Statement 5: Revenue (Continued)
The tax‑to‑GDP ratio
The global financial crisis hit all heads of revenue, as it affected all aspects of the economy — production, consumption, profits and employment. From its pre‑crisis level in 2007‑08, the tax‑to‑GDP ratio fell 3.6 percentage points to 20.1 per cent in 2010‑11, the biggest decline in the ratio since the 1950s.
Taxes have been recovering since the post‑crisis trough, but the recovery in tax receipts has not matched that of nominal GDP. Even though nominal GDP had recovered by 2010‑11 to the level projected at the 2008‑09 Budget — the last Budget before the crisis — tax receipts in 2012‑13 are still expected to be well below their pre‑crisis projection (Chart 2).
Chart 2: Change in GDP and tax receipts estimates
Nominal GDP
Tax receipts
Source: Treasury estimates.
This is partly because some of the factors that characterised the pre‑crisis period —very strong capital gains tax (CGT) receipts owing to strong equity prices and a maturing CGT system, rapidly rising commodity prices, rapid credit growth, and a low household savings rate — have not been sustained post‑crisis. Further, some factors contributing to the weaker recovery in tax receipts relative to the economic recovery are also affecting the structure of the tax base. These factors will constrain growth in tax receipts beyond the forecast period.
Key factors affecting the tax‑to‑GDP ratio from the pre‑crisis years to the end of forward estimates are discussed below.
Capital gains tax
Capital gains tax is paid by individuals, companies and superannuation funds on the realisation of assets held (Box 1). Reflecting strong asset price growth in the period before the financial crisis, CGT receipts reached a peak relative to GDP of 1.5 per cent in 2007‑08. Following the crisis, CGT receipts are expected to be only 0.5 per cent of GDP in 2011‑12. Had CGT receipts remained at 1.5 per cent of GDP, tax collections would be around $14.8 billion higher in 2011‑12.
The weakness in CGT is partly related to equity prices (Chart 3). While nominal GDP has increased by a third in the past half‑decade, the ASX 200 has fallen by a fifth over the same time.
Chart 3: Capital gains tax(a) and the ASX 200
(a) Yearly CGT amounts have been ascribed to the mid‑point of each fiscal year (January 1).
Source: RBA, Treasury estimates.
Even as equity prices recover, other factors will continue to subdue CGT receipts over the forward years. A large stock of capital losses was generated during the crisis (Box 2, Statement 5, 2011‑12 Budget), which is expected to affect future CGT receipts until at least 2014‑15. In addition, the housing market is expected to remain soft.
Box 1: Capital gains tax
When the price of an asset changes, this leads to a capital gain (or loss). CGT, however, is only paid when the gains are 'realised' (that is, when the asset is sold). CGT is not itself a separate tax. Instead, a net capital gain, which can be realised by individuals, companies and super funds, is assessed as a component of taxable income.
The CGT forecast is derived by applying an effective tax rate to the projected net capital gain. The net capital gain is determined by tracking the stock of assets that are subject to CGT and their price movements, while making assumptions about the 'realisation rate' of those capital gains (or losses). Realisation rates (the proportion of assets sold each year) vary considerably from year to year, depending on the type of asset, movements in relevant prices and the nature of investors. Asset price changes also vary considerably.
For forecasting purposes, it is assumed that the yearly change in asset prices equates to around 5.3 per cent over the projection period — the same as nominal GDP growth.
Forecasting CGT is further complicated by the fact that capital losses may be used to offset capital gains. A net capital loss in one year must be 'carried forward' into a later year when it can be used to offset a later net capital gain. The forecasting methodology must, therefore, track the stock of capital losses and the rate at which they are used over later years. In addition, many of these losses may never be used. For example, if a business goes bankrupt, any losses incurred by the business may be extinguished.
Consumer caution
A further significant development dampening the tax‑to‑GDP ratio is the greater share of household income that is being saved, rather than consumed (see Statement 4). The household savings rate, already rising before the global financial crisis, has remained elevated in recent years (Chart 4), while growth in personal and housing finance has slowed significantly.
