Chapter 4: Revenue gain estimates of tax expenditures
4.1	Introduction
The revenue gain approach has often been proposed as an alternative to the revenue forgone approach used to produce the tax expenditure estimates in Chapter 3. This is because the revenue gain estimates for individual tax expenditure items are thought to be comparable to estimates of the revenue impact of budget measures. 
The 2008 Tax Expenditures Statement (TES) incorporated, for the first time, estimates of six tax expenditures based on the revenue gain approach. Those six tax expenditures were chosen in order to highlight the effect of the difference in approaches on the tax expenditures estimates. 
The publication of revenue gain estimates has been undertaken in response to a recommendation by the Australian National Audit Office (ANAO) audit report Performance Audit Report No. 32 2007-08 — Preparation of the Tax Expenditures Statement. The ANAO recommended that Treasury and the Australian Taxation Office ‘identify opportunities to develop estimates of large or otherwise significant tax expenditures using the revenue gain approach’. More recently, the Joint Committee of Public Accounts and Audit (JCPAA) recommended, in its report on the ANAO audit of the TES, that ‘Treasury publish a paper for inclusion in the Tax Expenditures Statement calculating the twenty largest tax expenditures using both the revenue foregone and revenue gained methods to allow comparison with the Budget Papers’. Treasury’s response to these reports has been that, notwithstanding that there are significant practical difficulties in making revenue gain estimates (including estimating behavioural responses and the need for a policy specification for the removal of each tax expenditure examined), it would prepare revenue gain estimates for selected tax expenditures to illustrate the differences between the revenue gain and revenue forgone methods. In its response to the JCPAA report, Treasury noted that it is also intended that the 2009 TES include a limited number of estimates of tax expenditures using the revenue gain approach. This time it is intended to focus on the largest tax expenditures (on a revenue foregone basis).
This statement presents Treasury estimates of the revenue gain from eight of the largest tax expenditure items. Estimates for the revenue gain from the CGT concessions for housing and the CGT discount for individuals and trusts have not been quantified because those estimates are either very small and uncertain (housing) or because the significant uncertainty regarding the magnitude of response effects to a change (CGT discount).
There are considerable practical difficulties in producing estimates of the value of tax expenditures on a revenue gain approach for all 337 tax expenditures identified in this statement.
·	As there are no Government decisions to remove tax concessions, estimating the revenue gain from doing so requires the making of ad hoc policy assumptions. While the revenue gain estimates use a standard policy specification as far as possible, the estimates presented only represent one of a range of possible policy outcomes.
·		Estimating revenue gain requires information about existing taxpayer behaviour and the behavioural responses of taxpayers to policy changes for each estimate. In most cases this information is not available and assumptions need to be made to arrive at an estimate.
·		Calculating comprehensive revenue gain estimates that provide a reliable estimate of aggregate tax expenditures would require the specification of assumptions regarding the order in which tax expenditures are removed and how activity would flow to alternative concessions.
In this statement, revenue gain estimates are being provided for several of the largest tax expenditures. This year, these tax expenditures have been chosen because they best illustrate the considerable differences that can arise between estimates calculated on the revenue forgone basis and those prepared on the revenue gain basis, and how those differences can vary between tax expenditure items.
4.2	Standard assumptions for the revenue gain estimates
The tax expenditures listed below have been estimated using both the revenue gain and revenue forgone approaches. The revenue gain estimates all assume that the tax expenditures concerned:
·	are removed with effect from 1 July 2009; 
·	apply prospectively to transactions entered into after that date; and
·	other specific assumptions concerning likely policy specifications for the removal of each concession as set out in the description.
4.3	Guide to revenue gain estimate descriptions

Reference code
A Personal income
B Business income
C Retirement income
D Fringe benefits tax
E Capital gains tax
F Commodity tax
G Natural resource tax
H Goods and services tax
I Externalities

The descriptions of the revenue gain estimates included in this chapter present the revenue forgone and revenue gain estimates for a four year period for comparison. A brief outline of the reasons for any difference in the estimates is then provided.

