Part L - The treatment of tax refunds and tax credits in GFS
Australian System of Government Finance Statistics: Concepts, Sources and Methods
Next release Unknown
In GFS, it is important to understand the difference in the treatment of tax refunds and tax credits. Box 13.6 below describes the differences between the treatment of tax refunds and tax credits in GFS:
Box 13.6 - The treatment of tax refunds and tax credits in GFS
- Tax refunds are defined as adjustments for overestimation of taxes payable, or the return of excess amounts to taxpayers due to overpayments of tax paid. Tax refunds are attributed to the period in which the event occurred that generated the over assessments or overpayments and are recorded as a reduction in the appropriate tax category. However, a timing adjustment is made in cases where it is not possible to identify the over-assessment or overpayment of tax, and is recorded at the time when the need for the adjustment is identified. In the case of value-added taxes such as GST, taxpayers other than final consumers are allowed a refund of taxes paid on purchases. Even if this refund exceeds the taxes payable by an individual taxpayer, the net refund is recorded as a reduction in that category of tax.
Tax relief measures
- Tax relief measures are defined as incentives that reduce the amount of tax owed by an institutional unit. Tax relief measures can take the form of tax allowances, tax exemptions, tax deductions, or tax credits. Under the Australian taxation structure, tax allowances, tax exemptions and tax deductions are recorded on a net basis, i.e. are subtracted from taxable income before the tax liability is calculated and are therefore not recorded for GFS purposes. However, tax credits differ in that they reduce the actual amount of tax owed. Tax relief measures reduce the taxes receivable from the taxpayer and therefore reduces government tax revenue. Tax relief measures should be recorded as a reduction in the relevant tax category.
- Tax credits are defined as amounts subtracted directly from the tax liability due for payment by the beneficiary household or corporation after the tax liability has been computed. Tax credits may be granted by governments to assist low income earners or disadvantaged taxpayers, or to promote a specific behaviour such as the use of bio diesel or ethanol rather than leaded petrol for heavy vehicles in the transport industry.
- Tax credits may be payable or non-payable in nature. Where a tax credit is limited to the size of the tax liability of the individual or entity, it is said to be non-payable. Non-payable tax credits have the same effect on government accounts as tax allowances, deductions and exemptions in that they reduce the revenue of the government by reducing the tax liability of the taxpayer. Non-payable tax credits should be recorded on a net basis, i.e. as a reduction in the appropriate tax category in the same way that tax allowances, tax exemptions and tax deductions are recorded.
- Where a tax credit is not limited to the size of the tax liability, it is said to be a payable tax credit. Payable tax credits result in an expense to the government as they are required to pay out the excess amount of tax credit over the tax liability of a taxpayer.
- In GFS, payable tax credits are recorded on the gross basis, with the total amount of tax receivable recorded as taxation revenue (ETF 111) and the total amounts due as payable tax credits recorded as a current transfer expense. Payable tax credits are often not connected with the assessment of the taxable event and should be shown as a current transfer classified according to the purpose of the credit and the nature of the recipient. The current transfer should be treated as:
- Other subsidies on production (ETF 1253) - if the payable tax credit is paid to a producer unit on the basis of their level of production activities or quantities, or values of the goods and services they produce, sell, export or import;
- Current monetary transfers to households (ETF 1254) - where a payable tax credit is paid to households with the intention to provide for the needs that arise from certain events or circumstances; or
- Current transfer expenses not elsewhere classified (ETF 1259) - if a payable tax credit is such that it could not be included in the other current transfer expense categories.
- Tax credits differ to franking credits on dividends earned via franked or partially franked shares held by shareholders of a corporation. Under imputation systems of corporate income tax, shareholders holding franked or partially franked shares are wholly or partially relieved of their liability for an income tax on dividends paid by the corporation out of income or profits liable to corporate income tax. This is because the income tax has already been paid at the corporate level for holders of franked or partially franked shares. Under Australia's imputation system, income tax is not paid again on franked dividends at the individual level since it has already been paid at the corporate level. Tax relief in the form of franking credits are attributed to holders of franked or partially franked shares. If the franking credit on franked dividends exceeds a shareholder’s total tax liability, then the excess may be payable by the government to the shareholder and is recorded on a net basis as a negative tax rather than expense.
Source: Based on paragraphs 5.27, 5.28, 5.31, 5.44, International Monetary Fund Government Finance Statistics Manual, 2014