Sunset clause, legacy cleanup for tax expenditure reporting, experts recommend

Although comprehensive tax expenditure reporting has existed in Australia over the last four decades, Queensland University of Technology Business School Professor Kerrie Sadiq and Dr Ashesha Weerasinghe say it lacks management structures, accountability and evaluation.

In a submission to the Board of Taxation for the Red Tape Reduction Review, Sadiq and Weerasinghe said reporting makes tax expenditures visible, but “it does not subject them to the systemic evaluation and democratic oversight that direct spending programs receive”.

Further, the real costs and benefits behind government decisions are not within the public knowledge, which has created an environment where the expenditures “can proliferate unchecked” and attract less scrutiny than direct spending programs, “despite having equivalent fiscal impacts”.

“Unlike direct spending programs, which undergo annual parliamentary scrutiny, tax expenditures are disclosed only in a separate statement, without the same level of oversight,” the experts said.

“They have limited ministerial accountability, lack an annual appropriation requirement, and do not require the estimation of compliance costs during the policy design phase. The result is that poorly targeted, overly complex concessions survive indefinitely without the systematic review.”

As for policy, Sadiq and Weerasinghe said many tax expenditures remain law long after the rationale for them has changed.

For example, the fuel tax credits scheme continues to act as a blunt fossil fuel subsidy with no environmental conditionality, and continues to benefit large, profitable miners over Australia’s climate commitments.

The notably complex small business GST concessions also have a high compliance cost relative to benefit and are disproportionately used for passive assets rather than genuine business succession and innovation.

To address the gaps, Sadiq and Weerasinghe recommended that all new tax expenditures include mandatory review provisions post-implementation, with automatic sunset unless tax expenditure based on a productivity test is continued.

“That is, an assessment of whether the tax expenditure achieves its policy objectives more efficiently than a direct spending alternative, along with a compliance cost assessment,” Sadiq and Weerasinghe said.

“In addition, a tax expenditure performance dashboard should be introduced alongside the annual publication of a compliance cost estimate, take-up rates and distributional analysis for all tax expenditures above a certain threshold.”

The experts have also recommended a legacy provision cleanup through a systemic review of the existing tax expenditures.

More specifically, Sadiq and Weerasinghe recommended clear and measurable policy objectives, systemic cost-effective analysis, mandatory sunset clauses, budget integration for whole-of-government consideration, and a distributional impact analysis.