Australian Government, 2006–07 Budget

Estimates of revenue

Total revenue

Total revenue for 2006-07 is expected to increase by $8.8 billion, 3.9 per cent higher than estimated taxation revenue for 2005-06. Of this, taxation revenue is expected to increase by 4.4 per cent ($9.1 billion) and non‑taxation revenue is expected to decrease by 1.9 per cent ($274 million).

The increase has resulted primarily from higher estimated revenue from companies (up $6.4 billion) and individuals (up $810 million). The revenue estimates for 2005-06 and 2006-07 are provided in Table 4. Descriptions of the revenue heads are provided in Appendix C.

Table 4: Australian Government general government revenue

Table 4: Australian Government general government revenue

  1. See fringe benefits tax description in Appendix C.

Box 5.1: Revised revenue recognition methodology

Accrual accounting was introduced by the Australian Government in the 1999-2000 Budget. The AAS and GFS standards for accrual accounting (refer to Appendix A in Statement 2 for an explanation of these reporting standards) require that taxation revenue be recognised in the reporting period in which the taxpayer earns the income that is subsequently subject to taxation — this is known as the Economic Transactions Method (ETM). But the standards also permit government reporting using an alternative approach when the ETM approach would generate unreliable measures of taxation revenues.

Because ETM is an unreliable measure for several significant revenue heads — and these account for the majority of total revenue — all taxation revenue has been recognised in all accrual budget-related documentation since the 1999-2000 Budget using the Tax Liability Method (TLM). Under TLM, taxation revenue is accounted for at the time a taxpayer makes a self-assessment or when an assessment of a taxation liability is raised by the relevant authority.

Commencing with this budget, the Government has adopted ETM revenue recognition for all revenue heads where the measurement issues are not material, but will retain TLM revenue recognition where ETM measurement issues may be material. Consequently, the taxation revenues that will continue to be recognised on a TLM basis are:

  • individuals and other withholding taxation;
  • company income taxation; and
  • superannuation taxation.

Further details about taxation revenue recognition are provided in Appendix F.

Revenue estimates by revenue head

Income taxation revenue

Individuals and other withholding taxation

Estimated revenue from individuals for 2005-06, 2006-07 and the projection years is provided in Table 5. Estimated revenue from individuals in 2006-07 is expected to increase by $810 million (0.7 per cent), reflecting solid labour market outcomes and moderate growth in personal investment income, partially offset by personal income tax cuts.

Table 5: Individuals and other withholding taxation revenue

Table 5: Individuals and other withholding taxation revenue

  1. Medicare levy for 2004-05 is an estimate.
Gross income tax withholding

Gross income tax withholding (ITW) revenue is expected to increase by $180 million (0.2 per cent) in 2006‑07, reflecting the continuing strength in compensation of employees partially offset by the Government's decision to provide additional personal income tax relief.

Gross other individuals

Gross revenue from other individuals is expected to increase by $2.1 billion (7.8 per cent) in 2006‑07.

This increase reflects expected personal investment income from capital gains from continued strength in the share market, partially offset by the effect of additional tax cuts.

Income tax refunds for individuals

Refunds for individuals are expected to increase by $1.4 billion (9.4 per cent) in 2006‑07.

Refunds are generally related to movements in revenue from ITW and gross other individuals in the previous year.

Medicare levy

Revenue from the Medicare levy is expected to increase by $390 million in 2006-07. Movements in revenue from the Medicare levy are generally consistent with growth in personal taxable income.

Fringe benefits tax

Estimated revenue from fringe benefits tax for 2005-06, 2006-07 and the projection years is provided in Table 6.

Table 6: Fringe benefits tax revenue

Table 6: Fringe benefits tax revenue

  1. See fringe benefits tax description in Appendix C.

Revenue from fringe benefits tax is expected to increase by $60 million (1.6 per cent) in 2006-07. The revised estimate for 2006-07 reflects the reduction in the tax rate to 46.5 per cent.

Superannuation funds

Estimated revenue from superannuation funds for 2005-06, 2006-07 and the projection years is provided in Table 7.

Table 7: Superannuation funds revenue

Table 7: Superannuation funds revenue

Superannuation funds taxation

Taxation revenue from superannuation contributions and earnings income is expected to increase by $500 million (9.3 per cent) in 2006-07, reflecting strong earnings growth.

