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Variations in the revenue estimates since the 2007‑08 Budget

Table 2 is a reconciliation of this budget's revenue estimates with those at the 2007‑08 Budget and the 2007 PEFO.

Table 2: Reconciliation of total Australian Government general government
revenue estimates from the 2007‑08 Budget and the 2007 PEFO

Variations to total revenue for 2007‑08 and 2008‑09

Since 2007 PEFO, estimated total revenue for 2007‑08 has been revised up by $8.4 billion.

Of this, taxation revenue parameter and other variations contribute $6.7 billion mainly from individuals, companies and superannuation funds. The revisions for individuals largely reflect stronger than anticipated growth in employment and individuals' non‑wage income. Companies were only revised up owing to greater than expected revenue from Australian Taxation Office (ATO) audit activities, while superannuation funds had higher earnings in the 2006‑07 income year. This has been partly offset by a recent slowing in taxation collections, particularly for companies and superannuation funds relating to lower earnings growth in the 2007‑08 income year, reflecting, in part, global financial market turbulence.

Non‑taxation revenue has been revised up by $1.4 billion owing mainly to greater interest revenue.

Total revenue for 2008‑09 has been revised up by $8.8 billion since the 2007 PEFO.

Policy decisions taken since the 2007 PEFO contribute $2.4 billion to the overall revision in 2008‑09.

Taxation revenue parameter and other variations have contributed $3.6 billion to the revision. Taxation revenue is expected to be subject to the powerful opposing forces confronting the economy. Individuals' incomes, including from unincorporated businesses and property, are expected to grow strongly. Company profits are forecast to be higher, reflecting further strong rises in commodity prices. This is partly offset by recent falls in share prices, which are expected to reduce capital gains, and higher interest expenses for business. Revisions to superannuation funds have detracted significantly from revenue as earnings decline.

Non‑taxation revenue has been revised up by $3.0 billion in 2008‑09. This reflects a $0.8 billion increase in the RBA dividend and an increase in both Future Fund earnings and interest received by the Australian Office of Financial Management on its investments

Box 1: Opposing forces on revenue Since 2007 PEFO, there have been opposing economic forces acting on the revenue estimates. Large rises in Australia's non‑rural commodity prices have provided further stimulus to nominal incomes, especially for mining and related companies. Upward revisions in other economic parameters, in particular, compensation of employees, unincorporated business and property income, and consumption, have also been positive for revenue. Opposing those influences are the higher net interest rate environment weighing on business profits and the decline in recent months in the value of share markets, due to global financial market uncertainty, reducing CGT revenue. Most of the net interest impact flows from non‑financial corporations experiencing higher interest rates on borrowings and higher funding costs placing pressure on the margins of financial corporations. The impact of these conflicting forces on tax revenue is illustrated in Chart A, which provides a summary of changes in taxation revenue estimates since 2007 PEFO by the main sources of those changes. Chart A: Changes in taxation revenue by source since 2007 PEFO(a)(b) Commodity prices only reflect the direct impact on company tax and the petroleum resource rent tax. Data excludes GST. Source: Treasury estimates. In 2008‑09, the direct gain to revenue from higher commodity prices is more than offset by the loss to revenue from lower CGT and higher net interest costs. Hence, the Government has obtained significantly less revenue benefit from recent economic outcomes and tax collections, and the updated economic outlook over the forward estimates than in recent years, as shown in Chart B. Chart B: Total parameter and other variations to taxation revenue(a)(b) Change MYEFO to Budget Variation over four years. For consistency across years, data excludes GST. Source: Treasury estimates. Annual growth in underlying tax revenue (which excludes the impact of policy decisions) has also slowed significantly compared to recent years, primarily as CGT is forecast to fall in 2008‑09 (see Chart C). Chart C: Underlying taxation revenue growth(a) For consistency across years, data excludes GST. Source: Treasury estimates.

Effect of policy decisions

Policy decisions since the 2007 PEFO are expected to increase taxation revenue by $2.4 billion in 2008‑09 and $19.7 billion over the forward years.

