Statement 5: Revenue

This statement contains details of the estimates of Australian Government general government revenue.

The revenue estimates have been revised up since the Mid-Year Economic and Fiscal Outlook 2003-04 (MYEFO), largely due to stronger expected growth in wages and company profits, partly offset by the Government’s decision to provide personal income tax cuts worth $14.7 billion over four years.

Information about GST revenue is provided in Budget Paper No. 3, Federal Financial Relations 2004-05.

Overview

Relative to the Mid-Year Economic and Fiscal Outlook 2003-04 (MYEFO), total revenue for 2004-05 is expected to be higher, with stronger growth in income tax revenue from wage and salary earners, companies and superannuation funds. Personal income tax cuts of $14.7 billion across the forward estimates will commence from 1 July 2004.

Total revenue

Revenue estimates¹ for the period from 2003-04 to 2007-08 are provided in Table 1.

Table 1: Total Australian Government general government revenue
(accrual basis)

Table 1: Total Australian Government general government revenue(accrual basis)

Total revenue is expected to decline from 23.0 per cent of GDP in 2003-04 to 22.1 per cent in 2007-08. Taxation revenue is also expected to decline from 21.5 per cent of GDP in 2003-04 to 20.9 per cent in 2007-08. Historical revenue and receipts outcomes are provided in Appendix F of this statement.

Variations in revenue estimates since 2003-04 Budget

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

Table 2: Reconciliation of total Australian Government general government revenue estimates from 2003-04 Budget^(a)(accrual basis)

Table 2: Reconciliation of total Australian Government general government revenue estimates from 2003-04 Budget(a) (accrual basis)

The changes in the revenue estimates for 2003-04 and 2004-05 since the 2003-04 MYEFO are summarised by head of revenue at Appendix B.

Total revenue in 2003-04

Since MYEFO, estimated total revenue has been revised up in 2003-04 by $3.5 billion, largely due to higher than expected revenue from wage and salary earners, companies and, to a lesser extent, superannuation funds and small businesses. These increases are expected to be partly offset by lower customs duty.

Total revenue in 2004-05 and the forward years

Total revenue for 2004-05 has been revised up by $4.3 billion since MYEFO. As for 2003-04, the main growth is expected in income taxation revenue from individuals, companies and superannuation funds, with this partly offset by lower customs duty and the impact of the first stage of the Government’s personal income tax cuts.

Policy decisions

Policy decisions taken since the 2003-04 MYEFO are expected to reduce revenue by around $1.8 billion in 2004-05 and around $3.9 billion in 2005-06 (a more detailed description of these is provided in Budget Paper No. 2, Budget Measures 2004-05).

Most significantly, the Government’s decision to provide personal income tax cuts will reduce revenue by $1.9 billion in 2004-05, $3.8 billion in 2005-06 and $14.7 billion over the forward estimates. The tax cuts will take effect in two stages.

From 1 July 2004, the 42 per cent threshold will be increased from $52,001 to $58,001 and the 47 per cent threshold will be increased from $62,501 to $70,001.
From 1 July 2005, the 42 per cent threshold will be increased to $63,001 and the 47 per cent threshold will be increased to $80,001.

The Budget also includes a number of other major policy decisions.

The scheduled reductions in the superannuation surcharge rate will be increased to bring the maximum surcharge rate down to 7.5 per cent by 2006-07, with a cost to revenue of $610 million over the forward estimates.
A full rebate of wine equalisation tax for $1 million of domestic wholesale sales for wine producers will replace the existing Cellar Door Rebate scheme and accelerated depreciation for grapevine plantings, with a cost to revenue of over $300 million over the forward estimates.
Additional funding over four years for the Australian Taxation Office for increased compliance activities is expected to result in increased taxation revenue of $251 million in 2004-05 and $1,149 million over the forward estimates period.
The Australia-United States Free Trade Agreement, expected to come into force in January 2005, will reduce tariff revenue by $190 million in 2004-05 and around $1,460 million over the forward estimates period.
The application of withholding tax to certain payments made to foreign residents will increase taxation revenue by $125 million in 2004-05 and $540 million over the forward estimates period.
The Medicare levy thresholds will be increased, in line with the increase in the consumer price index. This will reduce tax revenue by $41 million in 2004-05 and around $100 million over the forward estimates period.