Superannuation surcharge

Revenue from the superannuation surcharge is expected to decrease by $350 million (34.0 per cent) in 2006‑07, reflecting the effect of its abolition. While the abolition of the surcharge extinguishes future liabilities from accruing, allowance has been made over the forward estimates period in relation to the identification of liabilities which accrued prior to 1 July 2005.

Company and other related income taxation

Estimated revenue from companies for 2005-06, 2006-07 and the projection years is provided in Table 8.

Table 8: Company and other related income taxation revenue

Table 8: Company and other related income taxation revenue

Company income taxation

Company tax revenue is anticipated to increase by $6.4 billion (12.6 per cent) in 2006-07, largely driven by strength in the finance, insurance and mining industries.

With business conditions remaining favourable, profit growth is expected to remain strong through 2006‑07. In particular, Australian mining companies have benefited from a surge in external demand for bulk commodities — particularly from China. However, as detailed in Statement 3, supply chain disruptions and adverse weather conditions affected the ability of Australian mining companies to fulfil their contracted export volumes in 2005-06. In 2006-07, it is anticipated that these temporary factors will abate and additional capacity will come on stream — boosting both company profits and company tax revenue in the budget year.

The company tax revenue estimates over the projection years of 2007-08, 2008-09 and 2009‑10 reflect a technical assumption that coal and iron ore prices will return to long-term average levels over the first two years of the projection period (see Box 6 in Statement 3).

Box 5.2: Some observations on trends in company tax collections

The strength of company tax collections has been highlighted in previous budgets, and it continues to be a major contributor to the strength in forecast revenue in 2006-07. This strength has been underpinned by Australia's long economic expansion and the consequent strong growth in corporate profitability.

Company profits have been growing faster than GDP. Company taxation revenue has also been increasing as a proportion of GDP — Chart 1. At an industry level, profits in the financial sector and, more recently, the mining sector, have grown faster than the rest of the corporate sector. Reflecting this, these industries made significant contributions to the growth in company taxation revenue as a proportion of GDP.

Chart 1: Company tax revenue

Chart 1: Company tax revenue

Source: Treasury estimates using ATO Taxation Statistics and ABS cat. no. 5206.

In previous budgets, attention was drawn to a number of other factors which have also contributed to the growth in revenue. These include the privatisation of major Government Business Enterprises, growth in capital gains derived by companies, the dividend imputation system and more effective compliance activities of the Australian Taxation Office.

This box contains some further observations on the impact of developments in the corporate income base on trends in company taxation revenue. These developments include the interaction of the high inflation environment of the 1980s with company tax payment arrangements and the high corporate debt-servicing ratios that prevailed in the 1980s and early 1990s.

The effective corporate tax rate

The strength of company taxation receipts has seen the effective corporate tax rate (measured as the ratio of company income tax paid to gross operating surplus) rise in recent years. It is currently not far above its long-run average — Chart 2.

Chart 2: The effective corporate tax rate

Chart 2: The effective corporate tax rate

Source: ABS cat. no. 5206.

One factor contributing to the rise in the observed effective corporate tax rate has been reforms to company tax payment arrangements.

Until the late 1980s, a company's taxation liability was due for payment entirely in the year following the year of income, providing companies with a taxation deferral advantage relative to other taxpayers. Consequently, in an environment of profit growth, the effective tax rate measured one year's tax liability over the next year's higher income. The deferral advantage had the effect of artificially lowering the effective tax rate in the 1980s.

Payment system reforms since the late 1980s have brought forward the timing of the payments, so that they are now broadly contemporaneous with the year of income, and the effective tax rate is higher as a consequence.

Company debt-servicing ratio

Trends in the debt-servicing ratios of corporations can also help to explain movements in the effective company tax rate, and in particular its unusually low level through the 1980s and into the 1990s.

Nominal and real interest rates rose sharply in late 1970s and remained high, by current standards, until the return to a low inflation environment in the early 1990s — Chart 3. At the same time, corporate debt levels were also rising, with this trend accelerating sharply over the second half of the 1980s, following financial deregulation, before a subsequent period of debt reduction in the early 1990s — Chart 4. These developments saw the debt-servicing ratio of corporations jump sharply in the 1980s and remain high until the early part of the 1990s — Chart 5.