These policy decisions are targeted at improving productivity and the fairness and integrity of the tax system. The decisions build on election commitments to defer income tax cuts for higher income earners and improve funding for ATO compliance activity which lead to savings of over $6 billion.

As part of its examination of expenditures, the Government has decided to abolish or improve the operation of a range of tax expenditures generating savings of $8.7 billion by 2011‑12. Together, these measures will contribute to a fairer tax system, a more productive economy and a fairer return for the use of Australia's non‑renewable resources.

Major policy decisions in the Budget include:

• The Government's election commitment to defer the income tax cuts to those earning over $180,000 will provide savings of $5.3 billion over the forward estimates period, which will be diverted to the Government's other priorities.
• Increased excise on 'other excisable beverages' (including 'ready‑to‑drinks') on and from 27 April 2008 will result in an ongoing gain to revenue, estimated to be $3.1 billion over the forward estimates period, which will help fund increased investment in preventative health.
• Increasing the migration program by providing an additional 31,000 skilled stream places and 6,500 family stream places, estimated to increase revenue by $2.9 billion over the forward estimates.
• Removing the current exemption of condensate from the crude oil excise which will result in an ongoing gain to revenue, estimated to be $2.5 billion from Budget night and over the forward estimates period.
• Increasing funding for compliance activities by the Australian Taxation Office, estimated to increase revenue by $2.0 billion over the forward estimates.
• Aligning the period over which capital expenditure on in‑house computer software is depreciated with computer hardware, from 2.5 years to 4 years, with an ongoing gain to revenue estimated to be $1.3 billion over the forward estimates period.
• Tightening the fringe benefits tax (FBT) exemption that applies to the private use of business property on an employer's premises by excluding meals under a salary sacrifice arrangement. This measure will have an ongoing gain to revenue, estimated to be $730 million over the forward estimates period.
• Tightening the FBT exemption for certain employer provided work‑related items (including laptop computers, personal digital assistants and tools of trade) by ensuring the exemption only applies where these items are used primarily for work purposes. This measure will have an ongoing gain to revenue, estimated to be $650 million over the forward estimates period.
• Introducing an integrity measure in relation to the goods and services tax and sales of real property which will result in an ongoing gain to revenue, estimated to be $620 million over the forward estimates period.
• Increasing the luxury car tax, providing additional revenue of $555 million over the forward estimates.
• Increasing the passenger movement charge, increasing revenue collections by the Australian Customs Service by $459 million over the forward estimates. The increase will contribute to offsetting the cost of a range of aviation security initiatives that until now have not been cost recovered.
• Reducing the withholding tax on certain distributions of Australian managed funds to foreign residents with effect from 1 July 2008, at a cost of $630 million over the forward estimates.
• Increasing the Medicare levy surcharge thresholds, at a cost to revenue of $660 million over the forward estimates.
• Other measures in the Budget will increase revenue by $763 million. These include a number of measures to improve productivity, and the fairness and integrity of the tax system, including:
• removing or reducing tax concessions such as those for capital protected borrowings, the entrepreneurs' tax offset and better targeting the concessions for prescribed private funds; and
• improved targeting of tax relief by better means testing of government support and by tightening eligibility for dependency tax offsets.

Table 3: Revenue policy decisions since the 2007 PEFO

Effect of parameter and other variations

In addition to new policy decisions, revisions to expected revenue are driven by recent economic outcomes and tax collections, and the updated economic outlook. The revenue variations discussed in this section stem from those parameter and other variations. That is, they explicitly exclude the impact of new policy decisions on revenue.

The revenue forecasts are based on the forecasts of economic activity presented in Statement 2, with changes in nominal incomes having consequent impacts on expected taxation revenue. The key economic parameters that influence revenue are shown in Table 4.

Analysis of the sensitivity of the taxation revenue estimates to changes in the economic outlook is provided in Statement 3.