Parameter and other variations

In 2003-04, parameter and other variations are expected to increase estimated revenue by $3.5 billion relative to the MYEFO forecasts.

Company tax revenue is expected to be $1.7 billion higher, reflecting stronger than expected company profit growth.
Income tax withholding (ITW) is expected to be $1.1 billion higher, largely due to underlying strength in the labour market.
Other individuals revenue has been increased by $350 million, driven by strength in small business profitability.
Customs duty revenue has been reduced by $330 million, due to weaker than expected growth in nominal imports, from the higher exchange rate.

In 2004-05, parameter and other variations are expected to increase revenue by $6.1 billion relative to MYEFO.

ITW is estimated to increase by $2.3 billion (before the $1.9 billion impact of the personal income tax cuts in that year), reflecting an upward revision to the outlook for wages.
Company tax revenue has been increased by $1.7 billion, due to a stronger outlook for company profits.
Superannuation contributions and earnings tax revenue has been increased by around $900 million, reflecting both ongoing strength in superannuation funds contributions and earnings growth and the one-off $610 million impact of the Government’s decision to extinguish its liabilities to the Telstra and Australia Post superannuation schemes.
Revenue from other individuals has been increased by around $290 million, reflecting higher forecast growth for small unincorporated businesses and property income, offset slightly by weaker expected primary producer income.
Petroleum excise revenue has been estimated to increase by around $240 million, largely due to a higher crude oil price.

Accrual and cash taxation revenue estimates

The revisions to the estimates of cash taxation receipts in this Budget broadly reflect the revisions to estimated accrual taxation revenue. Since MYEFO, estimated cash taxation receipts have been revised up by $2.3 billion in 2003-04, primarily due to higher expected taxation receipts from individuals and companies. For 2004-05, estimated cash taxation receipts have been revised up by $3.4 billion, largely reflecting higher expected taxation receipts from companies and superannuation funds.

The difference between the accrual and cash estimates arises because taxation liabilities are often recognised before the cash payments relating to the liabilities are received. As a result, when revenue is growing, accrual revenue is typically greater than cash receipts. The accrual taxation revenue estimate for 2003-04 is $3.5 billion above the cash taxation receipts estimate, and $2.9 billion above the cash taxation receipts estimate for 2004-05.

More detail on the differences between accrual and cash taxation estimates is provided in Appendix D.

Estimates of revenue

Revenue estimates by revenue head

Table 3: Australian Government general government revenue (accrual basis)

Includes Medicare levy revenue.
Consistent with GFS reporting standards, excludes fringe benefits tax collected from Australian Government agencies (estimated at $364 million in 2003-04 and $380 million in 2004-05).

In 2004-05, total revenue is expected to increase by $7.0 billion, of which taxation revenue is expected to increase by $8.5 billion and non-taxation revenue is expected to decrease by $1.5 billion.

The major contributors to the increase in taxation revenue are a $5.3 billion (5.9 per cent) increase in ITW revenue, a $2.1 billion (5.6 per cent) increase in company tax revenue and a $1.0 billion (22.4 per cent) increase in superannuation contributions and earnings tax revenue (the main part of which is the effect of the Government’s payments to Australia Post and Telstra superannuation schemes as set out earlier).

The Budget revenue estimates are strongly influenced by forecast economic growth and the expected composition of economic activity. The stronger outlook for nominal GDP, and company profitability in particular, largely reflects an upward revision to forecast growth in the terms of trade since MYEFO. It is worth noting that the relationship between company profits as measured by the National Accounts and company tax is not a constant one (see Box 1).

The 2004-05 revenue estimates are underpinned by the following major economic assumptions:

nominal GDP growth of 6 per cent;
average earnings growth of 4 per cent;
wage and salary-related employment growth of 1¾ per cent; and
company income growth of 9¼ per cent.

An analysis of the sensitivity of the revenue estimates to changes in the major economic parameters is provided in Budget Statement 2.

