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Special Topic: Tax revenue for year ended June 2009

The Government's financial statements for the year to June 2009 were published on 14 October. Those statements reported that core Crown tax revenue had "declined over the year, falling by $2.1 billion to $54.7 billion". We present here some further analysis of 2008/09’s tax revenue outturn, what caused this decline of $2.1 billion and what these results imply for the short-term outlook.

The decline in tax revenue was spread around most of the major tax types, the exception being GST, which increased in 2008/09.

Table 1 – Crown tax revenue, $ billion
Tax type 2008/09 Change since 2007/08
Source deductions 22.6 –0.8
Other persons tax 2.8 –0.8
Corporate tax 9.8 –0.7
GST 11.6 +0.4
Other 7.9 –0.2
Total 54.7 –2.1

Source deductions reduced by tax cuts

Changes to personal income tax rates and thresholds on 1 October 2008 and 1 April 2009 reduced source deductions (mostly PAYE) by about $1.7 billion. About $1 billion of growth came from macroeconomic factors, which is consistent with growth in aggregate salaries and wages of about 5% over the same period.

The decline in source deductions has continued on into the 2009/10 year. The effects of the tax cuts, and lower employment in the September 2009 quarter than in September 2008, outweigh the effects of increases in salary and wage rates over the past year. We expect year-on-year growth in source deductions to continue to be negative for the remainder of the 2009/10 year.

Other persons tax affected by the business cycle

Net other persons tax is an amalgam of income taxes from entities such as unincorporated businesses (eg, sole traders) and trusts, end-of-year square-ups from salary and wage earners, and personal income tax rebates (eg, for charitable donations). As with source deductions, this tax type was also affected by tax cuts, which reduced other persons tax by approximately $0.4 billion in 2008/09. Provisional tax was down on the previous year, by about $0.2 billion, mainly as a result of 2009 tax year unincorporated business profits being down on 2008 and taxpayers lowering their tax assessments accordingly. In addition, net terminal tax was down by $0.3 billion, mainly owing to a greater degree of income tax over-estimation in the 2008 tax year than in 2007.

These trends in provisional tax and terminal tax are typical of a recession. Provisional tax starts to come down as profits decline. Over-estimation of the amount of tax actually due increases through a combination of taxpayers using the standard uplift factor (ie, paying provisional tax on the basis of last year's tax plus 5%) and a desire to avoid interest and penalties, all in the face of declining profits/income. This increased over-estimation of tax eventually leads to lower net terminal tax. This pattern has continued in 2009/10 tax outturns to date, in which provisional tax assessments have continued to decline and net terminal tax is still at a relatively low level.

Corporate tax: profits, losses and tax cuts

The company income tax rate was reduced from 33% to 30% in the 2009 tax year. Along with a few other minor policy changes, this took about $1 billion out of corporate tax in 2008/09. Declining profits also had an effect on corporate tax to the tune of approximately $1.1 billion. It is also likely that an increase in the size and incidence of losses contributed to the decline in corporate tax, but this will not become clear until final 2009 tax returns are lodged over the next year or so.

On the positive side, recognition of revenue in respect of certain structured finance transactions added about $1.4 billion to corporate tax. For more information on this, see page 9 of the financial statements.

Corporate tax has continued its downward trend into 2009/10. Tax revenue for the four months to October 2009 quarter was down about 50% on the same period last year. In a similar fashion to other persons tax, net terminal tax is well down on last year and provisional tax has reduced further as profits have continued to decline and uplifting/ estimation is made from a relatively low base.

Examining the recent financial results of the top 50 or so largely New Zealand-owned listed companies shows that pre-tax profits are well down on last year, perhaps by as much as 50% in aggregate. These companies represent a wide range of industrial sectors, which is consistent with the decline in corporate tax revenue being across the board. Although we are restricted in what we can reveal publicly about the sources of company tax revenue, it is no secret that those companies that are most exposed to the finance and property sectors have been most affected by the downturn.

Figure 5 - Growth in tax revenue
Figure 5 – Growth in tax revenue.
Source:  The Treasury

GST growth in line with consumption

The $0.4 billion increase in GST in 2008/09 represents growth of around 3.9%. This was broadly in line with growth in total nominal consumption for the year, although Figure 6 demonstrates that this may have been more coincidental than anything else! The gap between the GST and consumption growth rates shows that other things also affect the amount of GST collected, eg, residential investment. Figure 6 also shows that the weak growth in GST has continued into the 2009/10 year.

Figure 6 – Core Crown GST revenue and nominal consumption
Figure 6 – Core Crown GST revenue and nominal consumption.
Source:  Statistics New Zealand, The Treasury

Summary

Although various tax cuts (approx. $3 billion) were the major factor in the decline in tax revenue in the year to June 2009, falling business profits also played a big part (in excess of $1 billion). On the positive side, growth in salaries/wages and consumption added approximately $1.5 billion to tax revenue. These factors are still at work in the 2009/10 outturns to date. Over the course of the year, the tax cut and falling profit effects are expected to dominate, resulting in a fall in total tax revenue for the full 2009/10 fiscal year despite a recovery in economic growth.

Further out, tax revenue is expected to grow again through the upswing in the economic cycle. However, the build-up of tax losses through the recession means that growth in business income taxes may grow more slowly than other taxes, as the tax losses are progressively used to offset subsequent profits. Thus, growth in total tax revenue may lag growth in nominal GDP for a year or two after the end of the recession.

Our latest updated forecasts will be released in the Half-Year Update on 15 December.

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