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Budget 2016 Home Page 2016 Tax Expenditure Statement - Budget 2016

What is a Tax Expenditure?

Governments can spend in a variety of direct and indirect ways. International public sector accounting standards (IPSAS 23) divide spending into three different categories: direct spending; spending through the tax system; and tax expenditures.

Table 1: Classification of Crown spending under public sector accounting standards
  Definition Reporting
Direct spending Traditional spending made as a direct transfer between the Crown and different entities or individuals. Disclosed in the Crown Financial Statements and annual Budget.
Spending through the tax system Hybrid transfers that can be taken as a cash payment or via a reduction in tax. A predictable cash value allows these transfers to be formally appropriated and disclosed in the Crown Financial Statements and annual Budget.
Tax expenditures Individual features of the tax system that reduce an entity's tax obligation in a way that is designed to give effect to policy other than to raise revenue in the most efficient and economically neutral way.

Tax expenditures are defined in tax legislation, but have not previously been disclosed.

The 2010 statement was the first disclosure since 1984.

Tax systems differ from country to country. Thus, there is no current international consensus as to how tax expenditures should be categorised. Treasury released a discussion of how tax expenditure reporting could be categorised to meet New Zealand's objectives in Treasury Policy Perspectives Paper 09/01.

Some countries define tax expenditures indirectly relative to a normative benchmark. This approach allows countries to report a wider set of structural tax expenditures that are generally applicable[1]. This document has focused, in the first instance, on a narrow subset of tax expenditures that bear a distinct fiscal cost and represent a clear policy-motivated exemption[2] to current tax practice. A summary of the guiding criteria is included in figure 1.

No attempt has been made to identify a normative tax benchmark or to comprehensively analyse tax legislation.

Figure 1: Guiding criteria for inclusion in this disclosure document
Figure 1: Guiding criteria for inclusion in this disclosure document.

Notes

  • [1] For example, Portfolio Investment Entities (PIEs) offer all tax payers the option of relatively 'concessional' tax treatment as a mechanism to encourage portfolio investment. While a non-revenue policy objective suggests that PIEs could be categorised as a tax expenditure, PIEs are excluded from the tax expenditure definition used in this document as PIEs are available to all taxpayers. A benchmark tax system would allow the Treasury to categorise structural features of the tax system such as PIEs, trusts, or progressive personal tax rates. A benchmark tax structure is useful where no clear exemption exists as it would define what constitutes the 'standard' tax treatment. For instance, is the 'standard rate' the company rate, PIE rate, trust rate, or one of the personal tax rates?
  • [2] The stated purpose of the Income Tax Act 2007 is to "define, and impose tax on, net income". Tax expenditures are not motivated by a desire to raise revenue in the most efficient manner possible, but instead are significantly motivated by non-revenue policy objectives.
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