House of Representatives

Tax Laws Amendment (2005 Measures No. 1) Bill 2005

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 4 - Mature age worker tax offset

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide a tax offset for workers aged 55 years and over, in order to encourage and reward participation in the workforce by mature age Australians.

Context of amendments

4.2 In the 2004 election policy statement Mature Age Worker Tax Offset, the Government announced that a new tax offset would be introduced to reward and encourage mature age workers who choose to stay in the workforce. The Government has stated that this measure is part of its strategy to deal with the demographic challenge posed by the ageing of Australia's population, through boosting economic growth by increasing productivity and improving labour force participation.

Summary of new law

4.3 The ITAA 1997 will be amended to introduce a new tax offset which will provide a maximum offset of $500 on the income tax liability of workers aged 55 years and over.

4.4 Eligibility for the offset will be based on age and net income from working (basically, income that is mainly a reward for the taxpayer's personal effort or skills or income from a business that the taxpayer carries on, less any relevant deductions).

Comparison of key features of new law and current law

New law Current law
Taxpayers aged 55 years and over at the end of the income year and who have net income from working of less than $63,000 (or $58,000 for the 2004-05 income year) will be entitled to the mature age worker tax offset, up to a maximum tax offset of $500.
The offset will phase in at five per cent from the first dollar of net income from working, so that the full $500 offset is achieved when net income from working reaches $10,000.
In 2004-05, the offset will phase out at five per cent from $48,000, so that no offset is available when net income from working exceeds $58,000. In 2005-06 and beyond, the offset will phase out at five per cent from $53,000, so that no offset is available when net income from working exceeds $63,000.
No equivalent tax offset exists.

Detailed explanation of new law

4.5 Subdivision 61-K is to be inserted into the ITAA 1997 to allow a maximum tax offset of $500 on the income tax liability of mature age workers.

4.6 Australian resident individuals who are aged 55 or over by 30 June of the relevant income year may be entitled to the mature age worker tax offset. However, they will not be entitled to any tax offset if their amount of net income from working is nil, or if their net income from working exceeds $63,000 (or exceeds $58,000 for the 2004-05 income year). If a taxpayer would have been eligible for the offset but dies before the normal end of their income year, the offset can be claimed in their 'date of death' return. [Schedule 4, item 2, sections 61-560 and 61-565]

4.7 The Government's 2004 election policy statement Mature Age Worker Tax Offset stated that eligibility for the offset would be on the basis of 'earned income'. For clarity, the term 'net income from working' has been used in the legislation instead of earned income.

Net income from working

4.8 Net income from working is defined as the sum of (excluding certain amounts, which are discussed in paragraphs 4.14 to 4.18):

·
personal services income (i.e. income that is mainly a reward for the taxpayer's personal effort or skills) that is included in the taxpayer's assessable income for the income year;
·
income from a business that the taxpayer carries on that is included in their assessable income for the income year;
·
the taxpayer's assessable farm management withdrawal amounts; and
·
the taxpayer's reportable fringe benefits total for the year,

less the sum of any expenses that the taxpayer can deduct for the income year, to the extent that they are related to their assessable personal services income or assessable income from a business that the taxpayer carries on. [Schedule 4, item 2, subsection 61-570(1); item 3, subsection 995-1(1), definition of 'net income from working']

Personal services income

4.9 Personal services income is included in net income from working. This is income that is mainly a reward for the taxpayer's personal efforts or skills (or would mainly be such a reward if it was the taxpayer's income).

4.10 Although personal services income is often thought about in the context of contractors and consultants, the term also includes many types of income from employment, such as salary and wages. Personal services income includes (but not exclusively):

·
salary or wages;
·
income of a professional person practising on his or her own account without professional assistance - for example, a medical practitioner in a sole practice;
·
income payable under a contract which is wholly or principally for the labour or services of a person;
·
income derived by consultants, for example, computer consultants or engineers from the exercise of personal expertise;
·
income derived by a professional sports person or entertainer from the exercise of his or her own skills (not including income from endorsement by the person of a sponsor's products); and
·
other income from working, such as commissions, bonuses and fees paid to directors or office holders.

4.11 Personal services income does not include any amounts which are not a reward for a taxpayer's personal effort or skills - for example, social security payments, veterans' affairs payments and superannuation pensions and annuities would not be included. [Schedule 4, item 2, subparagraph 61-570(1)(a)(i)]

Example 4.1 Sue is aged 57 and works as an employee of a direct marketing company, engaging in door-to-door sales of cosmetics. In 2004-05 she earns a salary of $36,000, receives commissions totalling $14,000 and is given a Christmas bonus of $1,000. All of these amounts will be included when calculating Sue's net income from working for 2004-05.

Example 4.2 Xavier is aged 66 and occasionally provides electrician services as a contractor. Income received from this activity will be included when calculating Xavier's net income from working. Xavier also receives a part pension from the Government. This will not be included when calculating Xavier's net income from working.

