Variations in the revenue estimates since the 2004‑05 Budget

Table 2 is a reconciliation of this Budget’s revenue estimates with those at the 2004‑05 Budget and the 2004‑05 MYEFO.

Table 2: Reconciliation of total Australian Government general government revenue estimates from the 2004‑05 Budget and the 2004‑05 MYEFO

Total revenue for 2004-05

Relative to MYEFO, estimated total revenue for 2004‑05 has been revised up by $3.2 billion, largely owing to higher expected revenue from wage and salary earners, personal investors and small unincorporated businesses.

Total revenue for 2005-06

Total revenue for 2005‑06 has been revised up by $7.0 billion since MYEFO, reflecting higher estimated revenue from companies, personal investors and small unincorporated businesses. These upward revisions have been partly offset by the impact of the Government’s decision to provide personal income tax cuts.

Effect of policy decisions

Policy decisions since the 2004‑05 MYEFO are expected to reduce taxation revenue by around $3.5 billion in 2005‑06 and around $26.1 billion over the forward years (a more detailed description of these is provided in Budget Paper No. 2, Budget Measures 2005-06).

In particular, the Government’s decision to provide personal income tax cuts will reduce revenue by $3.1 billion in 2005-06, and $21.7 billion over the forward estimates period. The tax cuts will take effect in two stages.

From 1 July 2005, the 17 per cent rate will be reduced to 15 per cent, the 42 per cent threshold will be increased from $58,001 to $63,001 and the 47 per cent threshold will be increased from $70,001 to $95,001 (compared with $80,001 announced in the 2004‑05 Budget).
From 1 July 2006, the 42 per cent threshold will be further increased to $70,001 and the 47 per cent threshold will be further increased to $125,001.

These tax cuts will increase disposable incomes and improve the incentives for all Australian taxpayers to participate in the workforce. Moving the 42 per cent threshold up to $70,001 means that more than 80 per cent of taxpayers will face a top marginal tax rate of no more than 30 per cent over the forward estimates period. Substantially raising the thresholds for the top two marginal tax rates will also improve work incentives.

The Government’s personal tax cuts package will also ensure that senior Australians in the community will be better off with an increase in the Medicare levy threshold that applies to them. This measure has been specifically designed to ensure that senior Australians do not pay the Medicare levy until they begin to incur an income tax liability.

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

The superannuation contributions and termination payments surcharge will be abolished for contributions made from 1 July 2005, with a cost to revenue of $650 million in 2006‑07 and $2.5 billion over the forward estimates.
The 3 per cent tariff applying to business inputs imported under a tariff concession order will be removed with effect from 11 May 2005, with a cost to revenue of $36 million in 2004-05, $290 million in 2005‑06 and $1.3 billion over the forward estimates.
The eligibility criteria for the mature age worker tax offset will be extended from 2005-06, with a cost to revenue of $70 million in 2005‑06 and $295 million over the forward estimates.
A four-year income tax exemption will be provided for temporary residents for most foreign source income, including capital gains, commencing from July 2006, with an estimated cost to revenue of $50 million in 2007‑08 and $105 million over the forward estimates.
The capital gains tax treatment of non-resident investors in Australia will be aligned more closely with international standards, with a cost to revenue of $50 million in 2005‑06 and $230 million over the forward estimates.
Certain currently unrecognised business capital expenditures (‘blackhole expenditures’) will be recognised for tax purposes from 2006‑07 with a cost to revenue of $35 million in 2006-07, increasing in later years, with a cost of $205 million over the forward estimates.
The capital allowance treatment of film copyright will be changed to ensure the application of the effective life depreciation regime, with effect to expenditures after 1 July 2004, with a cost to revenue of $15 million in 2005‑06 and $175 million over the forward estimates.
Foreign loss and foreign tax credit quarantining will be abolished, with effect from the first income year after Royal Assent, with an estimated cost to revenue of $25 million in 2007‑08 and in 2008-09.

A detailed description of the policy decisions is provided in Budget Paper No. 2, Budget Measures 2005‑06. A summary of revenue policy decisions since the 2004‑05 MYEFO is provided in Table 3.