Taxation revenue

Income taxation

Individuals and other withholding tax

Table 4: Individuals and other withholding tax (accrual basis)

Gross income tax withholding

ITW includes all taxes withheld from payments made under the Pay-As-You-Go (PAYG) withholding system and amounts withheld because no tax file number or Australian business number was quoted. It also includes applicable Medicare levy revenue. The bulk of ITW revenue arises from taxes withheld from wage and salary income but also includes all other withholding taxes levied on natural resource payments, dividends, interest and royalties paid to non-residents and payments to aboriginal groups for the use of land for mineral exploration and mining. These taxes are not separately identified from other PAYG revenues.

ITW revenue is expected to increase by $5.3 billion (5.9 per cent) in 2004-05, an increase of $720 million (0.8 per cent) over revenue forecast at MYEFO.

Gross other individuals

Revenue from other individuals consists of income tax paid by individuals other than that collected through the PAYG withholding system, and includes applicable Medicare levy revenue. It comprises:

PAYG instalments paid directly by individuals (that is, not withheld by employers); and
debit assessments on income tax returns.

Taxpayers in this category derive their income from many sources, including:

profits from small unincorporated businesses, primary production and property investments;
wages and salaries (when PAYG withholding credits are insufficient to meet the tax liability on assessment); and
capital gains.

Most revenue from other individuals is collected directly from the taxpayer through the PAYG instalment system. Individuals who are registered for the GST and individuals with tax liabilities of $8,000 or more will generally make quarterly payments. Individuals who are not registered for the GST and have taxation liabilities of less than $8,000 have the choice of making quarterly payments or an annual payment.

Revenue from other individuals is expected to increase by $630 million (3.2 per cent) in 2004-05 reflecting higher forecast growth for small unincorporated businesses and property income, offset slightly by weaker expected primary producer income and the impact of the personal income tax cuts.

Income tax refunds for individuals

A final assessment of the income tax liabilities of individual taxpayers is made on the basis of returns lodged after the end of each financial year. Refunds are made where tax credits exceed the final liability on assessment. Where tax credits are insufficient to meet the final tax liability, taxpayers make an additional payment (a debit assessment), which is recorded under the gross other individuals head of revenue.

Refunds paid to individual income taxpayers in any year will generally relate to earning activity in the prior year because assessment is only made after the conclusion of the year to which it relates.

Refunds to individuals are expected to increase by $650 million (5.3 per cent) in 2004-05. The estimate of growth in refunds for 2004-05 is lower than average, reflecting the impact of the income tax cuts announced in the 2003-04 Budget.

Medicare levy

Revenue from the Medicare levy is expected to increase by $340 million (6.2 per cent) in 2004-05, broadly consistent with expected growth in wages and employment.

Companies and other related income tax

Table 5: Companies and other related income tax (accrual basis)

Company income tax

Company income tax includes all income taxes paid by companies, including incorporated and unincorporated associations, limited partnerships and some public unit trusts. Company tax has been collected through the PAYG instalment system since the financial year beginning 1 July 2000. This system replaced the provisional tax and company tax instalment systems. Under the PAYG instalment system, most company taxpayers now pay their liability through four quarterly instalment payments and a balancing payment (five months after the final instalment), although some small companies are still able to make an annual payment.

As noted in Appendix D, under the transitional PAYG arrangements, the Government allowed companies to defer some liabilities from the old (pre July 2000) company tax instalment system for up to five years. The cash estimates reflect the expected receipt of these deferred payments ($365 million in 2003-04 and $335 million in 2004-05).

Company tax revenue is expected to increase by $2.1 billion (5.6 per cent) in 2004-05. The estimate has been boosted by a stronger outlook for company profits. This continues the strong growth in company tax collections over recent years. Box 1 provides an analysis of the reasons for this growth.

Box 1: Corporate profitability and company tax collections

Company tax cash collections have increased strongly from 3.3 per cent of GDP in 1994-95 to an estimated 4.5 per cent in 2004-05, around $10.4 billion higher than it otherwise would be. This growth has been underpinned by Australia’s long economic expansion and the consequent strong growth in corporate profitability (Chart 1).

