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1 This publication presents the results of a study of the effects of taxation and government expenditure on the distribution of income among private households in Australia in 2009–10. The results show how the allocation of benefits and taxes differ between households depending on characteristics such as household composition, life cycle stages, household size and income.
2 One of the major data sources used in this study is the Household Expenditure Survey (HES). This study is therefore currently undertaken every six years in conjunction with the HES. Other major data sources used in this study are the ABS Government Finance Statistics and Input-Output tables from the Australian System of National Accounts (ASNA).
3 Previous studies were conducted in relation to 1984, 1988–89, 1993–94, 1998–99 and 2003–04.
CHANGES IN THIS ISSUE
4 The methodology used for the 2009–10 study is broadly the same as that used in 2003–04. However, there have been some changes in the methodology and data sources used in the study. These changes need to be taken into account when comparing results from 2009–10 with 2003–04. The main changes that have impacted on this study are outlined below. A detailed evaluation of the impact of the changes is provided in Appendix 6.
Changes in the study of the effects of government benefits and taxes on household income
5 The main changes in this study include:
Changes in Household Expenditure Survey 2009–10
6 The Household Expenditure Survey (HES), which is one of the major data sources used in the study, underwent a number of changes in 2009–10. The main changes were:
7 The ABS has revised its standards for household income statistics following the adoption of new international standards promulgated in 2004. The changes that have been made since the previous study in 2003–04 include:
8 In this publication, net imputed rent estimates for owner occupied dwellings and privately subsidised rental accommodation have been included for the first time as a component of private income. This treatment aligns with the new international standards, but has not been adopted in other publications produced from the 2009–10 HES and the Survey of Income and Housing (SIH). Imputed rent estimates are published separately in Household Income and Income Distribution, Australia, 2009–10 (cat.no.6523.0).
9 To the extent possible, the estimates for 2003–04 shown in the time series tables in this publication and in Appendix 6 reflect the new treatments, including the addition of net imputed rent to all income measures for that year.
10 For more detail on the nature and impact of the changes on the income data, see Appendix 4 of Household Income and Income Distribution, Australia, 2007–08 (cat.no.6523.0).
11 To ensure consistency with the conceptual treatment of income introduced by the revision of household income standards, the 2009–10 HES includes some improvements to the treatment of non-cash benefits and salary sacrifice in household expenditure estimates. Non-cash benefits used by employees are incorporated to improve the coverage of consumption expenditure, and improvements to the inclusion of expenditures via salary sacrifice for vehicles have been implemented.
12 Most employee remuneration is in a monetary form. However a substantial number of employees receive other benefits in the form of goods and services i.e. non-cash benefits. Examples include the use of motor vehicles, provision of a computer, subsidised child care, housing rent free or at less than normal market rent, car parking, superannuation (employer contributions above the minimum compulsory contributions) and low interest loans. Information on non-cash benefits provided by employers has been collected from wage and salary earners and owners of incorporated businesses, commencing in 2003–04. These estimates of expenditure in kind have been included in the expenditure estimates for the first time in 2009–10.
13 More detailed information was collected for salary sacrifice on motor vehicles in the 2009–10 HES to improve the expenditure estimates for this type of expenditure. The additional information captured within the questionnaire was used to model the value of expenditure on motor vehicles and associated running costs such as fuel, insurance, registration, servicing and tyres.
Changes in the contents of this issue
14 The following changes have been made to the content of the publication:
CONCEPTS AND DEFINITIONS
15 The concepts and definitions relating to all measures of income, government benefits and taxes, net worth and households are described in the following section. Other definitions are included in the glossary.
GOVERNMENT BENEFITS, TAXES AND HOUSEHOLD INCOME
16 This section explains the relationship between the income concepts and components of government benefits, taxes and income presented in this study.
17 Household income consists of all current receipts, whether monetary or in kind, that are received by the household or by individual members of the household, and which are available for, or intended to support, current consumption.
