GUIDANCE NOTE: TREATMENT OF SALES OF GOODS AND SERVICES, TAXES AND FINES IN GOVERNMENT FINANCE STATISTICS
1. This note provides guidance on the treatment of revenue arising from the sales of goods and services and from taxes and fines in Government Finance Statistics (GFS) (footnote 1). In essence, the note therefore focuses on the distinction between non-tax and tax revenue. This distinction is critical in GFS and related macro-economic statistics because the impacts are recorded in different economic aggregates.
2. The distinction applied in GFS is based upon the economic characteristics of the items and not necessarily on any nomenclature used to identify them in the public records. Where there are borderline cases or contentious items, it is always preferable to determine their statistical classification by an examination of the underlying facts, on a case-by-case basis.
3. The scope of this note does not include the classification of proceeds from the sale or use of existing intangible non-produced assets of governments, such as the electromagnetic spectrum. In economic statistics, amounts received from their sale constitute sales of intangible non-produced assets. The note also excludes guidance on the treatment of tax refunds, allowances, rebates and credits in GFS which is available in Appendix 4 of the Australian System of Government Finance Statistics: Concepts, Sources and Methods 2001 (cat. no. 5514.0.55.001).
4. The statistical standards that underpin GFS and other macro-economic statistics explain the broad concepts and principles for distinguishing tax and non-tax revenue. These standards include the IMF Government Finance Statistics Manual 2001 (GFSM2001), the UN A System of National Accounts 1993 (SNA93) and the ABS Australian System of Government Finance Statistics (ABS GFS).
5. The IMF Government Finance Statistics Manual 2001 (GFSM2001) defines taxes as compulsory transfers received by the general government sector. Taxes include administrative fees that are clearly out of all proportion to the costs of providing any related services and fines or penalties relating to tax offences. Other fines or penalties imposed by courts or quasi-judicial bodies are also viewed as compulsory current transfers but are recorded in a separate fines category. Sales of goods and services by the general government sector include sales by market establishments, administrative fees and incidental sales by non-market establishments.
6. GFSM2001 is based on principles in the UN A System of National Accounts 1993 (SNA93) which describes taxes as compulsory, unrequited payments, in cash or in kind, made by institutional units to government units. They are described as unrequited because the government provides nothing in return to the individual unit making the payment, although governments may use the funds raised in taxes to provide goods and services to other units, either individually or collectively, or to the community as a whole. Also, one of the core functions of government is to regulate the ownership or use of certain goods or the pursuit of certain activities by issuing licences or permits for which a fee is demanded. If the issue of such licences involves little or no work on the part of government, the licences being granted automatically on payment of the amounts due, it is likely they are simply a device to raise taxes (footnote 2). However, if the government uses the issue of licences to exercise some proper regulatory function, like checking the competency or qualifications of the person concerned, the payments made are treated as purchases of services from government rather than payment of taxes, unless the payments are clearly out of all proportion to the costs of providing the services.
7. The ABS Australian System of Government Finance Statistics (ABS GFS) defines taxation revenue along the same lines as the GFSM2001 and SNA93. It describes a tax as a compulsory levy imposed by government, mainly designed to raise revenue. There is usually no clear and direct link between payment of taxes and the provision of goods and services (footnote 3). Sales of goods and services refer to revenue from the direct provision of goods and services by general government and public corporations. This revenue includes fees and charges for services rendered and sales of goods and services by general government and public corporations. It also includes fees from regulatory services. These fees are treated as revenue from sales if the government exercises some proper regulatory function, such as checking the competency or qualifications of a would-be licensee. Fines are civil and criminal penalties imposed on law breakers other than penalties imposed by tax authorities. Penalties imposed by tax authorities are classified as tax revenue.
8. While the statistical standards explain the broad concepts and principles for distinguishing tax and non-tax revenue, the following additional guidelines may be helpful in classifying transactions as sales of goods and services and as revenue from taxes and fines in GFS. The attached chart provides a schematic representation of the guidelines.
9. The initial step in the process is to recognise the institutional sector classification of the unit in receipt of the payment. The unit may be a corporation (i.e. a market producer within the public non-financial corporations (PNFC) or the public financial corporations (PFC) sectors (footnote 4)) or it may be a general government unit (i.e. a non-market producer within the general government sector (footnote 5)).
10. If the unit is a PNFC or PFC the receipt would be generated from market output and would be treated as sales of goods and services or other revenue (but never as a tax or fine (footnote 6)). Market output consists of goods and services that are sold at economically significant prices, or otherwise disposed of on the market, or intended for sale or disposal on the market. Economically significant prices are those that have a significant influence on the amounts producers are willing to supply and on the amounts purchasers are willing to buy. Payments for market output are considered to be requited or exchange in nature.
11. If the unit is general government then the receipt would be generated from non-market output and treated as sales of goods and services, or taxes or fines. In concept, non-market output consists of goods and services that are disposed of at prices that are not economically significant. Prices that are not economically significant do not have a quantitative impact on supply or demand. Such prices are likely to be charged in order to raise some revenue or to curtail frivolous demand that may occur when products are provided completely free (footnote 7).
12. The pricing or cost recovery criterion may be described variously in the policy documentation of the various general government units involved; however, for the purposes here it is useful to categorise it as full, partial, or as revenue generation (footnote 8).
Full cost recovery
Full cost recovery occurs when a government agency sets its prices in order to retrieve all costs incurred in providing products (footnote 9) to individuals payers. The basis of the costing is comprehensive and may include salaries, supplies of material, services, computing costs and capital and/or 'corporate' overheads.
