Government revenue, and the startling Budget surplus, are bolstered by surging commodity prices driving up company tax returns. Still, a quarter trillion-dollar tax elephant lurks in the corner and inflation menaces. Callum Foote on the Budget and tax.
This Budget’s revenue results were higher across the board than forecasted in the October mini-budget, increasing by $46.7bn from $621bn to $668 billion. Almost $30bn of the increase came from company tax receipts bolstered by windfall commodity prices.
Treasury is being cautious, predicting big drops in commodity prices, which in part contribute to what looks like company tax receipts falling off a cliff.
Company tax revenue is also in dire straits, forecasted to fall by almost $10 billion is 2024-25 as well, not growing beyond 2022 levels for the entirety of the forward estimates period.
Welcome to the circus – Stage 3 tax cuts
The elephant in the room for government revenues – the expenditure giant that is – is the slated Stage 3 tax cuts due to start in July 2024, which are forecasted to cost the budget a quarter of a trillion dollars over ten years.
Stage 3 will remove the $120,000 to $180,000 37% tax bracket, increase the 45% top tax bracket threshold from $180,000 to $200,000 and reduce the marginal tax rate faced by the $45,000 to $200,000 tax bracket from 32.5% to 30%.
Economists largely agree that the regressive stage 3 cuts make Australia’s tax system more inequitable. Roughly half of the $254bn worth of tax cuts over 10 years, $117bn, will go to those earning more than $180,000 a year.
To put this in perspective, the impact these cuts will have on the budget, the forecasted budget deficits between 2024 and 2027, which the Treasurer is very proud of wrangling down, equal $129bn.
Estimates from the Parliamentary Budget Office, requested by Greens leader Adam Bandt, found that in those same years, the Stage 3 tax cuts would cost the government $85.7bn in potential revenue.
Put another way, two-thirds of our foreseeable budget deficits will be the result of the stage 3 tax cuts along with having an inflationary effect on the economy.
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A tax hike for low and middle income earners
While everyday Australians would, of course, welcome a tax cut, one Morrison era tax offset has come to an end. Meaning that millions of Australians will be worse off come July 1 this year.
The low-and-middle income tax offset (LMITO), worth around $1500 a year for 10 million people earning between $50,000 and $90,000, ends this financial year..
Those who were benefiting from the LMITO, e.g. someone on the current median income of $65,000, will have it replaced by a tax cut of $500 under the stage 3 reforms.
Meaning, that median income earner, and millions like them, will still be $1,000 a year worse off come the introduction of the Stage 3 cuts.
Comparing that to a high-income earner (say a banker, or a lawyer, or a doctor) who was not eligible for LMITO but will be reaping in the highest tax cut the Stage 3 reforms have to offer, $9,075, may make low- and middle-income earners a touch upset.
Politicians will also be earning that extra $9,075 on their salaries.
Tax receipts
Treasury’s attempts to avoid the elephant by discussing how much of the revenue ‘upgrade’ – budget speak for increase – “is concentrated in the near term, underpinned by a strong labour market and higher commodity prices.”
Tax receipts are predicted to drop by $2bn next year, from $616.3bn to $614bn, and if you exclude GST, the shortfall is $5bn from $530bn to $525bn.
However, total tax receipts remain roughly 23.3% of GDP throughout the forecasted period.
The budget acknowledges “the strong upgrade to tax receipts is expected to moderate after 2023–24”, blaming a drop in forecasted commodity prices and wages. Here lies a different story being told about wages, compared to the Treasurer’s budget speech.
For the direct effect of the Stage 3 tax cuts on government revenue, the total individual and other withholding tax (tax receipts from wages) is expected to fall by $6.2bn.
The last time this occurred was during the Global Financial Crisis over a decade ago.
GST crackdown
There will be a crackdown on GST compliance by the ATO. A $589m, four-year investment in the ATO is estimated to increase GST receipts by $3.8bn, and other tax receipts by $3.8bn, over the 5 years from 2022–23. Now that’s a crack team effort…
Implementing a multinational tax floor of 15%
Complimenting changes to multinational tax avoidance from October, the Government will implement key aspects of Pillar Two of the OECD/G20 Two-Pillar Solution to address tax challenges arising from digitalisation of the economy.
These include a 15% global minimum tax for large multinational enterprises as well as a 15% domestic minimum tax starting on or after 1 January 2024.
The global minimum tax and domestic minimum tax will be based on the OECD Global Anti-Base Erosion Model Rules, which are designed to ensure large multinationals pay an effective minimum level of tax on the income arising in each jurisdiction where they operate.
The global minimum tax and domestic minimum tax will apply to large multinationals with annual global revenue of EUR750m (approximately $1.2bn) or more.
This measure will only have a modest impact on the government’s bottom line, estimated to increase receipts by $370m and increase payments by $111m over the 5 years from 2022–23.
The (small) PRRT changes
A final disappointment in the Budget comes in the form of meagre changes to the Petroleum Resource Rent Tax (PRRT).
The pre-announced changes to the PRRT are no different from those contained within the Budget.
The measure limiting the deductions that offshore oil and gas producers can claim on their yearly profit to just 90%, instead of the former 100%, has been widely panned as ineffectual and cynical.
The proposed measure will only bring forward $2.4 billion in taxation revenue over five years, which would have otherwise taken decades to flow through.
The change does not increase the minuscule rate of tax, compared to other global oil and gas exporters, Australia levies on its offshore oil and gas industry.
The extraction and sale of Australian LNG netted multinational corporations over $93 billion in revenue last year alone.
Already a coalition of Teal and independent candidates, along with the Greens have opposed the measure, while experts fear that Chalmers has tried to quell calls for additional, meaningful reforms to the PRRT.
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Callum Foote was a reporter for Michael West Media for four years.