18 The following diagram illustrates the different income concepts.
19 Private income is the most restricted concept of income used in this study. It comprises all current receipts excluding social assistance benefits in cash. Sources of private income include:
20 Receipts which are excluded from private income include:
Social assistance benefits in cash
21 Social assistance benefits in cash are income support payments from Australian governments to persons under social security and related government programs. Included are pensions and allowances received by aged, disabled, unemployed and sick persons, families and children, veterans or their survivors, and study allowances for students. Family Tax Benefit, Baby Bonus and Child Disability Assistant Payment paid to recipients of Carer Allowance are also included in social assistance benefits in cash.
22 Receipts of Family Tax Benefit are included, regardless of whether they are received fortnightly or as a lump sum.
23 One-off payments to families and carers, paid since 2003–04 are included, as well as the one-off stimulus payments paid in 2009–10.
24 Social assistance benefits in cash were allocated as reported in the HES. Pensions and allowances from overseas governments were excluded from these payments and included in private income.
25 Gross income is the sum of private income and Australian government social assistance benefits in cash before income tax, the Medicare levy and the Medicare levy surcharge are deducted.
Taxes on income
26 Taxes on income are the sum of personal income tax, the Medicare levy and the Medicare levy surcharge. These are imputed based on each person's income and other characteristics as reported in the HES.
27 Estimates of income tax were modelled, rather than collected from respondents, for a number of reasons. Firstly, changes in income, family or other circumstances of the respondent, which are not described in the survey, may affect full year income tax assessments. Secondly, income tax assessments are only made after the end of the financial year, and therefore are not yet available at the time that current income is collected from respondents. Thirdly, the income tax assessment of respondents may be affected by certain expenditures which they make, such as donations to charities, or other particular circumstances which are not captured in the survey. Finally, the HES provides sufficient relevant information to allow a relatively comprehensive model to be constructed.
28 Disposable income is derived by deducting taxes on income from gross income.
Social transfers in kind
29 Social transfers in kind consist of goods and services provided free or at subsidised prices by the government. In this study, allocation of social transfers in kind was restricted to those arising from the provision of education, health, housing, social security and welfare services, and electricity concessions and rebates.
30 In general, social transfers in kind were based on the cost to government of the provision of those services. The total value of social transfers in kind was defined as Commonwealth, state or territory and local government expenses, net of intra-government transfers, minus government pensions and allowances paid in cash minus government revenue from the sale of goods and services. For detailed descriptions of the methodologies used to allocate social transfers in kind see Appendix4.
Disposable income plus social transfers in kind
31 The value of government social transfers in kind for education, health, housing, social security and welfare, and electricity concessions and rebates is added to disposable income to calculate disposable income plus social transfers in kind.
Taxes on production
32 Taxes on production consist of taxes on products and other taxes on production. Total taxes on production are calculated net of any subsidies received from governments.
33 In allocating the taxes on production, it is assumed that industries will pass the burden of the taxes on production they pay to the purchasing industries and/or final consumers through higher prices. Also, the burden of the tax will be passed from one industry to another until the total burden of the tax is passed on to a final demand sector, one of which is the household sector.
34 Taxes on products are taxes payable on goods and services when they are produced, delivered, sold, transferred or otherwise disposed of by their producers. They include goods and services tax (GST), taxes and duties on imports, and other taxes on products such as fuel and tobacco excise.
35 Other taxes on production consist of all taxes except taxes on products that enterprises incur as a result of engaging in production. These taxes do not include any taxes on profits or other income received by the enterprise. They are taxes payable on the land, fixed assets or labour employed in the production process or on certain activities or transactions. Other taxes on production include taxes on payroll or workforce, land taxes, business and professional licences and stamp duties.
36 The amount of taxes on production paid by HES households was calculated as follows:
37 For a more detailed description of the methodology used to allocate taxes on production see Appendix 5.
38 Final income is the most extensive concept of income used in this study. Final income is equal to household disposable income plus social transfers in kind, less taxes on production.
OTHER CONCEPTS AND DEFINITIONS
39 This section describes other concepts and definitions relevant to this study.
40 The household is the basic unit of analysis in this publication. A household consists of one or more persons, at least one of whom is at least 15 years of age, usually resident in the same private dwelling. The persons in a household may or may not be related. They must live wholly within one dwelling.