Example 4.3 Jade is aged 55 and operates through a trust as an architect. The income from this activity is mainly a reward for Jade's personal efforts or skills and is attributed to her as personal services income. This income will be included when calculating Jade's net income from working.

Business income

4.12 Assessable income that a taxpayer receives from a business that he or she carries on is also included in their income from working (except where the income is passive income; see paragraphs 4.17 and 4.18). Business is defined in subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

4.13 The assessable income must be received from a business that the taxpayer themself carries on (i.e. that 'you' carry on). This includes a business that a taxpayer carries on as a sole trader or in partnership. If the business is carried on through another entity, such as a company or a trust, then it will not be a business that the taxpayer themself carries on. However, income that a taxpayer receives through a company or trust will still be included in their net income from working if it has been attributed to them as personal services income (see paragraphs 4.9 to 4.11). [Schedule 4, item 2, subparagraph 61-570(1)(a)(ii)]

Example 4.4 Christopher is aged 55 and runs a local corner store in partnership with his wife, Catherine, who is aged 53. They each receive a percentage of the partnership's net income. The income received by Christopher from the partnership will be included when calculating his net income from working for the purposes of the offset. As Catherine is under the age of 55, she has no entitlement to the offset.

Example 4.5 Tim is aged 60 and is one of the directors of a large consultancy company. He receives $40,000 in director's fees. Tim also receives $30,000 in business income from a trust distribution from a family trust, controlled by his son, which is not attributed to him as personal services income. Only the $40,000 in director's fees will be included when calculating Tim's net income from working.

Amounts specifically excluded from net income from working

4.14 Certain amounts of income are specifically excluded from the definition of 'net income from working'. These amounts relate to eligible termination payments; payments received on retirement or termination of employment in lieu of long service leave and annual leave; and passive income. [Schedule 4, item 2, subsection 61-570(2)]

4.15 Eligible termination payments are not included when calculating a taxpayer's net income from working. Eligible termination payments include certain payments made in consequence of the termination of a taxpayer's employment, and certain payments made by superannuation funds to members.

4.16 Payments to which sections 26AC and 26AD of the Income Tax Assessment Act 1936 (ITAA 1936) apply are also not included when calculating a taxpayer's net income from working. These sections cover certain amounts which are received on retirement or termination of employment in lieu of annual leave and long service leave.

4.17 For the purpose of clarity, the legislation specifically excludes 'passive income' (as defined in subsection 160AEA(1) of the ITAA 1936) from the calculation of a taxpayer's net income from working. This applies regardless of whether the taxpayer receives this income directly or indirectly through a business they carry on or through a trust distribution.

4.18 Passive income includes dividends, unit trust dividends and certain other amounts which are taken to be dividends under the taxation law. Annuities, interest income, rental income, royalties, amounts received from the assignment of intellectual property, profits of a capital nature (capital gains) and passive commodity gains are also included in the definition of 'passive income'. Other amounts included in passive income relate to certain attributable income of trust estates, certain amounts in relation to controlled foreign companies and certain amounts in relation to foreign investment funds.

Example 4.6 Margaret is aged 63 and receives a superannuation pension of $40,000 per annum. She also receives a small amount of interest income and some dividend income from her shareholding in public-listed companies. Margaret owns an investment property and receives rental income of $10,000. She also engages in part-time work as a nurse, for which she receives a wage of $12,000. Only the $12,000 which Margaret receives from her work as a nurse will be included when calculating her net income from working.

4.19 Personal services income and business income are only included in a taxpayer's net income from working to the extent that they are assessable; any income which is exempt from taxation or non-assessable is not included.

Net income

4.20 To calculate net income from working, any amounts that a taxpayer can deduct for the income year are subtracted, to the extent that they are related to the taxpayer's assessable personal services income or assessable income from a business that he or she carries on.

Example 4.7 Sue, the door-to-door cosmetics seller in Example 4.1, incurs $500 of work-related expenses that she can deduct in 2004-05. Sue's net income from working for 2004-05 would be calculated as follows:Net income from working =

$36,000 + $14,000 + $1,000 - $500

= $50,500If Sue had other deductions that were not related to her assessable personal services income - for example, if she had deductions relating to a rental property that she owned - these would not be included when calculating her net income from working.

Fringe benefits and farm management deposits

4.21 If a taxpayer has reportable fringe benefits, their reportable fringe benefits total will also be included when calculating their net income from working. Essentially, a taxpayer's reportable fringe benefits total is the sum of their reportable fringe benefits amounts from each of their employers (which are recorded on each of the taxpayer's payment summaries). Reportable fringe benefits are included in the calculation of net income from working to recognise that employees can receive some of their remuneration in the form of non-cash benefits. [Schedule 4, item 2, paragraph 61-570(1)(b); item 4, subsection 995-1(1), definition of 'reportable fringe benefits total']

