Every financial year, Federal Government foregoes a significant amount of taxes from individuals and businesses as tax breaks which are treated as tax expenditures. These typically involve tax exemptions, deductions, offsets, concessional tax rates and deferral of tax liabilities. The government incurs tax expenditures in a number of large policy measures including superannuation, investment properties, principal places of residence, health, food, education, financial services, child care, small business income, non-profit hospitals and philanthropy.
Capital gains tax (CGT) break on family homes (principal places of residence) and 50 per cent discount on investment properties is the largest tax expenditure accounting for $61.5 billion in 2016-17, far greater than superannuation tax concessions being $33.1 billion in the same year. Tax concession on superannuation is widely understood to be highly generous but tax break on properties turned out to be a greater impost on the federal budget, revealed by the Tax Expenditures Statement released in January 2017.
Goods and Services Tax (GST) costs $18 billion to the budget outcomes in 2016-17. The large GST expenditures include fresh food ($6.9 billion), education ($4.5 billion) and health ($4 billion). Banking and financial services have no GST in them, costing the budget an amount of $3.4 billion.
Health incurs substantial tax expenditures, totalling $8 billion in 2016-17. They relate to medical and health services ($4 billion), Medicare levy exemption ($2 billion), non-profit hospitals and public ambulance ($1.5 billion) as well as residential care and community care ($1.2 billion).
Additional tax expenditures include child care services and childcare assistance ($3 billion), redundancy payments ($2.6 billion), interest withholding tax on certain entities ($2.3 billion), family tax benefits ($2.2 billion), lower company tax and small business depreciation ($2.1 billion), local government bodies ($1.8 billion), health insurance rebate ($1.5 billion), aviation gasoline and turbine fuel ($1.3 billion), tax deductions on donations ($1.3 billion) and capital works on investment properties ($1.2 billion).
The Tax Expenditure Statement was mandated to ensure that the tax breaks and cash expenditures in the budget receive the same scrutiny by the Australian politicians and public. Tax breaks on properties (family homes and rental real estates) cost the budget as much as the Age Pension and Pharmaceutical Benefits Schemes (PBS) combined. Superannuation tax breaks cost the budget as much as Defence and Foreign Aid combined.
A debate is being raised around the tax break afforded to family homes where no CGT is payable on the disposal of these properties. With this tax concession at law, it is not uncommon for taxpayers to sell principal places of residence, after renovating and improving them, for a handsome profit without any obligation to pay tax on the financial gains made. Only 50 per cent CGT is payable on investment properties disposed after 12 months of ownership. The tax break of $61.5 billion given to properties in 2016-17 could be utilised to wipe out the entire current budget deficit of $35.5 billion and spend the rest for offering higher level of services to improve living standards of all Australians.