41 While income is usually received by individuals, it is normally shared between partners in a couple relationship and with dependent children. To a lesser extent, it may be shared with other children, other relatives and possibly other people living in the same household, for example through the provision of free or cheap accommodation. This is particularly likely to be the case for children other than dependents and other relatives with low levels of income of their own. Even when there is no transfer of income between members of a household, nor provision of free or cheap accommodation, members are still likely to benefit from the economies of scale that arise from the sharing of dwellings.
42 Household characteristics, including household income, are therefore the main information required for analysing income distribution. In this publication, the income distribution measures are all calculated with respect to households, as most of the relevant characteristics of persons relate to their household circumstances.
43 Much of the analysis in this study uses equivalised income rather than gross or disposable income since it enables comparison of the relative economic well-being of households of different size and composition. Equivalised household income is calculated by adjusting household income by the application of an equivalence scale. This adjustment reflects the requirement for a larger household to have a higher level of income to achieve the same standard of living as a smaller household. Where income is negative, it is set to zero equivalised income.
44 When household income is adjusted according to an equivalence scale, the equivalised income can be viewed as an indicator of the economic resources available to a standardised household. For a lone person household, it is equal to income received. For a household comprising more than one person, equivalised income is an indicator of the household income that would be required by a lone person household in order to enjoy the same level of economic wellbeing as the household in question.
45 The equivalence scale has been used to adjust private, disposable and final income for differing household sizes and composition. For more information on equivalised income refer to Appendix 2.
Lowest income decile
46 While equivalised income generally provides a useful indicator of economic wellbeing, there are some circumstances which present particular difficulties. Some households report extremely low and even negative income in the survey, which places them well below the safety net of income support provided by government pensions and allowances. Households may under report their incomes in the survey at all income levels, including low income households. However, households can correctly report low levels of income if they incur losses in their unincorporated business or have negative returns from their other investments.
47 Studies of income and expenditure reported in HES surveys have shown that such households in the bottom income decile and with negative gross incomes tend to have expenditure levels that are comparable to those of households with higher income levels (and slightly above the average expenditures recorded for the fifth income decile). This suggests that these households have access to economic resources such as wealth, or that the instance of low or negative income is temporary, perhaps reflecting business or investment start up. Other households in the lowest income decile in past surveys had average incomes at about the level of the single pension rate, were predominantly single person households, and their main source of income was largely government pensions and allowances. However, on average, these households also had expenditures above the average of the households in the second income decile, which is not inconsistent with the use of assets to maintain a higher standard of living than implied by their incomes alone.
48 It can therefore be reasonably concluded that many of the households included in the lowest income decile are unlikely to be suffering extremely low levels of economic wellbeing. Income distribution analysis may lead to inappropriate conclusions if such households are used as the basis for assessing low levels of economic wellbeing. For this reason, tables showing statistics classified by income quintiles include a supplementary category comprising the second and third income deciles, which can be used as an alternative to the lowest income quintile. (For an explanation of quintiles and deciles, see Appendix 1.)
49 Whenever a HES is conducted, analysis of households in the lowest income decile can be improved through direct observation of the expenditure and net worth of these households. An examination of households with low economic resources (income and wealth) is included as a feature article in Household Wealth and Wealth Distribution, Australia, 2009–10 (cat.no.6554.0).
50 The inclusion of net imputed rent in the definition of private income included in this study is likely to move some households, in particular those that own their own home outright, from the lowest income decile to a higher income decile.
51 Imputed rent estimates allows the analysis of household income to be extended to include the imputed rental incomes that flow to people living in homes owned by the occupant and those paying subsidised rent. Such imputations allow for more meaningful comparison of the income circumstances of people living in different tenure types, and to understand changes over time in income levels and the distribution of income when tenures may be changing over time. Including imputed rent as part of household income and expenditure conceptually treats owner occupiers as if they were renting their home from themselves, thus simultaneously incurring rental expenditure and earning rental income.
52 Imputed rent is included in income on a net basis i.e. the imputed value of the services received less the value of the housing costs incurred by the household in their role as a landlord. It is included on a gross basis, i.e. the imputed value of the services received, when it is included in expenditure estimates.
