European cash crisis slices $7 billion from tax revenue

THIS week's budget update will show the government still on track for a 2012-13 surplus, despite the euro crisis wiping a whopping $7 billion over four years off expected capital gain tax revenue since May.

By InvestSMART · 28 Nov 2011

By InvestSMART ·
28 Nov 2011

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The crisis has driven down the value of shares and other assets.

Treasurer Wayne Swan will unveil spending cuts to help reach the surplus target but said yesterday it would be wrong to "take an axe" to the economy when the overseas situation was so uncertain.

With the European crisis hitting revenue hard, Mr Swan said the government would strike a balance between strong fiscal discipline and supporting job creation and growth.

The financial crisis has consistently knocked revenue there has already been a $130 billion write-down over five years to 2012-13, compared with the forecast. The $7 billion reduction in the capital gains estimate follows a 15 per cent fall in the Australian share market since the May budget, which Mr Swan said would result in lower-than-expected capital gains tax from companies, superannuation funds and individuals.

Despite saying the government would not hit the economy too hard with cuts, Mr Swan warned the statement would involve some "difficult decisions" on savings.

"Maintaining our fiscal rigour is absolutely critical at a time when international financial markets are punishing those countries that lack discipline," he said.

Finance Minister Penny Wong said the government had made about $100 billion in savings in its last four budgets "and there are no easy saves left".

The government in recent months has appeared to waver on whether a 2012-13 surplus would be attainable but has now toughened its language.

The budget's bottom line in 2012-13 and later years will be helped by speeding up more than $1 billion of Queensland flood relief into this financial year.

Savings were announced last week in programs for teachers performance pay and immunisation. The measures each saved about $200 million over four years.

The budget update will include a crackdown on tax breaks for foreign workers and executives who get living-away-from-home allowances that are tax dodges, yielding hundreds of millions in savings. Senator Wong said these were raised in the recent tax forum as being "problematic".

Such claims have jumped from $162 million to $740 million in five years. The changes will not hit Australians getting legitimate allowances.

Last Friday, the government moved to remove a huge tax deduction that could be claimed in corporate mergers a loophole that could have threatened the revenue by $10 billion.

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Frequently Asked Questions about this Article…

How has the European financial crisis affected Australian tax revenue and capital gains tax?

The article says the European crisis has driven down asset values and wiped about $7 billion off expected capital gains tax (CGT) revenue over four years since May. More broadly, the financial crisis has contributed to a roughly $130 billion write-down in revenue over five years to 2012–13 versus earlier forecasts.

What impact did the fall in the Australian share market have on investors and tax receipts?

A roughly 15% fall in the Australian share market since the May budget is expected to reduce realised capital gains from companies, superannuation funds and individuals, which lowers CGT receipts and can affect investors’ portfolio values and future tax outcomes.

Is the government still on track to meet its 2012–13 surplus target despite the revenue hits?

According to the update, the government remains on track for a 2012–13 surplus. Treasurer Wayne Swan said the budget update will show the target is still reachable, but the government plans spending savings and some difficult decisions to help deliver the surplus.

What kinds of spending cuts and savings did the budget update mention that could influence the economy?

The update flags a mix of measures: speeding more than $1 billion of Queensland flood relief into the current financial year, announced savings in programs such as teachers' performance pay and immunisation (about $200 million each over four years), and broader measures to find further savings without "taking an axe" to the economy.

How will changes to tax breaks for foreign workers and executives affect government revenue?

The government plans a crackdown on problematic living-away-from-home allowances claimed by some foreign workers and executives. The article says such claims rose from $162 million to $740 million in five years and that closing abuses could yield hundreds of millions in savings while protecting legitimate allowances.

What is the corporate merger tax loophole the government moved to close, and why does it matter for investors?

The government moved to remove a large tax deduction that could be claimed during corporate mergers — a loophole that, if left open, could have threatened about $10 billion of revenue. Closing it aims to protect the budget bottom line, which matters for overall fiscal stability and market confidence.

What message did Treasury and Finance ministers give about fiscal discipline and economic support?

Treasurer Wayne Swan said the government will balance strong fiscal discipline with supporting job creation and growth and avoid heavy-handed cuts. Finance Minister Penny Wong noted the government had already found about $100 billion in savings across the last four budgets and that there are no easy savings left.

What should superannuation members and long-term investors take away from the budget update?

The article highlights that lower asset values and a weaker share market can reduce capital gains and therefore CGT paid by super funds and investors. While the government is aiming to protect the surplus through savings and tax tightening, long-term investors should be aware that market volatility affects portfolio values and can influence tax receipts and policy responses.