4.22 If a taxpayer has a farm management deposit (FMD), special rules apply as to how amounts relating to the FMD are included in the taxpayer's net income from working. FMDs allow primary producers to shift before-tax income from years when they need it least, to years when they need it most. For taxation purposes, income that is deposited into an FMD is generally allowable as a deduction in the year that the deposit is made, except to the extent that the amount deposited exceeds the taxpayer's taxable primary production income for the year. The income is then assessable in the year that the deposit is repaid (the income is withdrawn), to the extent that it was previously deductible. A taxpayer's net income from working will include any assessable income which they receive as a result of the repayment of an FMD. [Schedule 4, item 2, subparagraph 61-570(1)(a)(iii)]

Example 4.8 Glen is a primary producer aged 59 who operates an FMD. In 2004-05, Glen has taxable primary production income of $50,000 and makes a $30,000 deposit into the FMD, which is fully tax deductible in that income year and is not included when calculating Glen's net income from working. In 2005-06, Glen withdraws $10,000 from the FMD, which is assessable in that income year. The assessable income of $10,000 will be included when calculating Glen's net income from working for 2005-06.

Example 4.9 Amanda is a primary producer aged 57 who operates an FMD. In 2003-04, Amanda has taxable primary production income of $25,000 and makes a $30,000 deposit into the FMD, of which $25,000 is tax deductible in that income year and is not included when calculating Amanda's net income from working. In 2006-07, Amanda withdraws $30,000 from the FMD, of which $25,000 is assessable in that income year. The assessable income of $25,000 will be included when calculating Amanda's net income from working for 2006-07.

Calculation of the tax offset

4.23 In order to be entitled to the mature age worker tax offset, a taxpayer must have some net income from working. If a taxpayer has no net income from working - for example, if they only have income from sources such as superannuation, social security pensions, interest or dividends - then the taxpayer will not be entitled to any offset. Also, if a taxpayer's net income from working exceeds a certain amount then they will not be entitled to any offset.

4.24 For those taxpayers with net income from working below a threshold ($48,000 in 2004-05 and $53,000 in 2005-06 and later years) the amount of offset is calculated as five per cent of the taxpayer's net income from working, up to a maximum of $500. This means that the offset phases in over net income from working from $1 to $10,000, so that the full $500 offset is achieved when net income from working equals $10,000. In 2004-05, this full $500 offset will be available for taxpayers who have net income from working between $10,000 and $48,000. In 2005-06 and beyond, the full offset will be available for taxpayers who have net income from working between $10,000 and $53,000. [Schedule 4, item 2, subsections 61-565(1) and (3)]

4.25 In 2004-05, the offset will phase out at five per cent for net income from working over the threshold amount of $48,000. This means that taxpayers with net income from working of $58,000 or more will not receive any offset. In 2005-06 and beyond, the offset will phase out at five per cent for net income from working over the threshold amount of $53,000, so that taxpayers with net income from working of $63,000 or more will not receive any offset. [Schedule 4, item 2, subsections 61-565(2) and (3)]

4.26 The chart below shows the amount of offset that a taxpayer aged 55 years or over will be eligible to receive in 2004-05 and in 2005-06 and beyond, based on their amount of net income from working.

4.27 Only net income from working will affect a taxpayer's entitlement to the offset; any other income which they receive will not be included when calculating their offset entitlement.

[Graph unavailable.]

Example 4.10 Sue, the door-to-door cosmetics seller in Examples 4.1 and 4.7, has net income from working in 2004-05 of $50,500. She is above the $48,000 threshold for the maximum offset amount for the 2004-05 year, and so her entitlement to the mature age worker tax offset is calculated as follows:Tax offset =

$500 - [5% * ($50,500 - $48,000)]

= $375If Sue had $50,500 of net income from working in 2005-06 or a subsequent year, she would be below the $53,000 threshold which applies for these years. Hence her entitlement to the mature age worker tax offset would be calculated as follows:Tax offset= lesser of 5% * $50,500 or $500= lesser of $2,525 or $500= $500

4.28 Although the offset is calculated on the basis of net income from working, it will act to reduce the taxpayer's tax liability on their total taxable income.

Example 4.11 Cynthia is aged 59 and in 2005-06 she has net income from working of $10,500, and so is entitled to a mature age worker tax offset of $500. She also has other sources of income, and her total taxable income for the year is $50,000. The tax on her taxable income is $11,172. Cynthia's mature age worker tax offset will be subtracted from the tax on her taxable income when calculating the tax payable by Cynthia for the year.

4.29 The offset is non-refundable. That is, it cannot reduce a taxpayer's basic income tax liability below zero.

Application and transitional provisions

4.30 These amendments will apply to assessments for income years commencing on or after 1 July 2004. [Schedule 4, item 5]

Consequential amendments

4.31 The list of tax offsets in section 13 of the ITAA 1997 is amended to include a reference to the mature age worker tax offset. [Schedule 4, item 1]

4.32 Two additional definitions have been added to the Dictionary. [Schedule 4, items 3 and 4, subsection 995-1(1), definitions of 'net income from working' and 'reportable fringe benefits total']


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