Crackdown on tobacco research, phoenixing boosts budget

Taxpayers will no longer pay millions of dollars a year in rebates for tobacco and gambling research as part of a slate of measures announced by the federal government in its mid-year budget update.

The changes to research and development incentive eligibility are expected to save the budget $10 million per year from July 2025, but those savings will be heavily outweighed by other decisions taken by the government.

The mid-year economic and fiscal outlook, revealed on Wednesday, shows the budget bottom line will be $21.8 billion worse off overall in the four years to 2027/28, including a $17.5 billion hit from policy decisions made by the government.

Parameter variations - the effect of external economic changes - will cost the budget $4.2 billion more than expected in the May budget.

Other policy changes worsening the bottom line include an additional $2.7 billion to keep infrastructure projects on track, indexation increases for welfare payments such as the old-age pension and extending funding for programs facing a funding cliff.

The spending increases were unavoidable, Treasurer Jim Chalmers argued.

"I invite you to look through the new spending in the mid-year budget update and identify anything that any rational person would consider wasteful," he said.

Positive policy decisions have improved the budget bottom line by $400 million in 2024/25 and $1.7 billion over the four years, including $361 million reaped through better compliance resourcing at the Australian Taxation Office.

A crackdown on illegal phoenixing - when companies close down and start up again to avoid having to pay debts like outstanding wages - will increase tax receipts by $278 million, offset in part by an extra $151 million in payments.

While axing gambling and tobacco research rebates will help reduce tax payments, receipts from the tobacco excise were revised down by almost a quarter to $8.75 billion in this financial year.

The expected windfall from the petroleum resource rent tax was almost halved to $1.35 billion.

The massive reductions in tobacco and gas tax collections were "self-inflicted injuries", independent economist Chris Richardson said.

"We keep getting disappointed on tobacco tax collections because there's an enormous gap between how we tax and how we enforce the tax," Mr Richardson wrote on X.

"That gap has created a huge windfall for organised crime, generating heroin-like profits but slap-on-the-wrist legal risks."

Dr Chalmers said the lower tobacco tax take was partly because of a welcome drop in smoking rates, but more needed to be done to stamp out black market tobacco sales.

"There is an issue with compliance and with illegal tobacco. We're aware of that," he said.