53 Hedonic regression is used to estimate the market value of the rental equivalent of an owner occupied dwelling. Data from the SIH on reported rents paid by private market renters is regressed on the characteristics of their rented dwellings e.g. location and dwelling structure. The estimated coefficients are then applied to the corresponding characteristics of owner occupied and other dwellings to produce imputed values of the gross rental equivalence for these dwellings. Net imputed rent is estimated as gross imputed rent less reported housing costs. For owner occupiers, the housing costs subtracted are those which would normally be paid by landlords i.e. rates, mortgage interest, insurance, repairs and maintenance. For households paying subsidised rent, e.g. tenants of an employer and households occupying their dwelling rent-free, the housing costs that are subtracted are largely made up of the reported rent paid, but other housing costs incurred, such as rates, are also subtracted for some tenure types.
54 More information on the methodology used to estimate gross and net imputed rent is available in Experimental Estimates of Imputed Rent, 2003–04 and 2005–06 (cat.no.6525.0).
55 Net worth, often referred to as wealth, is the value of a household's assets less the value of its liabilities. Assets can take many forms including:
56 Liabilities are primarily the value of loans outstanding including:
57 In the 2009–10 SIH, some asset and liability data were collected on a net basis rather than collecting for each component listed above. In particular, if a survey respondent owned or part owned a business, they were asked how much they would receive if they sold their share of the business and paid off any outstanding debts.
MAJOR DATA SOURCES
58 The three major data sources used in this study are the 2009–10 ABS Household Expenditure Survey (HES), ABS Government Finance Statistics, and Input-Output tables from the Australian System of National Accounts (ASNA).
HOUSEHOLD EXPENDITURE SURVEY
59 The 2009–10 HES collected detailed information about the expenditure, income, assets, liabilities and household characteristics of private dwellings throughout Australia. The sample consisted of 9,774 households, which were enumerated from July 2009 to July 2010. The summary of the results from the survey was published in Household Expenditure Survey, Australia: Summary of Results, 2009–10 (cat.no.6530.0).
60 Previous Household Expenditure Surveys were conducted in 1974–75, 1975–76, 1984, 1988–89, 1993–94, 1998–99 and 2003–04.
61 Information reported in the HES is used as the basis for modelling the effects of various government benefits and taxes on household income. The survey provided details on the composition of households and the characteristics of their members, the level and sources of their income, and the patterns of their expenditure. Household income data were used to provide measures of private income and social assistance benefits in cash from the government; income, personal and household characteristics and taxation criteria for 2009–10 were used to calculate taxes on income paid; characteristics of household members and their expenditure patterns were used to identify recipients of social transfers in kind from government; and expenditure data were used to calculate taxes on production paid.
62 The Household Expenditure Survey and Survey of Income and Housing User Guide, Australia, 2009–10 (cat.no.6503.0), describes the definitions, concepts, methodology and estimation procedures used in the HES and the SIH.
Survey scope and coverage
63 The survey collects information by personal interview from usual residents of private dwellings in urban and rural areas of Australia (excluding very remote areas), covering about 97% of the people living in Australia. Private dwellings are houses, flats, home units, caravans, garages, tents and other structures that were used as places of residence at the time of interview. Long-stay caravan parks are also included. These are distinct from non-private dwellings which include hotels, boarding schools, boarding houses and institutions. Residents of non-private dwellings are excluded.
64 Usual residents exclude:
65 While no adjustment has been made to the HES population estimates to compensate for limited scope, efforts have been made to ensure that the appropriate share of government expenditures has been allocated to the HES population. This was achieved by calculating average benefits on the basis of benchmark estimates of the total population eligible for particular social transfers in kind.
66 The final sample on which estimates were based is composed of households for which all necessary information is available. The information may have been wholly provided at the interview (fully-responding) or may have been completed through imputation for partially responding households. The final combined sample consists of 9,774 households, comprising 17,955 persons aged 15 years and over.
Reliability of estimates
67 The estimates provided in the survey are subject to two types of error, non-sampling and sampling error.
68 Non-sampling error can occur in any collection, whether the estimates are derived from a sample or from a complete collection such as a census. Sources of non-sampling error include non-response, errors in reporting by respondents or recording of answers by interviewers, and errors in coding and processing the data. Non-sampling errors are difficult to quantify in any collection. However, every effort is made to reduce non-sampling error to a minimum by careful design and testing of the questionnaire, training of interviewers and data entry staff, and extensive editing and quality control procedures at all stages of data processing.