Chart 1: Company tax collections and the company income tax base^(a)

Chart 1: Company tax collections and the company income tax base(a)

The corporate income tax base is measured as the sum of corporate gross operating surplus, net interest receipts, dividend receipts and a stock valuation adjustment. It does not include an adjustment for depreciation charges.

Several other factors have also contributed to the increase in company tax paid.

The privatisation of General Business Enterprises such as Telstra, the Commonwealth Bank of Australia, Victoria Loy Yang A power station and the State Bank of NSW.
Capital gains tax paid by companies has grown significantly.
The increasing tendency of small business to incorporate, following the recession of the early 1990s.

In addition, Australia’s imputation system may provide some incentive for companies to pay tax in Australia in order to maximise franking credits. In effect, the corporate tax system operates in part as a withholding system for tax due at the shareholder level. Indeed, in recent years the growth of franking credits claimed at the shareholder level has broadly matched the growth in company tax.

Box 1: Corporate profitability and company tax collections (continued)

The strong growth in company tax has arisen despite the reductions in the company tax rate from 36 to 30 per cent, with base-broadening measures in business taxation reform offsetting the reductions in the tax rate, impacting on revenue in a broadly neutral way. In fact, notwithstanding the fall in the statutory tax rate, the effective tax rate (measured as the ratio of tax paid to the corporate income base) has not moved markedly beyond its normal cyclical variation (Chart 2).

Chart 2: Statutory and effective company tax rate

The company loss carry-forward system acts to dampen the cyclical link between corporate profits and taxes paid. However, after a long period of sustained growth in profits, the prior year loss pool will be substantially reduced, and this will cause an increase in tax paid for any given level of profit. This effect may be partly responsible for the small increase in the effective tax rate evident in recent years (as illustrated in Chart 2).

Superannuation funds taxation

Like companies, superannuation funds are taxed through the PAYG instalment system, but at a concessional rate of 15 per cent in relation to taxable contributions received, investment income and capital gains.

Superannuation funds were also allowed to defer some liabilities from the old company tax instalment system for up to five years. The cash estimates reflect the expected receipt of these deferred payments ($25 million in 2003-04 and 2004-05).

Superannuation tax on contributions and earnings income is expected to increase by $1.0 billion (22.4 per cent) in 2004-05, reflecting ongoing strength in superannuation fund contributions and earnings growth and the one-off impact of $610 million from the Government’s decision to extinguish its liabilities to the Telstra and Australia Post superannuation schemes. Abstracting from the impact of this decision, the underlying growth rate in superannuation contributions and earnings tax is 8.9 per cent in 2004-05.

A superannuation surcharge is also collected from superannuation funds. In 2003-04, a surcharge of up to 14½ per cent applies to the surchargable contributions of individuals with high incomes. Revenue from the superannuation surcharge is expected to increase by $130 million (10.3 per cent) in 2004-05, reflecting growth in wages. In this Budget, the Government has decided that the surcharge rate will now be reduced to 7.5 per cent by 2006-07.

Petroleum resource rent tax

Petroleum resource rent tax (PRRT) is levied on taxable profits in respect of offshore petroleum projects other than some of the North-West Shelf production and associated exploration areas, which are subject to excise (included in excise on petroleum and other fuel products) and royalties. PRRT is levied at a rate of 40 per cent of taxable profit and the amount paid is deductible from a company’s total profit when determining its company tax liability.

PRRT revenue is expected to decrease by $100 million (8.3 per cent) in 2004-05, reflecting an expected decline in production levels offset to some extent by the effect of a higher expected oil price.

Indirect taxation

Table 6: Indirect taxation (accrual basis)

Includes unleaded petrol and lead replacement petrol.
Includes aviation gasoline, aviation turbine fuel, fuel oil, heating oil and kerosene.
Includes duties imposed on imported petroleum products, tobacco, beer and spirits, which are analogous to excise duty on these items.
Estimates include the offsetting revenue effects of the WET rebate for cellar door and other sales.
WST was abolished on 1 July 2000; however, final liabilities, net of refunds, are still being recognised.

Excise

The major categories of excise duty revenue include petroleum and other fuel products, crude oil, tobacco and alcoholic beverages. Equivalent duties on identical imported products are imposed through, and reported under, customs duty.