Table 4: Key revenue parameters^(a)

1. Current prices, per cent change on previous year.
2. Compensation of employees measures total remuneration earned by employees.
3. Corporate GOS is an Australian National Accounts measure of company profits.
4. Property income measures income derived from rent, dividends and interest.

Data not available.

Parameter and other variations have contributed $6.7 billion in 2007‑08 and $3.6 billion in 2008‑09 to tax revenue since the 2007 PEFO. While parameter and other variations have increased taxes overall, there have been opposing influences acting on the revenue estimates.

Tax revenue has been boosted by stronger forecasts of growth in nominal non‑farm GDP, which has been revised up 0.8 and 2.3 percentage points in 2007‑08 and 2008‑09 respectively from the 2007 PEFO estimates. All components of nominal income have been revised, reflecting upward revisions to compensation of employees, unincorporated business and property income, company profits and consumption in 2007‑08.

Gross income tax withholding revenue is expected to be around $1.3 billion higher in both 2007‑08 and 2008‑09, largely as a result of higher forecast growth in compensation of employees in 2007‑08 (up 0.3 percentage points) primarily due to strong growth in wages.

Upward revisions in 2007‑08 and 2008‑09 to forecast growth in property income and unincorporated business income, the principal components of individuals' non‑wage and salary earnings, have contributed significantly to upward revisions to tax revenue from gross other individuals' income of just over $2 billion in each of those years. Mitigating these factors are lower expectations for CGT following the recent decline in the share market and fewer forecast high value asset realisations in the 2007‑08 income year (on which tax is paid in 2008‑09) compared with the 2006‑07 income year.

Taxation revenue from superannuation funds in 2007‑08 is expected to be $1.6 billion higher than forecast in the 2007 PEFO, as balancing payments related to the earnings of superannuation funds in 2006‑07 have been unusually strong, primarily reflecting more taxable contributions. Better wage and employment outcomes (compensation of employees) have increased taxable superannuation contributions, offset partly by weaker other income in 2007‑08, including capital gains.

Lower expectations for earnings on realised capital gains following, in part, from the recent falls in share markets is expected to reduce superannuation fund tax revenue in 2008‑09, down $1.8 billion on the 2007 PEFO estimate, mitigated slightly by increased contributions from higher wage and other earnings.

Forecast company tax revenue has increased by $1.2 billion in 2007‑08 as ATO audits have resulted in greater than expected revenue from amended tax assessments related to previous income years. Little, if any, of this additional revenue is expected to be collected in 2007‑08 as taxpayers may dispute these assessments (this accounts for most of the difference between the increase in accrual taxation revenue and cash taxation receipts in 2007‑08). Previous experience suggests that revenue will be collected over a number of years as disputes are settled. Without this additional revenue from audits, company tax in 2007‑08 would have been weaker than previously forecast, reflecting slowing profit growth, including from global financial market turbulence.

Significant increases in the prices of coal and iron ore are primarily responsible for the large upward revision to corporate GOS in 2008‑09 (up 9.2 percentage points). Offsetting the influence of commodity prices on taxable company profits, companies are expected to realise less income from capital gains as a result of lower share prices and accrue less net interest income (as non‑financial corporations experience higher interest rates on borrowings and higher funding costs place pressure on financial corporations margins). Taking into account all of these influences, forecast company tax is expected to be $1.7 billion higher in 2008‑09.

Estimated revenue from the petroleum resource rent tax (PRRT) has decreased by around $200 million in 2007‑08, as lower than expected extraction of oil and related fuels more than offset the rise in the oil price since 2007 PEFO (up A$15 per barrel). In 2008‑09, PRRT is expected to increase by around $500 million as the higher forecast oil price (up A$37 per barrel) more than offsets the impact of lower production expectations and an increase in deductible production and exploration costs.

Forecast goods and services tax (GST) revenue has increased by around $500 million in 2007‑08, largely reflecting higher than expected growth in consumption subject to the GST in late 2007. For 2008‑09, the decrease in forecast revenue of around $400 million primarily reflects GST refunds of around $500 million expected to be paid following the Federal Court of Australia decision in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159, as well as slower growth in consumption subject to GST and private dwelling investment (down 4.4 percentage points) relative to the 2007 PEFO forecasts.

