Statement 5: Revenue

This statement contains details of the estimates of Commonwealth general government revenue.

The revenue estimates have been revised down since MYEFO, largely as a result of the Government's decision to provide $10.7 billion over four years for personal income tax cuts.

Information about GST revenue is provided in Budget Paper No. 3, Federal Financial Relations 2003-04.

Overview

Relative to the Mid-Year Economic and Fiscal Outlook 2002-03 (MYEFO), total revenue in 2003-04 is expected to be lower, largely as a result of the Government's decision to cut personal income taxes from 1 July 2003.

Total revenue

Revenue estimates¹ for the period from 2002-03 to 2006-07 are provided in Table 1. Detailed estimates by head of revenue are provided in Appendix A.

Table 1: Total Commonwealth general government revenue (accrual basis)

Total taxation revenue as a share of GDP is expected to decline in the Budget and forward years, falling from 21.2 per cent of GDP in 2002-03 to 20.6 per cent of GDP in 2006-07. Total revenue over the same period is expected to fall from 22.8 per cent of GDP to 21.9 per cent of GDP. Historical total revenue and total taxation revenue outcomes (and their cash equivalents) are provided in Statement 13.

Variations in revenue estimates since 2002-03 Budget

Table 2 is a reconciliation of the 2003-04 Budget revenue estimates with those at the 2002-03 Budget and MYEFO in terms of both policy decisions and parameter and other variations.

Table 2: Reconciliation of total Commonwealth general government revenue estimates from 2002-03 Budget to 2003-04 Budget^(a)(accrual basis)

Table 2: Reconciliation of total Commonwealth general government revenue estimates from 2002-03 Budget to 2003-04 Budget(a) (accrual basis)

The changes in the revenue estimates for 2002-03 and 2003-04 since MYEFO are summarised by head of revenue at Appendix B.

Total revenue in 2002-03

Since MYEFO, total Commonwealth general government revenue for 2002-03 has been revised up by $2.2 billion, largely due to stronger than expected revenue from company tax, Commonwealth indirect taxes and non-taxation revenue. These increases are expected to be partly offset by lower revenue from gross income tax withholding (ITW) and fringe benefits tax (FBT), and higher than expected tax refunds to individuals.

Total revenue in 2003-04 and the forward years

Since MYEFO, total revenue for 2003-04 has been revised down by $1.8 billion. In the forward years, revenue is also expected to be lower. This is largely as a result of lower expected revenue from ITW - the Government's decision to provide further reductions in personal income tax from 1 July 2003, the flow-on effect of lower estimated ITW in 2002-03, and ongoing containment of wages growth are all expected to have a dampening effect on ITW growth. Partly offsetting this is higher than expected revenue from company tax and Commonwealth indirect taxes following on from strong collections in 2002-03. The estimate for non-taxation revenue has also been revised up by $1.1 billion for 2003-04.

Policy decisions

Policy decisions taken since MYEFO (a description of these is provided in Budget Paper No. 2, Budget Measures 2003-04) are expected to reduce revenue by $2.5 billion in 2003-04 and $2.8 billion in 2004-05. The reductions in personal income taxes from 1 July 2003 account for most of the reduction in revenue. This measure is estimated to reduce revenue by $10.7 billion over the four-year period 2003-04 to 2006-07. The tax cuts consist of:

an increase in the personal income tax thresholds - the 30 per cent threshold is to be increased from $20,000 to $21,600, the 42 per cent threshold is to be increased from $50,000 to $52,000 and the 47 per cent threshold is to be increased from $60,000 to $62,500;

an increase in the low income tax offset from $150 to $235 per year;

those eligible for the full offset will not pay income tax until their annual income exceeds $7,382 - up from $6,882 at present;

in addition, the income threshold at which the offset begins to reduce will be increased from $20,700 to $21,600; and

an increase in the Medicare levy thresholds that apply to senior Australians.