69 The estimates are based on a sample of possible observations and are subject to sampling variability. The estimates may therefore differ from the figures that would have been produced if information had been collected for all households. A measure of the sampling error for a given estimate is provided by the standard error, which may be expressed as a percentage of the estimate (relative standard error). Further information on sampling variability is given in Appendix 3.
Underestimation of some expenditure
70 The average expenditure on some goods and services reported by households in the HES is well below the level which can be estimated from other sources such as tax revenues and estimates of apparent consumption of the item (recorded Australian production plus imports less exports). This includes expenditure on alcohol, tobacco and gambling. No adjustment has been made to any of the reported expenditure data.
GOVERNMENT FINANCE STATISTICS
71 The ABS regularly produces summaries of government revenues and expenses. These government finance statistics (GFS) provide Commonwealth, state or territory and local government taxation revenues classified by type of tax and expenditures classified by purpose and type of economic transaction. The Government Purpose Classification (GPC) identifies the functional areas to which expenses relate (e.g. health, housing and welfare) while the Economic Transactions Framework (ETF) identifies the type of transaction. For example, direct cash payments to households are distinguished from expenses relating to the payment of administrative staff and from expenses on building construction. It is from the combination of these classifications that direct and indirect expenses in various programs were identified.
72 Estimates of total government expenses (for Commonwealth, state or territory and local government) used for social transfers in kind, and to compare the results of the allocation of social assistance benefits in cash, were specially tabulated and reflect 2009–10 data at the time of release of 2009–10 GFS. At the detailed purpose level used in this study, there may be some allocation inaccuracies due to reporting and classification errors in the data supplied to the ABS by government agencies.
73 Taxation information, used to assess the results of tax imputation methods, was obtained from the 2010–11 issue of Taxation Revenue, Australia (cat.no.5506.0).
74 Input-Output tables form part of the ASNA and provide a means of undertaking detailed analysis of the process of production, the use of goods and services (products) and of the income generated in that production. They show, for the economy as a whole and for groups of products, the total resources in terms of domestic output and imports, and the uses of goods and services in terms of intermediate consumption, final consumption, gross capital formation and exports.
75 The estimation of the incidence of taxes on production to households is based on extensive use of these Input-Output tables. Australian National Accounts: Input-Output Tables, 2007–08 (cat.no.5209.0.55.001) includes the supply-use tables with detailed explanatory notes on the data sources, content and methods of construction used.
UNIT OF ANALYSIS
76 The household is the basic unit of analysis in this publication. A household consists of one or more persons, at least one of whom is at least 15 years of age, usually resident in the same private dwelling. The persons in a household may or may not be related.
77 The household is adopted as the basic unit of analysis because it is assumed that sharing of the use of goods and services occurs at this level. If smaller units, say persons, are adopted, then it is difficult to know how to attribute to individual household members the use of shared items such as food, accommodation and household goods. Intra-household transfers are excluded. For example, if one member of the household were to pay board to another member of the same household then this is not considered as an increase in the amount of income or housing costs of the household.
BENEFITS AND TAXES ALLOCATED
78 The aim of the study has been to allocate only those benefits and taxes relatable to particular types of households. No attempt has been made to allocate the whole of government expenditure and revenue. Those government expenses and revenues which are allocated and those that are not allocated in the study are illustrated in the following graphs.
79 In many cases, the decision to allocate or not to allocate was guided by the availability of data for appropriate allocation to the household level. For social assistance benefits in cash, allocation of government expenses relating to these cash payments was restricted to cash payments covered by the HES income questionnaire. Taxes on income not allocated include taxes not directly relevant to the household sector such as corporate taxes, and taxes relating to some household receipts, such as capital gains tax.
80 Many social transfers in kind were not allocated because:
81 Taxes on production were calculated by applying intermediate and final tax rates derived from the Australian National Accounts: Input-Output Tables 2007–08 (cat.no.5209.0.55.001) to household expenditure. Because household expenditure does not account for the full amount of production and consumption recorded in the Input-Output tables, only a proportion of taxes on production was allocated to households.
COMPARISON WITH NATIONAL ACCOUNTS
82 Aggregate estimates of household income are published in Australian System of National Accounts (cat.no.5204.0) and taxation revenue are published in Taxation Revenue, Australia (cat.no.5506.0). These data allow comparison of estimates for the household sector as a whole to be compared with the estimates compiled in this study.