Petroleum and other fuel excise includes excise on petrol, diesel fuel, biodiesel, aviation gasoline, aviation turbine fuel, fuel ethanol, fuel oil, heating oil and kerosene. It is imposed at specific rates per litre of product.

Petrol includes unleaded petrol and lead replacement petrol (which replaced leaded petrol but is taxed at the unleaded petrol rate).
All revenue from excise duty on aviation gasoline and aviation turbine fuel contributes to the funding of aviation programmes. The rates of excise applying to aviation fuels are adjusted, as necessary, depending on the funding requirements of those programmes.

In 2004-05, revenue from excise on petroleum and other fuel products is estimated to increase by $160 million (1.2 per cent), in line with expected increases in sales of petrol and diesel.

There are two sources of excise on crude oil: production from offshore fields in the North-West Shelf production licence areas which are not subject to PRRT; and production from onshore fields and fields in coastal waters.

Excise on crude oil is levied on the sale price of the crude oil, and is the only excise not to be levied on a volumetric basis (where excise is applied per unit of quantity).

Revenue from crude oil excise is expected to increase by $10 million (3.2 per cent) in 2004-05.

Other excise is derived from beer, potable spirits and tobacco products.

For cigarettes, excise is imposed per stick for cigarettes that do not exceed 0.8 grams (actual tobacco content) and a per kilogram basis for other tobacco products.
For beer, spirits, brandy and ready to drink beverages, excise is imposed on the alcohol content. The excise rate on beer in containers greater than 48 litres (draught beer) is lower than for other beer.

Other excise revenue is expected to increase in 2004-05 by $110 million (1.5 per cent).

Wine is not subject to excise, but is subject to the wine equalisation tax (WET).

Excise indexation

The rates of duty for excisable commodities (with the exception of petroleum products and crude oil) are adjusted every August and February in line with half yearly CPI movements. If the change in the CPI is negative, the excise rate is not reduced but instead the decline is carried forward to offset the next positive CPI movement.

Excise indexation for petroleum products was removed in March 2001.

Table 7: Excise rates

Customs duty

Customs duty is imposed either as a percentage of the value of the imported good or on a volumetric basis (where duty is applied per unit of quantity) for excise equivalent products.

Tariffs on passenger motor vehicles (PMV) and textile, clothing and footwear (TCF) account for around one-third of the total duty collected. A further one-third of customs duty revenue is derived from duty imposed on imports of petroleum products, tobacco, beer and spirits, which is akin to excise duty on these items. The other dutiable goods currently attract a general tariff rate of 5 per cent.

Customs duty is expected to decrease by $250 million (4.5 per cent) in 2004-05. This is due to the combined impact of tariff reductions for PMV and TCF in January 2005, the Australia-United States Free Trade Agreement and more subdued growth in nominal imports due to the higher exchange rate.

Other indirect taxes

Other indirect taxes include the WET, luxury car tax (LCT) and the final wholesale sales tax liability.

All wines, meads, ciders and sakes are subject to the WET rate of 29 per cent, with tax being paid on the wholesale value of the goods. With the proposed rebate for up to $1 million of domestic sales, WET is expected to decline by $30 million (4.3 per cent) in 2004-05.

A LCT of 25 per cent applies to the GST exclusive price of a car above the luxury car tax threshold ($57,009), and there is expected to be a fall in collections of $10 million (2.9 per cent) in 2004-05.

Other indirect taxes are expected to remain unchanged in 2004-05.

Fringe benefits tax and other taxes

Fringe benefits tax

Fringe benefits tax (FBT) is paid on non-salary benefits provided by employers to employees, which are provided in place of, or in addition to, the salary and wages of employees. FBT is payable by employers and is assessed on the value of the fringe benefits provided to employees or their associates. FBT is levied at 48.5 per cent on the grossed-up taxable value of benefits as calculated under the FBT rules. FBT instalments are paid by employers each quarter of the FBT year from April to March (on the Business Activity Statement), with a final balancing payment due in May together with lodgement of the FBT return.

FBT is expected to increase by $10 million (0.3 per cent) in 2004-05.