The continuing consumer caution partly reflects sluggish asset prices and global instability and uncertainty. The effect of weaker consumer sentiment has been particularly evident in retail trade, but its effects on other activity can be pervasive, with flow‑on effects for tax receipts, especially for consumption taxes like excise duty and the GST.
Chart 4: Household savings ratio
Source: ABS National Accounts.
In addition to the effect of generalised consumer caution on tax receipts, households have been allocating a larger share of consumption towards goods and services not subject to the GST, such as education, rent, health and food, as their prices have increased substantially compared with the prices of goods and services that are subject to GST (Box 4, Statement 5, 2011‑12 Budget).
Increasing importance of the mining sector and the investment boom
High commodity prices and the mining boom have contributed to higher levels of nominal GDP. However, the shift in profits to the mining sector, and the dampening effect of the high exchange rate on some other parts of the economy, have also acted to dampen tax receipts as a share of GDP.
Tax receipts from the mining sector are being affected by high levels of tax deductions related to capital expenditure, reflecting the unprecedented scale of mining investment over the forward estimates. Total mining investment as a percentage of GDP is expected to double to nearly 9 per cent in 2013‑14 from its 2008‑09 level, which was already markedly higher than its historical share of around 1 to 2 per cent of GDP. This will result in continued high depreciation deductions, affecting tax paid relative to gross operating surplus (GOS) in the sector (Box 2).
In recent years, the mining sector has accounted for around 30 per cent of private corporate gross operating surplus, but only 15 per cent of company tax. The introduction of the minerals resource rent tax (MRRT) and higher expected petroleum resource rent tax (PRRT) receipts towards the end of the projection period will increase tax receipts from the mining sector.
Box 2: The mining sector and tax
The increasing importance of the mining sector to the Australian economy is reflected in the share of gross profits accruing to mining. Mining GOS accounted for 16 per cent of total corporate GOS in 2002‑03. By 2011‑12, it had risen to 29 per cent. Because the ratio of corporate income tax to GOS has been lower for mining compared to other industries (Chart A), a consequence of the compositional change in the economy is that corporate tax as a share of GOS declines over time. Total tax as a share of GDP also declines, all other things remaining equal.
Importantly, the expected massive increase in mining investment over the next three years, to nearly 9 per cent of GDP in 2013‑14, will generate very large tax deductions. This high investment is in contrast to the characteristics of the mining boom during the mid‑2000s, which was largely driven by increasing commodity prices and the expansion of existing projects. While existing projects are still expanding, there is an increase in new projects. In addition, the mining sector can deduct some forms of investment immediately rather than over the life of the asset. This will reduce the tax‑to‑GOS ratio during high investment periods. This is illustrated in Chart B, which shows that the mining sector's share of corporate tax is expected to remain below its share of GOS. The chart also shows that the introduction of the MRRT will increase the share of tax paid by the mining sector, such that the sector's share of tax increases towards its share of GOS.
Chart A: Corporate tax‑to‑GOS ratio
(average 2000‑01 to 2009‑10)
Chart B: The mining sector's share of
relevant corporate indicators(a)
Source: Treasury estimates, Taxation Statistics, ABS.
(a) Tax and depreciation are sourced from ATO taxation statistics, which is reported on an income year basis. 'Depreciation' is calculated as the 'deduction for decline in depreciable assets' plus 'immediate deduction for capital expenditure'. Taxes include company tax, PRRT, and MRRT but do not include state royalties. Although GOS is conceptually different to taxable income (Clark, J, Pridmore, B and Stoney, N (2007), 'Trends in aggregate measures of Australia's corporate tax level', Economic Roundup, Winter), it is the component of profits in GDP and is therefore the most appropriate economic base to analyse movements in the tax‑to‑GDP ratio.
Patchwork economy
Subdued growth in many sectors in the economy is also affecting tax collections. While the mining sector has grown strongly, the high Australian dollar together with global uncertainty and challenging credit conditions in some sectors of the economy have dampened consumer sentiment and reduced company profits and employment growth in the non‑mining sectors. This has resulted in weaker growth in company tax receipts from the non‑mining sector, which is likely to continue to weigh on the tax‑to‑GDP ratio over the forecast period.
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