Table 2 is a reconciliation of this budget's revenue estimates with those at the 2005‑06 Budget and the 2005‑06 MYEFO.
Table 2: Reconciliation of total Australian Government general government
revenue estimates from the 2005-06 Budget and the 2005-06 MYEFO
Total revenue for 2005-06
Since MYEFO, estimated total revenue for 2005-06 has been revised up by $4.2 billion, largely reflecting strong growth in company profits, strong capital gains for investors and robust growth in full‑time employment.
Total revenue for 2006-07
Total revenue for 2006-07 has also been revised up by $4.2 billion since MYEFO. The upward revision represents the flow-on effect of stronger growth in expected revenue from companies and individuals in 2005‑06, together with a stronger outlook for corporate profits in 2006.
These upward revisions have been partly offset by the impact of the Government's decision to provide additional personal tax relief and to increase the diminishing value rate of depreciation of eligible company assets acquired from 10 May 2006.
Effect of policy decisions
Policy decisions since the 2005-06 MYEFO are expected to reduce taxation revenue by around $7.0 billion in 2006‑07 and around $39.1 billion over the forward years.
The Government's decision to provide additional personal income tax relief will reduce revenue by $6.4 billion in 2006‑07, and $35.9 billion over the forward estimates period.
From 1 July 2006, the 30 per cent threshold will increase to $25,001; the 42 per cent marginal tax rate will be cut to 40 per cent and the threshold will increase to $75,001; and the top marginal tax rate will be reduced from 47 per cent to 45 per cent and the threshold will increase to $150,001.
The Government's personal tax cuts package includes changes to the low income tax offset (LITO). From the 2006-07 income year, the LITO will increase from $235 to $600 and will begin to phase out from $25,000. From 1 July 2006, the Medicare levy low income phase-in rate will also be reduced from 20 per cent to 10 per cent, ensuring that more low income taxpayers pay a reduced rate of Medicare levy.
In addition, the fringe benefits tax rate will be reduced to 46.5 per cent, effective from 1 April 2006, with a cost of $870 million over the forward estimates.
Reducing the top marginal rate and increasing the top threshold will improve Australia's competitiveness compared with other OECD countries. From 2006-07, the top marginal tax rate will apply to only around 2 per cent of taxpayers.
The budget also contains a number of other major policy decisions.
- Increasing the diminishing value rate for determining depreciation deductions under the diminishing value method from 150 per cent to 200 per cent for eligible assets acquired on or after 10 May 2006, with a cost to revenue of $3.7 billion over the forward estimates period.
- Taxing the distributions to non-resident trustee beneficiaries, which is expected to increase taxation revenue by $250 million in 2007-08 and $800 million over the forward estimates.
- Funding the Australian Taxation Office with an additional $82 million over four years to maintain tax compliance by high wealth individuals and their associated entities. This funding is expected to raise an additional $65 million in revenue in 2006-07 and $615 million over the forward estimates.
- Preventing some public sector superannuation schemes from improperly using pre-1 July 1988 funding credits. This is expected to increase taxation revenue by $150 million in 2006-07 and $600 million over the forward estimates.
A detailed description of the policy decisions is provided in Budget Paper No. 2, Budget Measures 2006-07. A summary of revenue policy decisions since the 2005-06 MYEFO is provided in Table 3.
Table 3: Revenue policy decisions since the 2005-06 MYEFO
- The personal income tax cuts and related reduction in the fringe benefit tax rate total $36.7 billion over four years.
Effect of parameter and other variations
Parameter and other variations are expected to increase revenue in 2005-06 by $4.2 billion, and revenue in 2006-07 by $11.2 billion, relative to the MYEFO forecasts.
Taxation revenue growth has been revised up to 4.4 per cent in 2006-07.
The strength in taxation revenue largely stems from further improvement in corporate profitability, bolstered by the flow-on effect of stronger outcomes in 2005-06.
Looking ahead, expected growth in nominal GDP remains supportive of continued strength in revenue, particularly from the corporate sector. In underlying terms, personal income is expected to continue to grow strongly on the back of continued strength in compensation of employees and the realisation of capital gains by investors.
Further detail on how the revised outlook for the economy has affected individual revenue heads over the forward estimates 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.
Taxation collections to the end of the March quarter 2006 imply that the end of year outcome for taxation receipts will be 9.0 per cent above 2004-05 levels. This compares with MYEFO expectations of 7.3 per cent.
The strength in taxation collections observed since MYEFO largely reflects the cumulative effect of earlier rises in the terms of trade on corporate profits and labour market outcomes.