In 2007‑08 and 2008‑09, revenue from excise duty has been revised up by around $100 million and $400 million respectively, on the back of stronger growth in demand for diesel, tobacco and other refined petroleum products. Overall, demand for fuels continues to grow despite rising prices, but strong business demand and substitution away from petrol engines in the consumer market is particularly supporting diesel excise revenue. Revenue from excise on other refined petroleum products is also increasing from the substitution away from petrol and diesel towards blends containing biofuels.

Customs duty revenue estimates have remained largely unchanged in 2007‑08 and 2008‑09, although this reflects offsetting movements in revenue components. The relative strength of the Australian dollar and increasing use of bilateral free trade agreements has resulted in a downward revision in the general and textiles, clothing and footwear categories of customs duty revenue. This decline is partly offset by increased importation of products that incur excise‑equivalent customs duty, in particular refined petroleum products and beer.

Forecast non‑tax revenue has been revised up by $1.5 billion in 2007‑08 and $2.8 billion in 2008‑09. In 2008‑09, this reflects an $814 million increase in the projected RBA dividend largely reflecting additional realised capital gains since 2007 PEFO. The RBA dividend in 2007‑08 was impacted by the appreciation in the exchange rate. Dividend payments from the RBA can vary significantly from year to year due to movements in interest rates and the exchange rate. There has also been an increase in Future Fund interest earnings, partly offset by a reduction in estimated Future Fund dividends due to revisions to the Fund's forecast portfolio. In addition there has been an increase in interest received by the Australian Office of Financial Management on its investments.

Box 2: Effect of terms of trade increases on tax revenue The tax revenue implications of the terms of trade boom flow from the impact of the boom on the nominal economy, which is discussed in Box 9 in Statement 2. Overall, the level of GDP is estimated to be around $100 billion or 9 per cent higher in 2008‑09 as a result of the terms of trade boom. These estimates provide broad orders of magnitude only and are sensitive to the rate, and composition, of growth assumed for the Australian economy without the terms of trade boom. The terms of trade boom is estimated to generate $87 billion in tax revenue over the five years to the end of 2008‑09, with $33 billion of that in 2008‑09 alone (see Chart A). The terms of trade boom is estimated to contribute 11 per cent of tax revenue in 2008‑09. These estimates are not a good guide to the effect of the terms of trade increase over the projection years, especially as key commodity prices are assumed to retrace some of their recent gains in the projection period. Chart A: Tax revenue
Tax revenue impact Source: Final budget outcomes and Treasury estimates.		Additional tax revenue by source Source: Treasury estimates.
The higher tax revenue has been driven primarily by higher income tax collected from individuals and companies, and higher CGT revenue. Table A: Composition of tax revenue gain Source: Treasury estimates. The revenue collected from companies is estimated to be $24.6 billion higher over 2004‑05 to 2008‑09. In 2008‑09, the terms of trade boom is estimated to have contributed $10.7 billion, or 14 per cent, of revenue from company tax. The increase reflects higher levels of company profits flowing from higher bulk commodity prices. Company profits are estimated to be around 20 per cent, or $51 billion higher, in 2008‑09 than would have been the case without the terms of trade boom. Mining companies receive higher revenue from commodity prices, boosting their profits and lifting investment. Companies that supply goods and services to the mining industry also benefit from stronger earnings, while many other companies gain indirectly as incomes flow through to other parts of the economy. Company tax revenue does not increase concurrently with higher company profits as companies pay some of their tax in the year following that in which profits are earned. Hence, significant revenue will be collected from companies in 2009‑10 as a result of the higher company profits in 2008‑09. The revenue collected from individuals is estimated to be $47.9 billion higher over the period, with $17.1 billion of that in 2008‑09. Most of this change reflects higher income tax withholding payments from individuals, due to higher average wages and employment. In 2008‑09, non‑farm average weekly earnings and employment are estimated to be higher by 6½ per cent and 2 per cent respectively due to the terms of trade boom. Individuals are also assumed to receive higher dividend payments as companies pass on to shareholders part of their increased profits. The revenue collected from superannuation funds is estimated to be $1.7 billion higher over the period, reflecting higher taxable contributions made to superannuation funds. Contributions are assumed to have risen with higher nominal wages and employment. Superannuation funds will have benefited from higher dividend income, which tends to reduce their net tax payable given that excess franking credits for tax paid by companies and trusts are refundable. The revenue collected from other taxes would also rise as higher incomes allow people to consume more taxable goods and services. Revenue from the GST, and excise and customs duties are estimated to increase by $8.9 billion and $4.0 billion respectively over 2004‑05 to 2008‑09. Any increase in revenue from the GST would result in an equal increase in grants to the States. The revenue collected from CGT on individuals, companies and superannuation funds is estimated to be $7.3 billion higher over 2004‑05 to 2008‑09 with the terms of trade boom, reflecting higher asset prices. Companies are assumed to retain part of their higher earnings which should result in the value of the Australian share market being higher than would otherwise have been the case, while higher incomes and increases in migration are assumed to increase the demand for housing and hence house prices.

