One of the biggest and most attractive tax breaks of recent years has never been announced by the Howard Government and probably never even went through Cabinet.
It's called salary sacrifice. It would have a cost to revenue - that is, to the taxpayers who miss out on it - of one or two billion a year. And that's certain to snowball over the next decade.
Partly because of its de facto origins, salary sacrifice is quite unfair. But because it's come in under the table, it's attracted none of the controversy attending other sectional handouts, such as the 30 per cent health insurance rebate.
Salary sacrifice involves asking your employer to reduce your salary by a certain amount and use that amount to pay for some benefit, such as additional super contributions, provision of a company car or purchase of a laptop.
Every dollar you sacrifice is a dollar that's not taxed at your marginal rate (which ranges from 16.5 per cent to 46.5 per cent). Your net tax saving, however, depends on the separate rate of tax imposed on the thing you've sacrificed for.
Purchase of laptops is not separately taxed, while super contributions are taxed at the flat rate of 15 per cent.
In theory, there's nothing to be gained by sacrificing for a benefit subject to fringe benefits tax (which is levied at 46.5 per cent). In practice, employees on the top marginal rate would still gain from being given a company car because the method used to calculate the value of the car for tax purposes has always understated it (as a sop to the motor industry when Paul Keating introduced the FBT in 1985).
Even so, you'd expect that the great majority of salary being sacrificed was going into super. How much is being sacrificed and what's it costing the taxman?
If the salary sacrifice tax break had ever been formally decided on, we'd have been told that from the outset. But since it's a loophole that simply got away from the tax gatherers, we've been given no information.
Until now. Last month the Bureau of Statistics published the first hard information about the incidence of salary sacrifice. It was buried in a technical report about changes to its measures of employee remuneration.
As at May 2004, 12 per cent of all employees were salary sacrificing. Their average sacrifice was 16 per cent of average weekly earnings. So more than 900,000 employees were sacrificing an average of $9000 a year. That's a total sacrifice of $8.2 billion a year.
If we make the unrealistically high assumption all that money was coming from people on the top tax rate contributing to super, we get a net cost to the taxman of $2.8 billion. Alternatively, if we make the unrealistically low assumption all the money was from people on the 31.5 per cent marginal rate contributing to super, we get a net cost to the taxman of $1.4 billion a year.
Wherever the truth lies between the two, we're talking big bikkies. What's more, it's a safe bet the use of salary sacrifice has grown significantly since May 2004.
And it's guaranteed to grow enormously now the taxation of super has been made so much more concessional with, first, the abolition of the super surcharge on higher income earners and, second, the removal of the tax on super end-benefits for people who retire at 60 or later.
It's the super changes that have legitimised salary sacrifice. It's clear from all the Government has said about those changes that salary sacrifice is no longer a loophole the authorities haven't yet got round to closing.
Rather it's now accepted as a legitimate and widely used means for employees to supplement their compulsory 9 per cent employer contributions. Its acceptance can also be seen in the way super concessions to the self-employed have been enhanced to make them equivalent to salary sacrifice for employees.
Note, however, that the legitimation of salary sacrifice has a downside: it makes it far less likely any government would ever remove the 15 per cent tax on contributions.
Another consequence of the combination of salary sacrifice with more concessional super is the way it's likely to divert money from negative gearing and property investment.
The rise of salary sacrifice illustrates the way tax policy can become captive to events. Most of the loopholes uncovered by the tax avoidance industry are tolerated while ever their use is limited to a few high-flyers, but blocked as soon as they start spreading to the hoi polloi.
But salary sacrifice is one that got away. It spread so quickly it soon passed the point where most politicians would be game to put a stop to it however great its growing cost to revenue.
My guess is that, earlier in the piece, Peter Costello and John Howard didn't want to stop it at a time when the rich and powerful were bellyaching so much about their failure to cut the top tax rate.
Mr Howard, like many cynical pollies, likes to have little-noticed safety valves that take the heat off powerful interest groups while passing unnoticed by the punters. They open a gap between perceptions and reality that benefits the pollies at both ends.
Another example of a loophole that got away and was subsequently legitimised is home-loan offset accounts. Some smarty thought of a way home buyers could hold money in a savings account without paying tax on the interest.
It took off and Mr Keating chose to let it through to the keeper, to muddle a metaphor.
The origins of salary sacrifice can be traced to another long-neglected loophole, fringe benefits. In the bad old days, company cars and other benefits went completely untaxed.
It wasn't until 1985 that, under the cover of a huge package of reforms (including a cut in the top rate from 60 to 49 per cent), Mr Keating summoned the courage to plug the loophole by introducing FBT.
But he deliberately excluded super contributions from the scope of FBT. And then a few years back it was decided to simplify FBT by excluding some small benefits such as laptops. Thus was the salary sacrifice loophole opened up.
Salary sacrifice is quite unfair on various counts. It's unfair because its existence isn't formally acknowledged and publicised by the Government, so you have to be well-advised to know about it.
It's unfair because employers are under no obligation to make it available to their workers, and some don't. This would most likely disadvantage non-executive employees.
It's unfair because the size of the saving per dollar sacrificed varies with the level of the employees' earnings. With super contributions, those earning more than $150,000 a year save a net 31.5c in the dollar.
Those on between $75,000 and $150,000 save 26.5c, those between $25,000 and $75,000 save 26.5c, and those on less than $25,000 save a princely 1.5c in the dollar, at best.
Had this saving incentive been introduced as a conscious policy rather than via the back door, it would have been made fairer by giving all comers a flat rebate of Xc in the dollar, as with the health insurance rebate and many others.
Finally, it's unfair because you have to be able to afford to salt away money in super to avail yourself of the break.
This unfairness is apparent from the distribution of salary sacrifice by occupation, as provided by the Bureau of Stats. The proportion of employees using it varies from 26 per cent of managers and 23 per cent of professionals to 5 per cent of labourers and 2 per cent of elementary clerical, sales and service workers.
The super concessions themselves work on the same unfair basis, of course. But adding salary sacrifice to the super mix makes the tax treatment of super even more biased against Howard's Battlers.
