Policy Approach

Federal Government Revenues

Under the Australian constitution the federal government is empowered to collect revenue to fund public works. Most of this revenue is collected in the form of taxation.

There are several different types of taxation. In many instances, students do not use these terms correctly, or they are not specific enough when suggesting the type of tax that the government is manipulating. It is well worth your time to learn these terms correctly from the start.

Direct Tax: A direct tax can be defined as one that is paid directly to the government by the person or institution that owes the tax. That is, the money does not pass to a third party before being paid to the government. Some examples of direct taxes that are levied by the Australian government are:
1. Personal income tax: This is the tax which contributes the highest percentage to the government revenue base – in 2004/5 income tax accounted for 54% of all government revenue, but by 2010/11 lower income tax rates meant that this had fallen to just under 50%. (There was also a change to the way in which the GST is reported that affected this outcome.) Income tax is the tax that we pay from our income. In Australia we have a progressive income tax scale. This means that as your income increases you will pay a higher rate of tax.
2. Company tax: At the end of each financial year, companies listed in Australia must pay some tax on the profits that they have made during the year. At the moment, the rate of tax payable by companies is 30%, but in the 2010/11 budget it was announced that for most companies this will fall to 28% in the near future.
3. Fringe Benefits Tax (FBT): This tax was introduced when it became apparent that many well paid executives were also being “paid” in the form of extras – benefits that were not necessarily being transferred in the form of money. For example, being given access to a company car has value, but it does not appear on the financial records of the tax payer. FBT was brought in to ensure that these benefits were also taxed.
4. Capital Gains Tax (CGT): When a person or a business sells an asset, it is possible that they will have made a profit on the sale. This profit is taxed. The value of the asset will be scaled based on an index, and then any excess received over the scaled value will be considered taxable.
Indirect Taxes: These are taxes which are collected by a third party on behalf of the government. At first this may seem an unusual concept – why would anyone want to act as a tax collector? The reality is that many activities are taxed, and the provider of these activities is obliged to collect the tax, and then pass it on to the government. Indirect taxes are regressive in nature. This means that as your income increases, the proportion of your total income that is spent on the tax decreases.
1. Goods and Services Tax: The most obvious example of an indirect tax is the GST. We pay the GST to businesses when we buy most goods and services, and they in turn pass it on to the federal government. The GST is levied at 10%, and it is levied on the majority of things purchased in the Australian economy. Exempt items include those things produced for export, basic food items and education.
2. Excise duties: At one time these were referred to as “penalty taxes”. The government levies excises on certain items that have relatively inelastic demand curves to assist in raising revenue. Sometimes, these excises are linked to programs designed to reduce negative externalities associated with the consumption of those items, but this is not always the case. Excises are levied on (amongst other things) petrol, cigarettes and alcohol.
3. Tariffs: A tariff is a tax that is paid on an import. When a local business imports certain things (such as clothing or motor vehicles) they must pay a tax to the federal government in order to take possession of these goods in order to sell them.

The government also gains a small percentage of its revenue from non-tax revenue. For example, the proceeds received from selling certain government assets, the profits derived from the businesses that the government still runs and dividends received for investments made by the federal government also appear in the federal budget.

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