Other major policy decisions reducing revenue over the four-year period 2003-04 to 2006-07 are:

the Government's response to the Board of Taxation's Review of International Taxation Arrangements, which is expected to reduce tax revenue by $270 million - this package of reforms will improve the competitiveness of Australian companies with offshore operations by reducing the complexity of the Controlled Foreign Company and Foreign Investment Fund rules, effectively reducing foreign taxes through double tax treaties, and generally ensuring that `active' businesses are subject to similar taxation as locally based competitors offshore;

the Australia-Singapore Free Trade Agreement, expected to come into force in July 2003, which will reduce tariff revenue by $130 million - the agreement builds on Australia's strong economic partnership with Singapore and will provide significant economic benefits to the Australian economy through a more open, predictable and transparent framework for bilateral trade across a wide range of areas;

the increase in the Medicare levy thresholds, in line with the increase in the consumer price index (CPI), which will reduce tax revenue by $85 million; and

the reform of the trans-Tasman imputation arrangements which will reduce taxation revenue by $70 million - this reform will improve the ease of trans-Tasman capital flows by reducing an additional layer of tax on these flows, thereby further strengthening the existing economic integration between Australia and New Zealand.

These reductions in revenue are partly offset by²:

an increase in excise revenue of $71 million, forming part of an incentive package to encourage the earlier take up of low sulphur fuels ahead of the introduction of new mandatory cleaner fuel standards - these increases in excise revenue will fund grants to fuel producers to subsidise the cost of producing cleaner fuels in the transition to the new fuel standards;

an increase in excise revenue of $35 million, as a result of making biodiesel an excisable fuel, as part of the Government's strategy to put in place a long-term sustainable framework for the taxation of fuels in Australia - the excise payable on biodiesel will be matched by grants payable to biodiesel producers, which will provide an effective excise exemption until 1 July 2008; and

an increase in income tax revenue of $30 million as a result of a tax integrity measure to ensure that the cost of the capital protection feature of a capital protected loan product is not treated as a deductible interest expense.

For more detailed descriptions of these and other policy decisions since MYEFO refer to Budget Paper No. 2.

Parameter and other variations

Parameter and other variations since MYEFO are expected to increase the revenue estimate for 2002-03 by around $2.2 billion. The major upward parameter revisions are:

company tax revenue is expected to be around $2.0 billion higher as a result of stronger than expected company profit growth; and

Commonwealth indirect tax revenue is expected to be around $870 million higher, including increases in excise revenue from tobacco ($240 million)³, diesel ($110 million) and petrol ($100 million), and increased revenue from customs duty ($300 million).

These upward parameter revisions in the estimates are partly offset by:

lower than anticipated revenue from ITW (around $1.1 billion), due to lower than expected wages growth;

higher than anticipated refunds to individuals (around $410 million); and

lower than expected FBT (around $140 million), reflecting a reduction in the use of fringe benefits since the introduction of The New Tax System.

In 2003-04, parameter and other variations have revised revenue estimates up by around $730 million since MYEFO. This has been driven by higher estimates of:

company tax revenue, reflecting the flow-on effect of higher company tax revenue for 2002-03; and

Commonwealth indirect tax revenue, as a result of higher expected tobacco excise and customs duty revenue.

These upward revisions to revenue are partly offset by lower estimates of:

ITW revenue, reflecting ongoing containment of wages growth; and

higher tax refunds to individuals.

Accrual and cash taxation revenue estimates

The revisions to the estimates of cash taxation receipts in this Budget are broadly in line with the revisions to the estimates of accrual taxation revenue. Estimated cash taxation receipts have been revised up since MYEFO by $881 million in 2002-03, largely reflecting higher than expected collections of company tax and Commonwealth indirect taxes. In the forward years, the cash estimates have been revised down since MYEFO, largely reflecting the Government's decision to provide personal income tax cuts in this Budget. More detail on the individual cash taxation estimates is provided in Table A2 (Appendix A).

There is a difference between the accrual and cash estimates because accrual taxation liabilities are generally recognised before the cash payments relating to the liabilities are received. As a result, accrual revenue is typically greater than cash receipts. The accrual taxation revenue estimate is $1.3 billion above the cash taxation receipts estimate for 2002-03 and $1.6 billion above the cash taxation receipts estimate for 2003-04. More detail on the differences between the accrual and cash taxation estimates is provided in Appendix D.

1 All revenue estimates in this statement are reported on an accrual basis unless otherwise specified. Commentary on accrual and cash taxation revenue is provided on page 5-6 and detailed estimates on a cash basis can be found in Appendix A and Appendix F. The revenue estimates exclude GST revenue, which is collected by the Commonwealth and provided in full to the States and Territories. A discussion of GST revenue can be found in Budget Paper No. 3.

2 Costings are provided over the four year period from 2003-04 to 2006-07.

3 The higher tobacco revenue reflects increased compliance and enforcement activity, together with significantly increased penalties introduced in 2000-01, which have limited the size of illicit sales of tobacco - thereby strengthening tobacco excise revenue.