House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 3: Working Australians tax offset

Outline of chapter

3.1 Schedule 3 to the Bill amends the ITAA 1997 to introduce a new non-refundable tax offset, named the working Australians tax offset (WATO), for Australian resident individuals who earn labour income. The WATO applies for the 2027–28 income year and subsequent income years.

Context of amendments

3.2 The income tax law provides a range of tax offsets that reduce the amount of income tax otherwise payable by eligible taxpayers. Many of the offsets are contained in Division 61 of the ITAA 1997.

3.3 Existing offsets are generally not targeted specifically to labour income. For example, the low income tax offset is based on taxable income and does not distinguish between income derived from labour and income derived from capital or savings. As a result, there is not currently any mechanism to provide broad-based tax relief targeted specifically to workers.

3.4 The WATO addresses this by providing targeted relief to Australian resident individuals who earn labour income for the 2027–28 income year and subsequent income years.

Summary of new law

3.5 Schedule 3 to the Bill amends the tax law to introduce a WATO into the ITAA 1997 to reduce the tax burden for Australian resident individuals whose labour income (reduced by labour deductions) is above the tax-free threshold for the 2027–28 income year and future income years.

Comparison of key features of new law and current law

Table 3.1 Comparison of new law and current law

Detailed explanation of new law

3.6 Schedule 3 to the Bill amends the ITAA 1997 to introduce a new tax offset for working Australians.

The WATO

3.7 The WATO is a non-refundable tax offset available for the 2027–28 income years and subsequent income years.

3.8 Individuals will be entitled to this new offset for an income year if:

•

during that income year they are an Australian resident individual; and

•

their net labour income exceeds the tax-free threshold within the meaning of the Income Tax Rates Act 1986. [Schedule 3, item 1, section 61-150 and subsection 61-155(1) of the ITAA 1997]

3.9 The WATO is intended to provide relief to working Australians. The amount of the WATO available to an individual depends on their net labour income for the income year. The WATO is not available to individuals whose net labour income does not exceed the tax-free threshold.

Amount of the WATO

3.10 The WATO provides a maximum benefit of $250 to eligible individuals. Individuals with income tax payable above $250 on their net labour income will be entitled to the full amount of the WATO.

3.11 A determination made by the Minister by legislative instrument may define the method for calculating the amount of the offset to which an individual may be entitled based on the amount of their net labour income for an income year or the basic income tax payable on their net labour income. This may provide for calculation of the amount of WATO when the amount of tax payable on net labour income is less than $250. This aligns with the approach to other offsets in the income tax system, such as the Seniors and Pensioners Tax Offset. [Schedule 3, item 1, section 61-160 of the ITAA 1997]

3.12 The delegation of legislative power is appropriate because it provides the Minister with the ability to prescribe methods for calculating an amount of offset up to and including $250, as to provide targeted relief to Australian workers in relation to the amount of income tax payable on their net labour income, and adjustable to reflect ongoing refinements to the tax system which affect the tax payable on net labour income.

3.13 The legislative instrument is subject to disallowance and sunsetting under the Legislation Act 2003 and will be subject to appropriate parliamentary oversight and scrutiny.

Net labour income

3.14 An individual's net labour income used to determine their eligibility and the amount of the WATO is calculated as labour amounts less labour deductions for an income year.

3.15 The meaning of labour amounts captures the types of assessable income that have the character of labour income under the income tax law. Labour amounts is the sum of the following amounts included in an individual's assessable income for an income year:

•

an amount of assessable labour income as defined in subsection 25-130(4) of the ITAA 1997 as proposed in Schedule 4 to the Bill (being assessable income from work-related activities covered by the standard deduction);

•

an amount derived from carrying on a business as a sole trader;

•

an amount of personal services income within the meaning of subsection 84-5 of the ITAA 1997;

•

the discount amount of an employee share scheme interest under section 83A-25 of the ITAA 1997; and

•

a payment from which an amount must be withheld (even if the amount is not withheld) under section 12-60 in Schedule 1 to the TAA 1953 (being payments made under labour hire arrangements to individuals in the course of an enterprise).

3.16 The meaning of labour deductions captures deductions under the income tax law that relate to the gaining or producing of labour income. Labour deductions is the sum of the following in an income year:

•

a loss or outgoing incurred in gaining or producing an amount of assessable labour income or personal services income;

•

a loss or outgoing incurred in carrying on business as a sole trader;

•

an amount that can be deducted under section 25-130 of the ITAA 1997 as proposed in Schedule 4 to the Bill (being the amount of an individuals' standard deduction);

•

the decline in value of depreciating assets under section 40-25 of the ITAA 1997 (other than the decline in value for depreciating assets that have been allocated to a low value pool under section 40-425) to the extent the deduction arises in respect of the depreciating asset used in deriving assessable income from carrying on a business as a sole trader or gaining or producing an amount of personal services income;

•

an amount of deduction that is mentioned in paragraphs 25-130(2)(d) to (g) of the ITAA 1997 as proposed in Schedule 4 to the Bill (relating to specified categories of work-related expense deductions covered by standard deduction); and

•

an amount that can be deducted under subdivision 328-D of the ITAA 1997 to the extent the deduction arises in respect of deriving assessable income from carrying on a business as sole trader (being deductions for depreciating assets for small business entities).

[Schedule 3, item 1, subsection 61-155(2) of the ITAA 1997]

3.17 If an amount is covered under more than one paragraph of the meaning of labour amounts or labour deductions, the amount is only included once in the calculation of net labour income under subsection 61-155(2) of the ITAA 1997. [Schedule 3, item 1, subsection 61-155(3) of the ITAA 1997]

Priority and refund status

3.18 The WATO is subject to specific priority and is applied immediately prior to other tax offsets covered in the table in subsection 63-10(1) of the ITAA 1997. The WATO is a non-refundable tax offset and cannot be transferred or carried forward. The amendments provide for the order in which the WATO is applied relative to other tax offsets when calculating an individual's tax liability. This priority ensures that the WATO interacts appropriately with other offsets within the broader tax system. As with other non-refundable offsets, any excess amount remaining after applying the WATO is not refundable and is extinguished. [Schedule 3, item 2, subsection 63-10(1) of the ITAA 1997 (table item 3)]

3.19 It is not expected that the WATO will be taken into account in the administration of PAYG withholding schedules under section 15-25 in Schedule 1 to the TAA 1953, consistent with the Commissioner of Taxation's general approach to non-refundable tax offsets.

Consequential amendments

3.20 Consequential amendments are made to the ITAA 1997 to incorporate the WATO into the income tax law. These amendments include inserting a reference to labour income in section 13-1, signposting Subdivision 61-E. [Schedule 3, item 3, section 13-1 of the ITAA 1997 (table item headed "labour income"]

Commencement, application, and transitional provisions

3.21 Schedule 3 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October after the Act receives Royal Assent. [item 6 of the commencement table in clause 2 of the Bill]

3.22 The amendments made by Schedule 3 apply in relation to assessments for the 2027-28 income year and subsequent income years. [Schedule 3, item 4]