Agricultural levies and other taxes

Revenue estimates for agricultural levies and other taxes in 2003-04 and 2004-05 are provided in Table 8.

Table 8: Agricultural levies and other taxes (accrual basis)

Includes all other taxation revenue collected by Australian Government agencies.

Total agricultural and other tax revenue is estimated to increase by $68 million (4.0 per cent) in 2004-05. This mainly reflects higher expected revenue from agricultural taxes and the superannuation guarantee charge.

Non-taxation revenue

Revenue estimates for 2003-04 and 2004-05 are provided in Table 9 for the various categories of non-taxation revenue.

Table 9: Non-taxation revenue (accrual basis)

Includes all other non-taxation revenue collected by Australian Government agencies.

Non-taxation revenue is expected to decrease by $1.5 billion (12.7 per cent) in 2004-05. This largely reflects reduced dividend revenue from associated entities.

Sales of goods and services

This category consists of revenue from the direct provision of goods and services by the Australian Government general government sector, including reimbursement of GST administration costs received from the States. Sales of goods and services are expected to increase by $74 million (1.8 per cent) in 2004-05, mainly due to an increase in revenue from GST administration fees and immigration fees.

Interest

Interest income is expected to decrease by $162 million (13.0 per cent) in 2004-05.

Interest from other Governments

This category mainly consists of revenue from the States on General Purpose and Specific Purpose borrowings.

The Australian Government receives interest payments from the States in respect of General Purpose borrowings made on behalf of the States under the State Governments’ Loan Council Programme (and from the Northern Territory in respect of advances made under similar general purpose capital assistance arrangements). Payments relating to these advances are made, in turn, by the Australian Government to bond holders.

Interest from the States on General Purpose borrowings is declining as a result of the June 1990 Loan Council decision that the States and Territories make additional payments to the Australian Government each year to facilitate the redemption of all maturing Australian Government securities issued on their behalf. The reduction in interest revenue from the States is matched by a reduction in public debt interest expenses.

The Australian Government also receives interest on Specific Purpose borrowings to the States, including on advances made under the Commonwealth-State Housing Agreements, States (Works and Housing) Assistance Acts, Northern Territory Housing Advances, and by the Australian Capital Territory on debts assumed upon self-government.

Interest from other governments is expected to decrease by $13 million (6.0 per cent) in 2004-05.

Interest from other sources

This item includes interest income on Australian Government cash balances and on other financial assets. It excludes swap transactions entered into as part of the Australian Government’s debt management strategy, as they are classified as financing transactions under Government Finance Statistics standards. The Australian Office of Financial Management is responsible for the management and reporting of the Australian Government’s net debt portfolio.

Interest income from other sources is expected to decrease by $149 million (14.5 per cent) in 2004-05.

Dividends

The main sources of dividends are the Australian Government’s Business Enterprises and the Reserve Bank of Australia (RBA). Dividend payments from the RBA can be volatile, as they are sensitive to movements in interest rates and the exchange rate.

Total dividends are expected to decrease by $1.6 billion (38.4 per cent) in 2004-05, largely due to a decline in RBA dividends. The decrease results from lower estimated earnings due to lower world interest rates and the re-building of RBA foreign exchange reserves.

Petroleum royalties

Petroleum royalties are paid by producers operating in the North-West Shelf oil and gas fields off Western Australia as well as the Timor Sea.

Petroleum royalties are expected to increase by $32 million (5.7 per cent) in 2004-05, due to expected increases in crude oil prices.

Other sources of non-taxation revenue

Other non-taxation revenue includes Child Support Trust Revenue (collected by the Child Support Agency) and seigniorage from circulation coin production.

Other non-taxation revenue is expected to increase by $114 million (5.9 per cent) in 2004-05. There is a $150 million increase due to the recognition of revenue in relation to trust fund receipts from the Reinsurance Trust Fund levies. These levies are imposed by the Private Health Insurance (Reinsurance Trust Fund Levy) Act 2003. This revenue is fully offset by an equivalent change in expenses reflecting the payment of the levy into the Trust Fund.

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 5-5 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 Australian Government and provided in full to the States and Territories. A discussion of GST revenue can be found in Budget Paper No. 3, Federal Financial Relations 2004-05.