The Government has announced a ‘Temporary Budget Repair Levy’. The tax will apply at a rate of two per cent to personal taxable incomes in excess of $180,000 per annum from 1 July 2014 to 30 June 2017, and is projected to raise $3.1 billion over the forward estimates. The legislation that has been introduced will adjust ‘a number of tax rates that are currently based on the top personal marginal tax rate’, including the fringe benefits tax.
In 2011–12 (the latest public data) approximately 2.3 per cent of taxpayers had taxable incomes above $180,000; the Explanatory Memorandum estimates that ‘around 400,000 taxpayers (or less than four per cent of taxpayers) will directly incur the levy’.
Levies and taxes
Some commentary has centred on the distinction between a levy and a tax. The High Court has previously broadly defined a tax as ‘a compulsory exaction of money by a public authority for public purposes … and … not a payment for services rendered’. Taxes on specific industries or transactions are often described as levies, particularly if revenue is used for industry purposes.
The contribution of high-income earners to ‘repairing’ the Budget
The Treasurer stated in his budget speech ‘Tonight we are asking higher-income earners to help repair the Budget … It is only fair that everyone makes a contribution’ and the Prime Minister has stated that ‘there’s a very significant share of the heavy lifting being done by high income earners as it should’. The Treasurer also stated the need to ‘ensure the Budget is sustainable’. One measure of the long-term sustainability of a budget is the ‘structural balance’. In a report on the topic, the Parliamentary Budget Office (PBO) explained:
The structural budget balance (SBB) is a partial measure of the sustainability of the budget. It shows the underlying position of the budget after adjusting the actual budget balance for the impacts of major cyclical and temporary factors.
Personal income taxes (including capital gains) are an important part of the Australian Government’s structural balance. They are one of the largest revenue sources, at almost 52 per cent of the Commonwealth’s taxation revenue over the forward estimates.
$180,000 is the threshold for the highest personal marginal tax rate (45 per cent). The application of the new tax effectively reverses a two per cent decrease to the top marginal rate that first applied in 2006‑07 (the previous top marginal rate was 47 per cent). However, the preceding two per cent decrease was one of a larger set of tax cuts that significantly altered the structural budget balance. The PBO estimated that:
Over two thirds of the 5 percentage points of GDP decline in structural receipts over the period 2002–03 to 2011–12 was due to the cumulative effect of the successive personal income tax cuts granted between 2003–04 and 2008–09.
These income tax cuts took the form of both lower tax rates and higher thresholds. As the PBO noted in an analysis of Commonwealth revenue:
In Australia, changes to tax rates and thresholds have been particularly noticeable for higher incomes, with the top marginal tax threshold increasing from $35,788 (or $141,955 in 2012–13 dollars) to $180,000.
Figure 1 shows changes in the threshold for the top income rate, and the number of and taxable income share of individuals paying the top marginal rate.
Figure 1: Top marginal rate thresholds and taxpayer statistics
Source: Parliamentary Library estimates based on Australian Taxation Office (ATO), Tax Statistics, 1999–2000 to 2011–12. Data are unavailable for 2004–05 as ATO tax statistics for those years do not align with the top tax bracket. 2003–04 and 2005–06 data are approximate because of differences between ATO statistics and the top tax bracket.
While the tax will contribute to improving the fiscal balance, it will only apply above the higher threshold first applied in 2008–09. In terms of net fiscal impact, the tax is the largest revenue measure in the 2014‑15 Budget. The majority of savings in the Budget come from reductions in expenditures. More importantly, as a temporary tax it will not permanently alter the underlying structural balance, because the top marginal rate for those earning over $180,000 will decrease again after 2017–18.
. Australian Taxation Office (ATO), Tax Statistics 2011–12, ATO, 2013, Table 3: Individual tax – selected items by taxable income, age, gender and taxable status, 2011–12 income year, accessed 15 May 2014; Explanatory Memorandum, Tax Laws Amendment (Temporary Budget Repair Levy) Bill 2014, op. cit., p. 7.
. Matthews v Chicory Marketing Board (Vic)  HCA 38, (1938) 60 CLR 263, see also, http://www.austlii.edu.au/au/cases/cth/HCA/1938/38.html, accessed 15 May 2014. The High Court has also emphasised the substance rather than the form; see Ha v New South Wales  HCA 34, see also, http://www.austlii.edu.au/au/cases/cth/HCA/1997/34.html, accessed 15 May 2014.
. In one example, funds from the Dairy Adjustment Levy were used for the Dairy Structural Adjustment Fund (P Pyburne, Dairy Adjustment Levy Termination Bill 2008, Bills digest, 36, 2008–09, Parliamentary Library, Canberra, 2008, accessed 15 May 2014).
. 45 per cent is the highest marginal personal income tax rate; this means that for every dollar over the threshold ($180,000), the tax rate is 45 per cent. Lower tax rates apply to lower income levels.
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