Box 3: Capital gains tax Capital gains tax (CGT) is a significant, yet volatile, component of individuals, companies and superannuation funds income taxes. Tax payable on net capital gains was $11.4 billion (1.1 per cent of GDP) in 2005‑06, a 64 per cent increase on 2004‑05. Early data indicates that CGT has grown to almost $17 billion in 2006‑07. Income from capital gains can be broken into three broad sources from tax returns: shares, real estate and other assets, as shown in Chart A. Companies and superannuation funds derive a large proportion of their capital gains from shares, while individuals derive a significant proportion of their capital gains from both shares and real estate. Compositional shifts in capital gains can occur over time as prices change at different rates across asset markets. From the mid‑1990s through to around 2000, share markets generally grew strongly and this led to an increasing proportion of capital gains being derived from shares. In the first few years of the 2000s, house prices grew strongly while share markets slowed, resulting in real estate becoming more significant as a source of capital gains. In the last few years, the share market again grew more strongly than house prices, leading to a higher proportion of capital gains being derived from shares. Chart A: Total capital gains income by asset type (income‑year basis)(a)
Levels		Proportion
This data is sourced from the CGT schedule, which taxpayers are generally required to complete if their net capital gains in that year are more than $10,000. On average, over 90 per cent of all capital gains by value are reported in the CGT schedule. Source: ATO Taxation Statistics and Treasury estimates for 2006‑07. In recent years, capital gains from shares and real estate have not always moved in line with changes in Australian shares and house prices, respectively. Capital gains income is also affected by the length of time assets are held, when assets are disposed of and the availability of capital losses to offset capital gains. Charts B and C compare capital gains as a percentage of the total capital stock with the relevant price. Capital gains from shares generally move with changes in Australian share prices, but there is significant uncertainty regarding the timing of the gains. As real estate assets tend to be turned over less frequently than shares, capital gains from real estate tends to follow the trend in house prices rather than year to year movements.
Chart B: Capital gains from shares and share prices Per cent of total market capitalisation. Source: RBA Bulletin, ATO Taxation Statistics and Treasury estimates for 2006‑07.		Chart C: Capital gains from real estate and house prices Per cent of total capital stock. Source: ABS cat. no. 6416, ATO Taxation Statistics and Treasury estimates for 2006‑07.
The CGT estimates in this Budget are shown in Table A and assume some decline in CGT receipts in 2008‑09 and 2009‑10, reflecting recent falls in the share market and a forecast slowing in house price growth from 2008‑09. There is often a lag of up to one year between an asset being sold and when CGT is assessed and collected. Table A: Capital gains tax forecasts (cash basis) Source: Treasury estimates.

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