The Mid-Year Economic and Fiscal Outlook (MYEFO) provides a picture of a resilient domestic economy that is inching its way forward through a testing environment of high inflation and higher interest rates. The budget balance has improved through this period, coming in well ahead of the government’s expectations. This has been driven by stronger than expected commodity prices and by historic tax policy settings formulated for a different type of economy – the COVID era.
The government now expects the 2023-24 Budget to be close to a balanced budget, and if recent history is a good guide, then the likelihood of a surplus occurring is high. But this outcome comes at a cost to both individual and corporate tax payers - the latest national accounts shows nominal income tax paid per capita increased by nearly 7% in the September quarter alone and was 20.5% higher than the same quarter in 2022.
While this income tax growth is high it must be remembered that the genesis of this budget outperformance to historic levels comes off the back of the fiscal and monetary policy stimulus packages put in place to stabilise the economy during the COVID pandemic. Higher company income tax receipts is a result of the underpinning aggregate demand through programs like JobKeeper (which subsidised the operating costs of many businesses in Australia), while higher personal income tax receipts comes from high employment rates - created through ensuring workers kept their linkages to their employers during the pandemic downturn and stimulating spending through very low interest rates.
Achieving this high tax take is therefore in essence taxpayers repaying the social cost of seeing the economy through the other side of pandemic without much economic scarring. This should be done - there is no thing as a 'free lunch' - and enables our national debt position to fall, thereby enabling headroom to enact nation-saving policies again when the next major economic shock occurs. And we can be confident it will.
But MYEFO reaffirms the need for reform to enable a long term fiscally sustainable position for the budget. Simply put, government spending as a percentage of GDP is still too high relative to our tax take - even at these elevated levels of tax receipts. KPMG continues to advocate the need for wholesale tax reform or spending restraints or both in order for the budget to be balanced 'over an economic cycle'.
It should be noted there are several other factors creating a ‘perfect storm’ for a strong budget performance –
- strong commodity prices have increased revenues
- bracket creep has also contributed as higher wages and nominal profits increase revenue from income taxes
- High employment levels have increased revenue
- High Inflation has increased revenue from indirect taxes
It should also be noted that the outlook for inflation in MYEFO reinforces the likelihood of interest rates staying higher for longer as the FY24 forecast for CPI has jumped up by 50bp compared to the May Budget.
Alia Lum, KPMG Tax Policy Partner added:
There were some new tax measures in the MYEFO statement, including an increase in the foreign resident capital gains withholding tax rate applicable to purchasers of Australian real property from 12.5% to 15% and removal of the $750,000 purchase price threshold before the measure kicks in. The announcement to deny a tax deduction for general interest charge (GIC) and shortfall interest charge (SIC) imposed by the Australian Taxation Office (ATO) incurred in income years starting on or after 1 July 2025 was unexpected and will significantly increase the cost on taxpayers with respect to lengthy ATO audits and disputes, voluntarily amending tax returns or making late tax payments. This is particularly a concern where interest charges continue to accrue despite delays that are caused by the ATO in a review or objection process, or for matters such as transfer pricing where there is no time limitation in how many years back the ATO can challenge. Taxpayers will also need to carefully consider whether they will agree to any Period of Review extension requests from the ATO.
For further information
Ian Welch
iwelch@kpmg.com.au
0400 818 891