Tax expenditure title

Tax expenditure estimates
- nil
.. not zero, but rounded to zero
* estimate is not available

A1: Title of the tax expenditure	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2008‑09	2009‑10	2010‑11	2011‑12	2008‑09	2009‑10	2010‑11	2011‑12	
									
Reason for difference	
Brief reasons including assumptions

	

4.4	Tax expenditures based on revenue gain approach
C5: Superannuation — concessional taxation of employer contributions	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	11,400	12,100	13,250	14,550	8,250	9,250	10,150	11,150	
Reason for difference	It is assumed that the Superannuation Guarantee remains and therefore compulsory contributions continue. Voluntary contributions are assumed to be directed to alternative tax preferred investments involving negative gearing. Because more voluntary contributions come from those with higher marginal tax rates, the average tax rate for residual compulsory contributions is lower.	
C6: Superannuation — concessional taxation of superannuation entity earnings	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	9,800	11,250	13,450	16,100	8,650	9,450	10,750	12,250	
Reason for difference	It is assumed current preservation rules remain. In the accumulation phase voluntary concessional contribution are assumed to cease (as in C5) and most non concessional contributions are also not invested in superannuation after the start date. Over time this reduces the superannuation asset base and thus the revenue gain on withdrawing the earnings tax concession. Additionally, a significant proportion of funds in the retirement phase (not preserved) are withdrawn. Because of other tax concessions for older Australians (particularly the Senior Australians Tax Offset), the funds withdrawn attract minimal tax in the new investments chosen.	

H23: GST — Food — uncooked, not prepared, not for consumption on premises of sale and some beverages	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	5,600	5,900	6,100	6,400	5,500	5,700	6,000	6,300	
Reason for difference	Removing the GST exemption applicable to certain types of food would be expected to decrease demand for those items. However, the impact of this behavioural response is expected to be small as demand for GST‑free food is likely to be relatively inelastic to changes in price.	
F21: Customs duty	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	‑2,950	‑2,650	‑2,820	‑3,000	‑2,950	‑2,650	‑2,820	‑3,000	
Reason for difference	Under the customs duty benchmark, goods imported into Australia are free from customs duty except to the extent that the duty is equivalent to taxes imposed on domestically produced goods. Bringing the customs duty tax expenditure into line with the benchmark would remove the revenue currently collected from tariffs on imports (which is reported as a negative tax expenditure). While the change may increase demand for imported goods, this would have no impact on customs duty revenue once the tax rate has been reduced to zero.	
H14: GST — Health; medical and health services	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	2,700	2,950	3,200	3,500	2,650	2,900	3,150	3,400	
Reason for difference	Removing the GST exemption for medical and health services would be expected to decrease demand for those services. However, the impact of this behavioural response is expected to be small as demand for medical and health services is likely to be relatively unresponsive to changes in price.	
H11: GST — Education	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	2,550	2,750	2,950	3,200	2,300	2,450	2,700	2,900	
Reason for difference	Removing the GST exemption for education would be expected to decrease demand for education services. This is primarily due to an expected fall in demand for private education and ‘discretionary courses’.	
H2: GST — Financial Supplies; input taxed treatment	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	2,120	2,230	2,330	2,430	2,120	2,230	2,330	2,430	
Reason for difference	Removing the input taxed treatment of financial services is not expected to materially impact the demand for these services. This is because of the relatively small increase in the price of financial services that would result from applying the normal GST rules and the lack of substitutable services that are available.	
A56: Exemption of Tax Bonus for Working Australians	
Estimates	Revenue Forgone Estimate ($m)	Revenue Gain Estimate ($m)	
	2009‑10	2010‑11	2011‑12	2012‑13	2009‑10	2010‑11	2011‑12	2012‑13	
	2,070	95	0	0	2,882	134	‑	‑	
Reason for difference	If the tax bonus were to be made taxable, the payment rate would have to be grossed up by an amount sufficient to offset the tax payable, in order for the tax bonus to have the intended impact. This would result in a larger revenue gain than indicated by the revenue forgone estimate. The fiscal impact of this revenue gain would be wholly offset by the increased expenditure necessary to gross up the payments, with the increased expenditure incurred in advance of the increased tax revenue.