Table 3: Revenue policy decisions since the 2004‑05 MYEFO

Effect of parameter and other variations

Parameter and other variations are expected to increase revenue in 2004‑05 by $3.3 billion, and revenue in 2005‑06 by $10.5 billion, relative to the MYEFO forecasts.

Parameter variations

Since MYEFO, estimated nominal GDP growth in 2004‑05 has been revised down by ½ of a percentage point, but taxation revenue growth has been revised up by 1½ percentage points. The strength in taxation revenue is largely the result of stronger than expected employment growth in the second half of 2004, improved income for small unincorporated businesses and additional strength in individuals’ realised capital gains and other income.

Looking ahead, there have been significant upward revisions to revenue in 2005‑06 and the projection years since MYEFO, reflecting the flow on effect of a stronger expected revenue base in 2004‑05 and a significant upward revision to nominal GDP growth in 2005-06.

Relative to MYEFO, nominal GDP growth for 2005‑06 has been revised up by 1¾ percentage points to 7½ per cent — despite a slight downward revision to real GDP growth — reflecting significant increases to estimated growth in the GDP deflator as a result of recent increases in commodity export prices (see Box 3 in Statement 3). These increases are expected to lift corporate profits significantly in 2005-06, which — due to the timing of company tax collections — will boost revenue in both 2005‑06 and 2006-07. Company tax revenue over the projection years of 2006-07, 2007‑08 and 2008‑09 reflects a technical assumption that commodity prices return to their long-run average level over the first two years of the projection period (see Box 7 in Statement 3).

Further detail on how the revised outlook for the economy has affected individual revenue heads over the forward estimates period is provided later in this statement. An analysis of the sensitivity of the taxation revenue estimates to changes in the major economic parameters is provided in Statement 2.

Box 1: Changes to the revenue forecasting methodology

In recent years, revenue has grown more strongly than forecast. Two principal factors have contributed to this:

nominal GDP has grown more strongly than forecast, because of the stronger than expected housing cycle in 2002 and 2003 and stronger than expected growth in the terms of trade in 2003 and 2004; and
taxation revenue from companies², small unincorporated businesses and personal investors has been growing at an unexpectedly faster pace relative to growth in underlying incomes.

As a result of this divergence between actual and forecast revenue, the revenue forecasting methodology has been adjusted. Estimates in this Budget are based on the revised methodology and result in revenue forecasts and projections being more responsive to changes in forecast and projected income. They mostly affect company income tax and gross income tax from other individuals.

Company tax

Revenue from taxes on company profits has been growing significantly faster than the corporate income tax base. Possible reasons for this include:

the privatisation of major Government Business Enterprises;
growth in capital gains made by companies;
the long period of economic expansion, which has reduced the stock of carried-forward losses to offset tax payable;
more effective compliance activities of the Australian Taxation Office;
changes in the structure of ownership of shares, combined with changes in the dividend imputation system, which may have affected the incentive for companies to pay tax in Australia in order to maximise franking credits; and
the increasing tendency for small businesses to incorporate.

Gross other individuals

Revenue from taxes on the incomes of personal investors has been growing strongly owing to strong corporate profits and consequent dividend payments. Revenues on realised capital gains have also been growing strongly because of asset price increases in respect of shares and housing. Income earned by small unincorporated businesses and increasing numbers of self-employed persons is also contributing to this revenue strength.

Other variations

Tax collections to the end of the March quarter 2005 were 8.4 per cent higher than last year, compared with expected growth of 7.6 per cent at MYEFO. The strength in tax collections in the year to date has largely reflected the stronger than expected employment growth during the second half of 2004.

The Budget estimates of tax revenue in 2004‑05 factor in a deceleration in collections growth in the final quarter of the year, reflecting an expectation of weakening company tax collections, and lower forecast nominal GDP growth. Company profits are expected to be somewhat weaker than previously forecast for 2004-05, reflecting weaker than expected profits from the private non-financial sector in the second half of 2004.

The Budget estimates also incorporate adjustments to forecasting methodology to align the estimates more closely to recent experience (see Box 1). These adjustments affect the gross other individuals, refunds for individuals and company income tax revenue heads and generally increase estimated revenue since MYEFO for 2005‑06 and the projection years.

² Strength in company tax revenue growth was highlighted in the 2004‑05 Budget (page 5-10).