The frequency and mechanism of price-setting may be such that at any point in time the actual recovery may be slightly more or slightly less than the costs incurred. However, this is still considered to be full cost recovery if, on average, over a number of time periods, the recovery approximates the costs incurred, and moreover, full cost recovery is the bona fide intention of the government agency setting the prices. If under a full cost recovery regime as described above, the actual recoveries exceed costs (including capital and overheads) by more than 25% consistently over a number of time periods and are expected to remain that way in future, then there may be a case to view it as ‘revenue generation’, as described further below.
Partial cost recovery
Partial cost recovery occurs when a government agency sets its prices in order to retrieve some, but not all, of the costs incurred in providing products to individual payers. In some instances, there may be no obvious rigour or basis in the price-setting process and no clear or explicit linkages between the prices charged and the various cost elements.
Under a partial cost recovery regime, the payment received is less than the cost of providing the product. The prices charged therefore only generate some degree of cost recovery. Even if no explicit cost recovery is intended, some nominal prices or levies may still be charged in order to curtail frivolous or excessive demand that may occur when products are available completely freely (footnote 10).
For statistical classification purposes, a distinction between full and partial cost recovery is not significant as both are treated alike; however, they have been discussed here separately for clarity.
Revenue generation occurs when a government agency sets its prices above and beyond the amount required to retrieve all costs incurred in providing products to individual payers. Under revenue generation, the payment received is greater than the cost of providing the product. Revenue generation includes payments which are "clearly out of all proportion to the cost of the services provided" (footnote 11) and those "being for little or no work performed, with the product provided more or less automatically" (footnote 12).
If, under a revenue generation regime as described above, the actual recoveries do not exceed costs (including capital and overheads) by more than 25% consistently over a number of time periods and are expected to remain that way in the future, then there may be a case to view it as ‘full cost recovery’, as described above. It is expected that such cases would only occur as exceptions rather than as norms and that any judgement regarding the appropriate statistical treatment will need to consider the underlying policy intention.
13. If the payment for a product provided directly to the payer is equal to or lower than the cost of providing it, as described under ‘full’ or ‘partial’ cost recovery, then the payment is treated as the sale of goods and services. If the payment is greater than the cost, as outlined under ‘revenue generation’, then the payment is treated as a tax.
14. In certain circumstances it may be conceptually justifiable to split the payment into a ‘revenue generation’ and a ‘full cost recovery’ component, therefore treating a portion of the payment as the sale of goods and services and the remaining portion as a tax. It may be appropriate to adopt this treatment in situations where a product of measurable benefit is provided to the payer and the case is economically significant.
15. Consideration also needs to be given to situations where a specific product cannot be identified as being provided directly to the payer. In these cases the nature of the payment needs to be looked at further. If the payment is in the nature of a general impost on members of the community, corporations, non-profit institutions, etc, including for breach of tax laws or regulations, then it is treated as a tax (footnote 13)
16. If a product cannot be identified as being provided directly to the payer and the payment is an imposition of a penalty on an individual entity for breach of non-tax law then it is treated as a fine.
APPLICATION OF CLASSIFICATION GUIDELINES
17. While the classification basis set out in the statistical standards are largely driven by principles and concepts, their application and interpretation in specific borderline circumstances can remain judgmental to a degree. A case-by-case examination of all such cases is always preferable for the purposes of establishing a treatment that best reflects the economic substance of the arrangement.
18. The guidelines outlined here are intended for use in compiling a set of macro-economic statistics, including government finance statistics. Their use for other purposes is encouraged as it would lead to consistency in the reporting of similar items, but they are not intended to question the appropriateness of any administrative, accounting or constitutional designation of the items concerned in a particular government’s records.
1. Sales of goods and services may include items labelled as user charges, administrative charges, regulatory fees, co-payments, etc, especially within the general government sector. <Back
2. SNA93, paragraph 7.55. <Back
3. Revenue from certain taxes may be hypothecated i.e. linked to or earmarked for specific purposes; however, it does not change the characteristics of the tax revenue as it still reflects an unrequited (or non-exchange) impost in respect of the payer. <Back
4. The PNFC and the PFC sectors consist of corporations created and controlled by government for the purpose of producing goods or services for the market. They may be a source of profit or other financial gain to their parent government. These corporations are categorised as non-financial or financial depending on the nature of their primary activity. <Back
5. The general government sector consists of all government units and all non-market NPIs that are controlled and mainly financed by government. General government units provide non-market goods and services to the community on a collective or individual basis. They also redistribute income and wealth by means of transfer payments. These activities are mainly financed by taxation or other compulsory transfers. <Back
6. Conceptually, a tax or a fine can only be imposed by a unit within the general government sector. If the administrative arrangements are such that an agent such as a PNFC or a PFC is authorised to collect such a tax or a fine, then that tax or fine is re-assigned to the general government sector for statistical purposes. <Back
7. GFSM2001, paragraph 5.8. <Back
8. The pricing or cost recovery criterion is applied by looking at a range of periods to avoid short term reclassifications between categories - if it holds for several consecutive periods or if it holds for the current period and is expected to hold for several future periods, then it is applied strictly. <Back
9. ‘Products’ may include goods, services, and certain permits and licences. <Back
10. GFSM2001, paragraph 5.8. <Back
11. GFSM2001, paragraph 5.7. <Back
12. SNA93, paragraph 7.55. <Back
13. With such an impost, the payment may greatly exceed any product that the payer may identify as being an indirect result of the payment. Furthermore, some non-payers may receive a product in an indirect way and some payers may not. <Back