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Accounting Changes Reallocate $1.8 Billion Extra

7 September 2006

Accounting Changes Reallocate $1.8 Billion Extra Into June Tax

There have been significant changes to the way provisional tax revenue is estimated in the revised June 2006 Tax Outturn released this morning.

“As foreshadowed last month, the Inland Revenue Department recently reviewed its
provisional tax revenue estimation method and concluded that provisional tax revenue can be reliably estimated when it is incurred rather than when payment is due, as has been the case up until now,” said Dr Peter Bushnell, the Treasury’s Deputy Secretary responsible for the Budget and Macroeconomic Branch.

The new estimation method has been used for the calculation of today’s revised June Tax Outturn and will be used in all forthcoming statements on the Crown’s accounts.

“The changes provide a more reliable estimate of provisional taxes owed to the Crown at any point in time and also avoid the fluctuations in provisional tax revenue due to changes in payment dates.

“This revised method for estimating revenue, combined with tax receipt data currently provided, will over the coming years ensure that a more complete and current picture of both the Crown’s tax revenues and cash flows are available to the public,” Dr Bushnell said.

“It is important to stress that the transition to the new estimation method does, of course, result in a one-off adjustment higher in revenue booked reflecting more than just the usual 12 months of provisional tax revenue being reported in the 30 June 2006 financial statements. In this year of transition, no one should mistake this to represent an increase in underlying tax revenue available to the Crown,” Dr Bushnell said.

Today’s data show the increase in tax receivable booked in 2005/06 stands $1.8 billion higher than the previously published estimate which had been calculated using the now discarded estimation method.

Total tax revenue of $54.4 billion booked in 2005/06 using the old payment-based
provisional tax accrual system has been boosted by $1.8 billion of provisional tax accrued and booked in 2005/06 which under the previous accounting system would not have been booked until the September Quarter.

This is illustrated in a diagram in the June Tax Outturn. (Excel 5.0: junaccrual06.xls (37 KB))

“The Treasury has also re-calculated the forecasts it released at the time of Budget 2006 using the new estimation method so that the public can have a clear picture of how the actual tax outturn compares against forecast,” Dr Bushnell said.

“The revised $56.2 billion measure of total tax revenue in the financial year is $224 million or 0.4% above the revised forecast for the period prepared for Budget 2006, which is in line with the historic variance between outturns and forecasts.

“Across tax types, GST contributed $126 million and source deductions, mostly PAYE, accounted for $119 million of the variance. Recent labour market data indicate that aggregate salaries and wages were above the Treasury's expectations in the June Quarter and this will have contributed to both of these positive variances - directly through PAYE deducted from pay packets and indirectly through the GST collected when consumers spend their salaries and wages,” Dr Bushnell said.

The annual CPI inflation rate of 4% in the financial year, which was above the Treasury's forecast for 3.3%, will have also contributed to the positive GST forecast variance. • Revised release of June Revenue (Excel 5.0): junrev06-rev.xls (23 KB))
“These changes to tax revenue calculation have no implications for the differences between IRD and Treasury tax forecast tracks highlighted in Budget 2006. “Neither set of forecasts included this change so the forecast variances of both departments have been affected similarly.

More importantly, the two sets of tax projections were quite similar for both 2005/06 and 2006/07 and it was not until fiscal 2007/08 that there was a significant difference between the two sets of forecasts,” Dr Bushnell said. The July 2006 Tax Outturn report is expected to be published on the Treasury’s website on 14 September and the 2005-2006 Crown Financial Statements for the financial year that ended on 30 June, are due to be tabled in Parliament before 13 October.


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