Chart 3: Nominal and real interest rates

90 day bank bill rate

Chart 3: Nominal and real interest rates - 90 day bank bill rate

Source: RBA Bulletin and Treasury estimates.

Chart 4: Corporate debt indicator

Bank-intermediated corporate debt

Chart 4: Corporate debt indicator - Bank-intermediated corporate debt

Source: RBA Bulletin and ABS cat. no. 5206.

The high levels of the corporate debt-servicing ratio in the 1980s and early 1990s had the effect of depressing the effective corporate tax rate over this period, since the interest costs of debt finance are generally deductible in calculating taxable income. As the gearing of corporations returned to more sustainable levels, and interest rates fell in line with the resumption of low inflation, the corporate debt‑servicing ratio fell in the 1990s, unwinding the earlier depressing effect on the effective corporate tax rate — Chart 6.

Chart 5: Corporate debt-servicing ratio(a)

Net interest payments to corporate GOS

Chart 5: Corporate debt-servicing ratio(a) - Net interest payments to corporate GOS

  1. Non-financial corporations.

Source: Treasury estimates using ATO Taxation Statistics and ABS cat. no. 5206.

 

Chart 6: Impact of debt(a) on company tax

Contribution to effective corporate tax rate

Chart 6: Impact of debt(a) on company tax - Contribution to effective corporate tax rate

  1. Non-financial corporations.

Source: Treasury estimates using ATO Taxation Statistics and ABS cat. no. 5206.

Petroleum resource rent tax

Estimated revenue from the petroleum resource rent tax is expected to increase by $520 million (26.4 per cent) in 2006-07, reflecting the impact of higher expected profitability of offshore petroleum projects from higher oil prices in Australian dollars.

Excise and customs revenue

Estimates for 2005-06, 2006-07 and the projection years are provided in Table 9 for excise and customs revenue.

Table 9: Excise and customs revenue

Table 9: Excise and customs revenue

Excise duty

In 2006-07, revenue from excise duty on petroleum is expected to increase by $30 million (or 0.4 per cent), which is a decline in real terms. Excise from other fuel products is expected to increase by $230 million (104.5 per cent) in 2006-07. This arises principally from recent fuel tax changes which apply the full rate of excise which is netted off by a credit scheme. This head records the revenue. The credit scheme is recorded in expenses. While revenue increases, so do expenses.

Revenue from crude oil excise duty is expected to increase by $140 million (42.4 per cent) in 2006‑07, reflecting the effect of higher estimated oil prices on desired production levels.

Other excise revenue is expected to increase by $140 million (1.8 per cent) in 2006-07, reflecting higher estimated revenue from beer and the ready to drink category of alcoholic beverages.

Customs duty

Customs duty revenue is expected to increase by $467 million (9.0 per cent) in 2006-07, reflecting solid growth in expected imports.

Other taxation revenue

Revenue estimates for 2005-06, 2006-07 and the projection years are provided in Table 10 for the wine equalisation tax, the luxury car tax, agricultural levies and other taxes.

Table 10: Other taxation revenue

Table 10: Other taxation revenue

Total other taxation revenue is estimated to decrease by $35 million (1.0 per cent) in 2006‑07.

Revenue from the wine equalisation tax and the luxury car tax is expected to remain unchanged from 2005‑06 levels, reflecting underlying demand in both those markets.

Revenue from agriculture levies in 2006-07 is also expected to be largely unchanged from the 2005‑06 levels.

Other taxes are expected to decrease by $47 million (2.3 per cent) in 2006-07, largely reflecting the phasing out of the aircraft noise levy for Sydney Airport and the stevedoring levy.

Non-taxation revenue

Revenue estimates for 2005-06, 2006-07 and the forward years are provided in Table 11 for the various categories of non-taxation revenue. Item descriptions are in Appendix C.

Table 11: Non-taxation revenue

Table 11: Non-taxation revenue

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

Non-taxation revenue is expected to decrease by $274 million (1.9 per cent) in 2006-07, largely reflecting decreased dividend income as a result of the sale of Telstra. This is partially offset by interest and dividends earned by the Future Fund. The fund received its seed funding of $18 billion in May 2006 and the estimates assume that the proceeds from the Telstra sale will be transferred to the Future Fund.

 

Miscellaneous