Statement 5: Revenue
Appendix E: Taxation revenue recognition
There are different methods of accounting for taxation revenue. Each method of revenue recognition results in estimates and outcomes that may be significantly different to those produced using other methods.
Accrual accounting was introduced by the Australian Government for the 1999‑2000 Budget. Before then, all estimates and outcomes were reported only on a cash basis. Cash recognition still plays a role in budgeting and outcomes reporting, with both accrual and cash taxation estimates and outcomes reported in the budget papers. Furthermore, there are also different methods for recognising accrual revenue.
This appendix provides an explanation of the different revenue recognition methods that apply to the various taxation revenue heads.
Revenue recognition methods
Cash recognition
Under cash recognition, which is also referred to as receipts recognition, taxation receipts are accounted for at the time a taxation payment is received by the relevant authority. The receipt may be a different amount than the taxation liability and result in a subsequent amended (refund or debit) assessment. The receipt may also be received in a period different from that to which the taxation liability relates.
Cash recognition is an integral part of budget reporting as a cash flow statement must be prepared under the accrual accounting frameworks on which the budget must be based. It also provides additional information about the structure of taxation. Cash data are available over a much longer period — accrual data are only available since 1999‑2000 — and are therefore often used for time series analysis.
Accrual revenue recognition
The AAS and GFS standards for accrual accounting (refer to Appendix A in Statement 3 for an explanation of these reporting standards) require that taxation revenue be recognised in the reporting period in which the underlying economic transaction occurs, such as when the taxpayer earns the income that is subsequently subject to taxation. This is referred to as the economic transactions method (ETM). However, the standards permit reporting using an alternative approach when there is an inability to reliably measure taxation revenues using ETM.
Currently, ETM has been determined not to be a reliable measure for several significant revenue heads — individuals and other withholding taxation, company income taxation and superannuation taxation. These revenue heads, which collectively account for the majority of total revenue, are recognised using the taxation liability method (TLM) rather than ETM.
Under TLM, taxation revenue is accounted for at the time a taxpayer makes a payment or self assessment or when an assessment of a taxation liability is raised by the relevant authority (eg the Australian Taxation Office). This method retains some elements of cash revenue recognition — for example, revenue is recognised when cash payment occurs if it is prior to an assessment being raised.
The point of revenue recognition under ETM and TLM can sometimes be in different periods — for example, a taxation return for the 2007‑08 income year lodged in October 2008, and which results in a new taxation liability or a refund, would be recognised in the 2007‑08 financial year under ETM and in the 2008‑09 financial year under TLM. In this case, ETM requires that outcomes for 2007‑08 include an estimation of liabilities or revenue relating to activities in 2007‑08 that are likely to be identified in subsequent periods. TLM outcomes do not incorporate this estimation, as only currently identified taxation liabilities are reported. Consequently, aggregate TLM revenue outcomes are usually known with relative certainty, although there can be estimation issues involved in allocating aggregate amounts between different heads of revenue.
History of accrual revenue recognition
From 1999‑2000 to 2005‑06, all accrual taxation revenue was recognised in budget documents on a TLM basis. From the 2006‑07 Budget, ETM revenue recognition has been adopted for all revenue heads where the ETM revenue can be reliably estimated. This generally occurs where the economic activity, the identification of the liability and the receipt of the payment all occur with little or no lag — and consequently, the ETM and TLM (and cash) recognition methods produce relatively consistent results.
TLM revenue recognition continues to be used where ETM estimates are considered unreliable. At present, this is limited to individuals and other withholding taxation, company income taxation and superannuation taxation, but this will be reviewed periodically. ETM estimates and outcomes are inherently more volatile for these revenue heads, mainly because they incorporate the estimation of significant levels of liabilities likely to be identified in future periods. This additional level of estimation would increase the likelihood of differences between the revenue estimates and outcomes, with consequent impacts on the budget balances. This greater level of uncertainty would make the implementation of fiscal policy more problematic than if these revenue heads continue to be recognised using TLM.
Differences between the accrual and cash taxation revenue estimates
Table E1: Estimates of taxation revenue on an accrual and cash basis
- Automotive Competitiveness and Investment Scheme.
Automotive Competitiveness and Investment Scheme
The Automotive Competitiveness and Investment Scheme (ACIS) operates by providing customs duty credits to exporters of Australian automotive products. The credits can be offset against future customs duty on specific imports.
Under accrual accounting, an expense is recognised when the ACIS credits are issued. Later, specified imports generate a customs duty liability and customs duty accrual revenue is recognised. Under cash accounting no cash payments are made upon the issue of ACIS credits and when ACIS credits are used to offset the customs duty liability on specified imports no customs duty cash is received. Therefore accrual accounting recognises the gross customs duty liability generated by all imports and cash accounting recognises the (smaller) net amount of customs duty cash received after the use of ACIS credits. As such, the accounting treatment of ACIS credits accounts for $400 million of the difference between the accrual and cash estimates in 2008‑09.
Carbon Pollution Reduction Scheme
Consistent with guidance issued under the United Nations System of National Accounts, payments for emission units under the CPRS are treated as taxes in this Budget.
In cash terms, the payments for emissions units bought at auction are recorded as taxation receipts when the cash is expected to be received. Emission unit auctions are planned for before, during and after the year to which the permits relate. In the accrual statements, taxation revenue is recognised in the year that emissions are expected to occur or are confirmed. As a result, there will be a significant difference between accrual revenue and cash receipts (see Box 5).
There will also be a difference between accrual revenue and cash receipts due to allocations of free emissions units to assist selected industries. Free emissions units do not generate cash tax receipts. However, accrual tax revenues are recorded for emissions related to all emission units (including those allocated for free). In accrual statements free emission units accrue an expense when they are allocated to industry.
Other
This category consists of other timing differences between the recognition of accrual revenue and cash receipts as well as instances where revenue has been recognised but payment is no longer expected to be received. For example:
- receivables arise where taxation liabilities are recognised in one period, but the taxpayer is not expected to pay the liability until a later period;
- remissions occur where taxation liabilities are recognised, but circumstances are taken into account and the Commissioner of Taxation reduces the amount of various penalties and interest required to be paid;
- a taxation liability may be written‑off where the previously recognised revenue is no longer expected to be received; and
- a credit amendment may be issued where a taxation assessment is amended (for example, where a court decision leads to a change in the interpretation of the taxation laws).
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