Social assistance benefits in cash
83 According to the ASNA, Australian households received $100,855 million social assistance benefits in cash in 2009–10. By comparison, in this study $77,856 million social assistance benefits in cash were allocated to households. The difference between the estimates is due mainly to the inclusion in the ASNA of some payments that have been classified as social transfers in kind in this study ($15,262 million). These include child care assistance (CCR and CCB), Private Health Insurance Rebate (PHIR), child support payments paid to households via the Child Support Agency and some education related payments made to parents to offset the cost of educating their children. Additionally, some other one-off or irregular payments made by various state and Commonwealth agencies may not have been fully captured in the HES. Other reasons for the lower allocation of social assistance benefits in cash in this study include scope exclusions in the HES. The HES estimates do not include pensions and allowances received by people living in non-private dwellings (e.g. nursing homes), nor by people living in very remote areas of Australia. It is estimated that in 2009–10 this may account for up to $4,000 million of the difference.
Social transfers in kind
84 ASNA estimates of social transfers in kind to Australian households were $144,821 million in 2009–10. In this study, $156,322 million of social transfers in kind were allocated to households. The main reason for the difference is the classification of government expenditure on child care assistance and the PHIR as social transfers in kind in this study, but as social assistance benefits in cash in the ASNA. Additionally, the ASNA estimate includes $7,097 million expenditure on residential aged care that is excluded from this study due to the exclusion of non-private dwellings, such as nursing homes, from the scope of the HES.
Taxes on income
85 Total income taxes levied on individuals were $124,787 million (Taxation Revenue, Australia, 2010-11 (cat.no.5506.0)) . In this study, $113,934 million taxes on income (91%) were allocated to households. The main reasons for the underestimation of taxes on income in this study are:
Taxes on production
86 Government revenue from total taxes on production less subsidies was $127,865 million. Net taxes on production on Household Final Consumption Expenditure (HFCE) (a national accounts concept measuring net expenditure on goods and services by households and non-profit institutions serving households) account for approximately 76% of total taxes on production. Therefore, at best, 76% of this revenue would be allocated by the study. The study allocated $80,252 million or 63% of total taxes on production. Less than 76% of taxes on production were allocated because:
87 ABS publications draw extensively on information provided freely by individuals, businesses, governments and other organisations. Their continued cooperation is very much appreciated: without it, the wide range of statistics published by the ABS would not be available. Information received by the ABS is treated in strict confidence as required by the Census and Statistics Act 1905.
SPECIAL DATA SERVICES
88 The ABS offers specialist consultancy services to assist clients with more complex statistical information needs. Clients may wish to have the unit record data analysed according to their own needs, or require tailored tables incorporating data items and populations as requested by them. Tables and other analytical outputs can be made available electronically or in printed form. However, as the level of detail or disaggregation increases with detailed requests, the number of contributors to data cells decreases. This may result in some requested information not being able to be released due to confidentiality or sampling variability constraints. All specialist consultancy services attract a service charge, and clients will be provided with a quote before information is supplied. For further information, contact ABS information consultants on 1300 135 070 from 9:00am to 4:30pm AEST Monday to Friday (International callers +61292684909).
UNIT RECORD FILE
89 For clients who wish to undertake more detailed analysis of the survey data, a confidentialised unit record file (CURF) will be available on 13 July 2012. Both the basic and expanded versions of the 2009–10 HES CURF have been revised by appending the study estimates to each household record. A full range of up-to-date information about the availability of ABS CURFs and about applying for access to CURFs is available via the ABS web site <https://www.abs.gov.au> (see Services We Provide, Confidentialised Unit Record Files (CURFs)). Inquiries to the ABS CURF Management Unit should email: email@example.com, or telephone (02) 6252 5853.
90 Users may wish to refer to the following ABS products which relate to government benefits, taxes and household income. All publications can be downloaded free of charge from the ABS website.
91 The earlier publications relating to government benefits, taxes and household income are listed below. These publications can also be downloaded free of charge from the ABS website.
92 Users may also wish to refer to the following non-ABS products which relate to income.
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