recent years have been investment allowances, accelerated depreciation and trading stock valuation adjustment, all of which affect a wide spectrum of industry, while special arrangements have benefited primary production, tourism and mining industries.

The investment allowance applies to a wide range of plant and equipment, including leased plant. It provided for a deduction equal to 40 per cent of the cost of plant purchased under a contract made in the period 1 January 1976 to 30 June 1978 and first used by 30 June 1979; it now provides a deduction of 20 per cent of the cost of plant ordered in the period 1 July 1978 to 30 June 1985. The 40 per cent allowance also applied in the case of partly-completed plant to so much of the expenditure incurred on that plant as was attributable to its installation as at 3 June 1979.

Double depreciation applied to new plant and equipment first used or installed for use by taxpayers in the manufacturing and primary production industry sectors on or after 1 July 1974 and before 1 July 1975. The double depreciation scheme also applied in 1975-76 and was extended in coverage, but was discontinued after the 1975-76 income year.

The trading stock valuation adjustment was a special deduction equal to a prescribed percentage of most classes of trading stock including livestock. The prescribed percentage was based on half the percentage increase in the goods component of the Consumer Price Index between the June quarter prior to the year of income and the June quarter of the year of income and was applied to the value of the trading stock at the commencement of the year. The adjustment was terminated with effect from the 1979-80 income year.

Depreciation allowances are provided for certain new income-producing buildings commenced after 21 August 1979, where the buildings are used to provide short-term accommodation for travellers. The allowance is 2i per cent per annum of the construction cost of the building.

Most of the relevant concessions in the income tax field may be grouped in three broad categories, namely:

A - those allowing the deduction of amounts that are not authorised under the general provisions of the law;

B - those allowing certain taxpayers to deduct the cost of items of plant over shorter periods than is the case for the general run of taxpayers; and

C - those exempting certain classes of income (now confined to exemption of income from gold mining).

Details of estimated amounts of revenue forgone in 1979-80 under the main provisions in categories A and B, which exceed $840 million, are shown in the following table. A miscellany of other provisions is not included, in some cases because of lack of data on revenue forgone or questions about the extent to which they may properly be regarded as wholly 'Industry Assistance'. These provisions include the rebates allowed to shareholders in respect of capital subscribed for petroleum exploration and mining (conditional on the company forgoing certain deductions); the concession whereby primary producers are allowed to adopt artificially low values for natural increase in their livestock accounts for taxation purposes; and the accelerated depreciation of expenditure on employees' amenities.

The income equalisation deposits scheme and the averaging provisions applied to primary producers are also not included. The income equalisation deposits scheme permits deposits by a primary producer, within specified limits, to be deducted against assessable income in the year the deposits are made and withdrawals of deposits to be included in assessable income in the year they are withdrawn. (Deposits up to 31 August are deductible against assessable income of the preceding income year.) Interest is paid on the deposits.

Under the averaging provisions, primary producers effectively have their income from primary production taxed at rates corresponding to their average income (for the current and preceding four years) in a year when average income is less than taxable income. Depending on the amount of their income not derived from primary production, some or all of that income may also be effectively taxed at the lower rates corresponding to average income.

The purpose of the averaging provisions is to ensure that fluctuations in income in conjunction with progression in rates of tax do not lead to those taxpayers bearing higher tax rates than other taxpayers having incomes which, over a period of years, are comparable but non-fluctuating. The effects go beyond that when there is an upward (e.g. inflationary) trend in money incomes over a number of years since, even if fluctuations in income are superimposed on that trend, the averaging provisions result in the taxpayers covered by them bearing lower tax rates than other taxpayers whose incomes over an equal period of years are comparable. Furthermore, even in the absence of an upward trend in income the provisions introduced in 1977-78 do more than remove the effect on tax of fluctuations in income, as averaging is applied only in years when to do so benefits the taxpayer, and tax is calculated at ordinary rates in other years.

Estimated Revenue Forgone

Main Provisions in 1979-80 $ million

Category A -

Investment allowance........... 414

Trading stock valuation adjustment......... 324

Certain expenditure on land used for primary production^) and for telephone lines allowed to primary producers and deductible over 10 years ..... 3

Expenditure on scientific research (excluding accelerated depreciation on plant) . 1 Capital expenditure of certain mining enterprises and in respect of transport of certain minerals (excluding deductions in respect of plant otherwise depreciable)(Zi) 74

Total Category A........... 816

Category B -

Double depreciation on certain plant........ \ 20

Special rate of depreciation on plant used for scientific research . . /

Deduction for plant used in mining or exploration and in respect of transport of certain minerals which would otherwise be subject to depreciation ... (c)

(a)   Special deductions (Section 75a) are allowed to taxpayers engaged in primary production in respect of certain classes of capital expenditure not subject to depreciation by which the amount of the expenditure is allowed in equal annual instalments over 10 years.

(b)   Development expenditures by general mining and petroleum mining companies are now deductible on a diminishing value basis by reference to a maximum life of mine or field of 5 years. Expenditure on facilities for the transport of minerals is deductible in equal instalments over either 10 years or 20 years, at the taxpayer's option to be exercised with the first claim for the deduction. However, some expenditure is deductible under provisions of earlier years which continue to apply to expenditure made in those earlier years.

(c)   The total amount of deductions allowed for such purchases of plant used in mining, exploration and in respect of transportation of minerals allowed under Divisions 10, 10aa and 10a aa in respect of the 1978-79 income year was $240 m. The absence of precise information on the amounts that would otherwise have been deductible by way of depreciation of the relevant plant makes it impossible to provide a reliable estimate of the effect of these deductions on revenue. The total amount allowable will in no case exceed the deduction allowable over the life of the mine or the plant by way of normal depreciation. However, where the deduction results in a deferment of tax or in the carrying forward of deductions which otherwise would be lost to the business where it remains non-taxable for more than 7 years, there is a cost to the Budget. Where there is a constant or increasing rate of investment in plant or equipment subject to accelerated depreciation the concession can provide for the taxpayers concerned a revolving or increasing credit in their account with the taxation revenue.







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